Acquisition Expenses Push Old National Profit Lower

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Evansville-based Old National Bancorp (Nasdaq: ONB) is reporting a second quarter profit of $18.8 million, compared to $28.5 million for the same period last year. Chief Executive Officer Bob Jones says the results were affected by expenses related to mergers. July 29, 2014

News Release

EVANSVILLE, Ind. (July 28, 2014) - Today Old National Bancorp (Nasdaq:ONB) reported 2nd quarter 2014 net income of $18.8 million, or $.18 per share. Impacting current quarter results is $6.3 million of pre-tax merger and integration expenses and a $10.5 million unfavorable pre-tax change in the indemnification asset. These results compare to earnings per share of $.26 reported in the 1st quarter of 2014 and earnings per share of $.28 in the 2nd quarter of 2013. Included in 1st quarter 2014 results were $2.5 million of merger and integration expenses and a $7.3 million change in the indemnification asset. Included in 2nd quarter 2013 results were $.9 million of merger and integration expenses and a $1.5 million change in the indemnification asset.

Old National Bancorp's Board of Directors declared a quarterly cash dividend of $.11 per share on the Company's outstanding shares. This dividend is payable September 16, 2014, to shareholders of record on September 2, 2014. For purposes of broker trading, the ex-date of the cash dividend is August 28, 2014.

"With nearly $140 million in new loan volume along with a continued strong loan pipeline, and the culmination of our Tower Bank & Trust partnership, this was a quarter defined by growth," said Old National President & CEO Bob Jones. "It's worth noting that our current quarter earnings reflect more than $6 million in pre-tax merger and integration expenses. Despite these anticipated costs, this was a quarter that saw Old National continue our growth strategy and build upon the positive momentum of previous quarters."

Committed to our Strategic Imperatives and 2014 Initiatives

Old National's continued steady performance and strong credit and capital positions can be attributed to the Company's unwavering commitment to the following three strategic imperatives: 1. Strengthen the risk profile; 2. Enhance management discipline; and 3. Achieve consistent quality earnings.

Guided by these three strategic imperatives, Old National's primary initiatives for 2014 are: 1. Continue to grow core revenue; 2. Reduce operating expense; and 3. Transform the franchise into higher-growth markets, all while maintaining a strong credit culture and capital position.

Grow Core Revenue

Balance Sheet and Net Interest Margin

At June 30, 2014, total period-end loans increased $471.8 million to $5.550 billion from $5.079 billion at March 31, 2014. The acquisition of Tower added $355.2 million to June 30 balances while $139.6 million of the increase (excluding covered loans) resulted from organic loan growth occurring across all of Old National's major loan segments.

On average, total loans increased $310.1 million to $5.380 billion in the 2nd quarter of 2014 compared to $5.070 billion in the 1st quarter of 2014. The acquisition of Tower added $254.2 million to quarterly average balances in the 2nd quarter while organic loan growth contributed $74.8 million. Partially offsetting these increases was an $18.9 million decrease in covered loans during the 2nd quarter of 2014.

Excluding covered loans acquired in the 2011 FDIC-assisted acquisition of Integra Bank, total loans increased $494.9 million to $5.379 billion at June 30, 2014, from $4.884 billion at March 31, 2014. The acquisition of Tower added $355.2 million to June 30, 2014, balances. Importantly, loans in the recently acquired Michigan and Northern Indiana branches grew $23.6 million to $70.0 million at June 30, 2014, from $46.4 million at March 31, 2014.

Total core deposits at June 30, 2014, including demand and interest-bearing deposits, increased $259.2 million to $7.517 billion, compared to the $7.258 billion at March 31, 2014. The acquisition of Tower added $440.4 million to June 30, 2014, period end core deposit balances. On average, total core deposits increased $298.6 million to $7.473 billion during the 2nd quarter of 2014 compared to $7.175 billion during the 1st quarter of 2014. The acquisition of Tower added $285.6 million in average core deposits to 2nd quarter 2014 balances.

Total investments, including money market accounts, increased $246.7 million to $3.456 billion from $3.210 billion at March 31, 2014. The primary driver of this increase can be attributable to the acquisition of Tower. On average, total investments, including money market accounts, increased $143.7 million, to $3.350 billion at June 30, 2014, from $3.207 billion at March 31, 2014.

Old National reported net interest income of $84.5 million in the 2nd quarter of 2014 compared to $83.5 million in the 1st quarter of 2014, and $79.2 million in the 2nd quarter of 2013. Net interest income on a fully taxable equivalent basis was $88.7 million for the 2nd quarter of 2014 and represented a net interest margin on total average earning assets of 4.07%. These results compare to net interest income on a fully taxable equivalent basis of $87.4 million and a margin of 4.22% in the 1st quarter of 2014 and net interest income on a fully taxable equivalent basis of $83.4 million and a margin of 3.97% for the 2nd quarter of 2013. Refer to Tables A and B for Non-GAAP taxable equivalent reconciliations.

Fees, Service Charges and Other Revenue

Total fees, service charges and other revenue represent an important component of Old National's revenue stream and amounted to $37.9 million, or 30.5% of the company's total revenues, for the 2nd quarter of 2014. This compares to $39.9 million in the 1st quarter of 2014 and $44.3 million in the 2nd quarter of 2013. The declines are attributable to a $10.5 million unfavorable change in the indemnification asset relating to the 2011 FDIC-assisted acquisition of Integra Bank reported in the 2nd quarter of 2014, compared to unfavorable changes of $7.3 million and $1.5 million reported in the 1st quarter of 2014 and the 2nd quarter of 2013, respectively. The 1st quarter of 2014 also included $2.4 million of insurance contingency income. The Tower Financial acquisition contributed an additional $1.3 million in fees, service charges and other revenue during the current quarter. Old National's fee-based businesses of insurance and wealth management saw year-over-year increases from the 2nd quarter of 2013 (exclusive of the contributions from the Tower acquisition) of $.5 million and $.5 million, respectively, while the investments business revenue remained stable.

Reduce Operating Expense

Old National reported total noninterest expenses of $98.1 million in the 2nd quarter of 2014 compared to $88.3 million in the 1st quarter of 2014 and $86.9 million reported in the 2nd quarter of 2013. The Tower Financial acquisition added $2.2 million in operational costs during the current quarter. Included in Old National's 2nd quarter 2014 noninterest expenses were $6.3 million of merger and integrations charges. This compares to merger and integration charges of $2.5 million and $.9 million incurred by Old National in the 1st quarter of 2014 and the 2nd quarter of 2013, respectively.

Transform the Franchise into Higher-Growth Markets

On April 25, 2014, Old National Bancorp completed its acquisition of Tower Financial Corporation of Fort Wayne, Indiana. The acquisition added $355.2 million of loans (net of a $28.2 million loan mark) and $440.4 million of core deposits to the Old National franchise at June 30, 2014.

On June 4, 2014, Old National announced its intent to acquire Lafayette, Indiana-based LSB Financial Corp in a stock and cash merger. This acquisition will more than double Old National's presence in an important Indiana community with five banking centers and $368.7 million in total assets as of June 30, 2014.

On July 14,