Old National Bancorp — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in millions of dollars unless stated otherwise. Old National is a regional bank holding company operating primarily in Indiana, Illinois, Kentucky and southwestern Michigan.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $78.0 | $74.2 | $236.2 | $224.4 |
| Noninterest income | $47.8 | $40.9 | $140.3 | $138.5 |
| Noninterest expense | $96.7 | $89.0 | $273.8 | $266.3 |
| Net income | $23.9 | $19.7 | $76.4 | $68.7 |
| Diluted earnings per share | $0.23 | $0.20 | $0.75 | $0.72 |
| Net interest margin, fully taxable equivalent | 3.96% | 4.09% | 3.99% | 4.18% |
- Q3 net income rose about 21%; management attributed the increase primarily to the Indiana Community Bancorp acquisition, completed in September 2012. Per-share comparisons also reflect the shares issued for that acquisition.
- Net interest income increased 5.2% in Q3 and 5.3% year to date, while fully taxable equivalent margin declined. Management cited earning-asset yields falling faster than funding costs and said purchased-loan accretion benefited margin by $4.8 million in Q3 and $16.0 million year to date; it expects that accretion to decline over time.
- Provision for loan losses was a credit of $1.7 million in Q3 and $4.6 million for the first nine months, versus provision expense of $0.4 million and $2.8 million in the comparable 2012 periods. Management cited improving credit quality, lower loss rates and recoveries on acquired impaired loans.
- Q3 efficiency ratio was 72.96%, compared with 75.26%; the nine-month ratio was 69.30%, compared with 71.71%. The company defines this as a non-GAAP measure.
Financial position, cash flow and capital
- Total assets were $9.65 billion at September 30, 2013, up 1.1% from year-end 2012. Total loans were $5.07 billion, down from $5.20 billion at year-end; deposits were $7.21 billion, down 1.0% from year-end.
- Cash and cash equivalents were $247.4 million. For the first nine months, operating cash flow was $120.0 million, investing cash flow was $161.7 million and financing cash flow was negative $298.4 million; cash declined $16.7 million from the beginning of the year.
- Short-term borrowings were $419.0 million and other borrowings were $633.9 million, versus $589.8 million and $237.5 million, respectively, at year-end 2012. The increase in wholesale funding was partly related to financing securities purchased ahead of the Bank of America branch transaction. Deposits assumed in that transaction replaced most of the related temporary borrowing.
- Management reported $3.22 billion of available funds at subsidiaries, including cash, unencumbered securities and borrowing availability; the parent company reported an additional $38.9 million of available cash. These are management-reported liquidity resources, not cash on hand alone.
- Old National Bancorp’s Tier 1 leverage ratio was 8.80%; its bank subsidiary’s ratio was 7.78%. The subsidiary’s Tier 1 risk-based and total risk-based capital ratios were 12.55% and 13.45%, respectively, above stated well-capitalized thresholds.
- Shareholders’ equity was $1.16 billion, down from $1.19 billion at year-end. Accumulated other comprehensive income moved from a $29.8 million gain to a $44.9 million loss, reflecting market-related securities losses; management reported a $74.9 million adverse change in unrealized securities losses during the first nine months.
Changes, outlook and material items
- Old National completed its acquisition of 24 Bank of America branches on July 12, assuming approximately $565 million in deposits. A Tower Financial Corporation merger was pending, subject to regulatory and shareholder approvals, with a first-quarter 2014 expected closing. The filing describes consideration of 1.20 Old National shares plus $6.75 cash per Tower share.
- The company sold deposits from nine branches in the first quarter and agreed to sell three more branches, expected to close in December 2013. It had consolidated 40 branches in the prior 12 months and closed 18 in August; management intended to consolidate or sell seven additional banking centers in Q4.
- Commercial loan demand remained soft and commercial loan growth slowed in Q3. Management said it was expanding into southwestern Michigan and continuing efforts to improve branch efficiency. It sold $96.9 million of fixed-rate residential loans to reduce interest-rate exposure.
- Q3 expenses included $2.7 million of branch-consolidation costs, $2.3 million related to the Bank of America acquisition and a $1.2 million charitable contribution. Q3 company-owned life insurance income included a $1.1 million single-life insurance benefit. The nine-month period also included a $1.0 million loss on extinguishment of debt and a $2.2 million branch-divestiture deposit premium.
- Interest-rate modeling showed that an immediate 1% rate increase could reduce one-year net interest income by $4.3 million (1.65%); a 3% increase could reduce it by $28.6 million (10.94%). The two-year model showed a 0.41% increase under a 1% rate rise but declines under larger increases. Management cautioned that modeled results are not guarantees of actual outcomes.
- Management said it did not intend to sell securities in unrealized-loss positions and did not expect to be required to sell them. In Q3, $357.8 million fair value of municipal securities was transferred from available-for-sale to held-to-maturity; the related $31.0 million unrealized loss remains in equity and will be amortized over the securities’ remaining lives.
- Five pooled trust preferred securities had a $9.4 million fair value and $13.5 million unrealized losses. No other-than-temporary impairment was recorded for the first nine months of 2013; management’s assessment depends on estimates of defaults, recoveries and future cash flows.
- An Indiana class action concerning debit-card and ATM transaction sequencing and overdraft fees had been certified. The court directed the parties to mediation and indicated it would deny the company’s summary-judgment motion after receiving the mediator’s report. Management said it could not determine the probability of a material adverse outcome or reasonably estimate a loss.
- No specific earnings or revenue guidance was provided. The filing identifies economic, credit, interest-rate, liquidity, acquisition-integration, FDIC loss-sharing and regulatory risks. Management stated that the bank subsidiary was well capitalized and that expected covered-asset losses would not exceed the $275 million FDIC loss-sharing threshold.
Important facts for investors to verify
- Whether the pending Tower acquisition closes on schedule and on the disclosed terms, and whether integration costs or customer attrition differ from expectations.
- Whether credit metrics continue improving: nonperforming loans were 3.20% of loans including covered assets, down from 5.64% a year earlier; troubled debt restructurings rose to $46.5 million from $32.1 million at year-end.
- How falling purchased-loan accretion, soft loan demand and the declining net interest margin affect future earnings.
- Whether securities valuation losses, the longer portfolio duration and the modeled sensitivity to rising rates affect equity, liquidity or income more than management expects.
- The outcome and potential financial impact of the overdraft-fee class action, for which the filing provides no clear loss estimate.
- Whether branch consolidation savings offset restructuring costs and whether management completes the stated Q4 branch actions.