Old National Bancorp — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are primarily against December 31, 2010 and the prior-year quarter. Old National is a regional bank operating mainly in Indiana, Illinois and Kentucky. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial results and condition
- Earnings: Net income was $16.4 million, up from $10.1 million a year earlier; diluted EPS was $0.17 versus $0.12. Return on average common equity was 6.78%.
- Revenue and margins: Net interest income increased 11.3% to $61.4 million; noninterest income was essentially unchanged at $42.8 million. Net interest margin was 3.45%, or 3.62% on a fully taxable-equivalent basis, compared with 3.12% and 3.33%, respectively. Management attributed improved net interest income and margin to the Monroe acquisition, asset and funding mix, and lower funding costs.
- Credit costs: Loan-loss provision fell to $3.3 million from $9.3 million. Annualized net charge-offs declined to 0.27% of average loans from 0.70% in the income-statement summary (the executive summary separately reports 0.72% for the prior-year quarter). The allowance was $72.7 million, or 1.74% of loans, versus 1.93% at year-end.
- Expenses and taxes: Noninterest expense rose 3.7% to $79.9 million, including $7.9 million associated with Monroe, of which $3.5 million was acquisition and integration costs. The effective tax rate increased to 21.6% from 14.4%. The efficiency ratio improved to 74.55% from 75.68%.
- Balance sheet: Total assets were $8.09 billion, up 11.3% from year-end, primarily reflecting Monroe. Loans were $4.19 billion and deposits $6.06 billion. Cash and cash equivalents totaled $413.0 million. Shareholders’ equity was $984.0 million.
- Debt and liquidity: Short-term borrowings were $374.3 million and other borrowings $439.6 million. The contractual maturity schedule shows $150.0 million of other borrowings due in 2011, primarily the bank’s subordinated notes maturing in October. The company reported $737 million of discount-window borrowing capacity. The bank was described as well-capitalized; consolidated Tier 1 leverage was 8.44%, Tier 1 risk-based capital 12.81%, and total risk-based capital 14.32%.
- Cash flow: Operating activities provided $57.0 million and investing activities provided $173.2 million; financing activities used $68.8 million. Cash increased $161.4 million to $413.0 million. Investing cash flow included $83.6 million of cash acquired with Monroe.
Material changes and unusual items
- On January 1, 2011, Old National acquired Monroe Bancorp in an all-stock transaction valued at approximately $90.1 million, issuing about 7.6 million shares. Monroe added 15 banking centers, approximately $419.4 million of loans and $627.5 million of deposits. It contributed $10.5 million of revenue and $2.6 million of net income in the quarter.
- The acquisition added $68.4 million of goodwill and $10.5 million of definite-lived intangible assets. Acquisition accounting included estimated fair-value marks; management said these adjustments increased first-quarter net interest income by $3.7 million. The purchase-price allocation remained preliminary.
- Nonperforming loans increased to $121.4 million from $70.9 million at year-end, and underperforming assets rose to $136.3 million from $77.1 million. Management said the Monroe acquisition was the primary reason for the increases; acquired loans had no allowance carried forward because estimated credit losses were reflected in acquisition-date fair values.
- Available-for-sale securities had $13.7 million of net unrealized gains. Pooled trust preferred securities had $18.1 million of unrealized losses; seven non-agency mortgage-backed securities were below investment grade. The company recorded $0.3 million of credit impairment on two non-agency mortgage-backed securities in the quarter and said it did not intend to sell available-for-sale securities in an unrealized-loss position.
- On April 11, 2011, the trust subsidiary agreed to acquire Integra Bank’s trust business, with approximately $386.8 million of assets under management, for $1.25 million in cash. Closing was expected by June 30, subject to regulatory approval and other conditions; this was a subsequent event, not a completed Q1 acquisition.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said it remained focused on expense reduction, credit quality, and franchise growth. It anticipated returning to selling most new residential mortgage production and noted weak commercial loan demand and cautious real-estate underwriting.
- Management expected continued uncertainty in residential real estate. Further deterioration in borrowers, collateral values or the economy could increase credit losses, impair securities, or require a larger loan-loss allowance. The filing describes the allowance estimate as judgmental and provides a $7.7 million range for general reserves.
- Interest-rate models indicated modest one-year sensitivity: a 1% rate increase was projected to raise net interest income 0.34%, while 2% and 3% increases were projected to reduce it 0.73% and 1.92%. Over two years, modeled income rose modestly under the disclosed rising-rate scenarios. Economic value of equity fell 2.04%, 10.74% and 15.76% under immediate 1%, 2% and 3% rate increases, respectively. Management cautioned that model outputs are not guarantees.
- Off-balance-sheet exposures included $1.063 billion of commitments to extend credit and $76.7 million of standby letters of credit. Litigation includes a trust-administration case scheduled for trial in February 2012 and a class action challenging checking-account practices; the company could not estimate a loss for the latter. Management said pending matters were not expected to materially affect consolidated financial condition, while acknowledging possible period-specific effects on results or cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also stated that no material changes had occurred in previously disclosed risk factors.
Important facts for investors to verify
- Whether Monroe’s acquired loans, especially criticized, classified and doubtful credits, perform in line with acquisition-date cash-flow and fair-value assumptions—and how acquired-credit accretion affects reported margin.
- Whether nonperforming loans, foreclosed properties and criticized/classified assets improve, particularly after excluding acquisition-related additions.
- Whether the allowance remains adequate as loan quality and local economic conditions evolve, and whether additional provision or charge-offs are needed.
- Potential credit deterioration or valuation changes in non-agency mortgage-backed and pooled trust preferred securities, including the substantial unrealized losses on the latter.
- Execution of merger integration and cost savings, the Integra trust-business transaction’s approval and closing, and refinancing or repayment of 2011 debt maturities.
- Developments in the disclosed lawsuits, off-balance-sheet commitments, liquidity sources and interest-rate sensitivity.