Old National Bancorp — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar amounts below are in millions except per-share data. Old National is a regional banking company. Comparisons are with the corresponding 2011 periods unless otherwise noted.
Financial performance and condition
- Profitability: Q2 net income was $27.2 million, or $0.29 per diluted share, versus $17.0 million, or $0.18, in Q2 2011. First-half net income was $48.9 million, or $0.52 per diluted share, versus $33.4 million, or $0.35.
- Interest income and margin: Q2 net interest income was $76.0 million, up 21.9%; first-half net interest income was $150.2 million, up 21.5%. Fully taxable-equivalent net interest margin was 4.26% for Q2 and 4.23% for the first half, compared with 3.67% and 3.64%. Integra purchase-accounting accretion added 55 basis points to Q2 margin and 53 basis points year to date; management expects this benefit to decline.
- Noninterest income: $48.5 million in Q2, up 11.4%, and $97.7 million in the first half, up 13.0%. Q2 results included $6.2 million of net securities gains, versus $0.5 million a year earlier.
- Expenses and efficiency: Noninterest expense rose 7.9% to $86.0 million in Q2 and 11.0% to $177.3 million for the first half, primarily reflecting Integra. The efficiency ratio improved to 69.20% from 71.92% in Q2 and to 70.06% from 72.74% for the first half. First-half expense included $11.4 million of impairment on certain covered other-real-estate-owned properties.
- Credit costs: Provision for loan losses was $0.4 million in Q2 and $2.4 million for the first half, down from $3.2 million and $6.5 million. First-half net charge-offs were $5.7 million versus $8.6 million; the annualized ratio was 0.24% versus 0.41%. The allowance was $54.8 million, or 1.16% of loans excluding loans held for sale, at June 30.
- Balance sheet: Assets were $8.69 billion, up 8.4% year over year and 0.9% from December 31, 2011. Total loans were $4.72 billion; deposits were $6.67 billion. Shareholders’ equity was $1.07 billion.
- Funding and debt: Total funding was $7.29 billion. Wholesale borrowings were $619.7 million, down $126.0 million year over year; wholesale funding was 8.5% of total funding, versus 11.0%. On June 30, the company redeemed $13 million of subordinated notes and $3 million of trust preferred securities. Bank capital ratios exceeded regulatory minimums; the bank met the well-capitalized definition.
- Cash flow: For the first six months, operating activities provided $125.0 million; investing activities used $30.0 million and financing activities used $54.8 million. Cash and cash equivalents increased $40.2 million to $263.0 million. These cash-flow figures should be considered in the context of a bank’s balance-sheet funding activities.
Material changes versus comparable periods
- Earnings and margin benefited substantially from the July 2011 Integra FDIC-assisted acquisition, acquired-loan accretion, and lower funding costs. The company also reported stronger organic lending in Q2: $112.2 million of loan growth, partly offset by a $59.3 million decline in covered loans.
- Reported asset-quality measures include Integra covered loans. Total nonperforming loans were $240.5 million versus $118.4 million a year earlier, but were down from $298.2 million at year-end. The filing reports nonperforming loans to total loans of 5.13% including covered assets and 2.38% excluding them. Covered loans are subject to FDIC loss sharing and are treated as performing for accounting purposes despite being categorized as nonaccrual.
- Deposits grew $655.2 million year over year, including $602.3 million acquired from Integra. Noninterest-bearing demand deposits increased, while time deposits fell 19.7% year over year. Residential real-estate loans rose 46.2% year over year, reflecting both originations and acquired balances.
- Q2 net securities gains and first-half OREO impairment were significant contributors to reported results. The FDIC indemnification asset was $127.7 million at June 30, down from $147.6 million at year-end; its Q2 income-statement adjustment reduced noninterest income by $4.0 million.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management said it expects similar efficiency-initiative charges in Q3 and Q4 2012; Q2 included $1.7 million of such costs. Integra accretion is expected to diminish over time.
- Old National agreed to acquire Indiana Community Bancorp for an estimated $79.2 million in stock. Shareholders approved the merger on July 24, 2012; closing was expected in Q3, subject to regulatory approvals.
- The OCC issued a June 4, 2012 consent order concerning the bank’s Bank Secrecy Act/anti-money-laundering program. The order requires enhanced risk assessment, customer due diligence, transaction monitoring, independent testing, and staffing and training. The filing says the OCC identified no systemic undetected criminal activity or money laundering and the order did not require a civil penalty; failure to comply could lead to restrictions or penalties.
- Management cites economic and credit risk, weak loan demand, acquisition integration and FDIC loss-share uncertainty, securities valuation and impairment, and interest-rate and liquidity risks. Its model shows a +300-basis-point rate shock could reduce one-year net interest income by 3.01%; a scenario with short-term rates unchanged and long-term rates falling could reduce net income 1.88% in year one and 4.29% cumulatively in year two.
- Among contingencies, an overdraft-fee class action was ongoing; no class had been certified, and management could not estimate the probability or amount of a material loss. Other legal matters were described as not expected to materially affect consolidated financial condition, though a particular period’s results or cash flows could be affected.
Investor verification priorities
- Separate recurring earnings from securities gains, Integra accretion, acquisition/integration costs, and OREO write-downs; assess how quickly acquired-loan accretion may run off.
- Review credit quality both including and excluding Integra covered assets, especially nonaccruals, criticized/classified balances, TDRs, and the adequacy of the allowance.
- Track FDIC reimbursement claims, the indemnification asset and loss-share assumptions, and whether covered losses remain within the expected reimbursement tiers.
- Monitor progress and costs under the OCC consent order, as well as the status and potential exposure of the overdraft-fee litigation.
- Confirm completion and integration of the Indiana Community Bancorp acquisition, and evaluate the interest-rate sensitivity and funding mix as deposit and market conditions change.