Midwest bank Old National Bancorp. (ONB) declared fourth-quarter 2014 earnings per share of 25 cents. The reported figure came in line with both the Zacks Consensus Estimate and the prior-year quarter figure.
For full-year 2014, the company reported earnings of 95 cents per share, lagging the Zacks Consensus Estimate by 2 cents. Moreover, it compared unfavorably with earnings of $1 per share in 2013.
Results reflected strong top-line performance driven by a rise in both net interest income and non-interest income. While decrease in provisions, and increase in loans and deposits marked the positives for the quarter, elevated operating expenses acted as a headwind. On the other hand, credit quality represented a mixed bag.
Fourth-quarter net income on a fully taxable equivalent basis (“FTE”) came in at $29.3 million, up 19.1% year over year. For 2014, net income was $103.7 million, increasing 2.7% year over year.
During the quarter, Old National Bancorp completed the acquisition of the Lafayette, Indiana-based LSB Financial Corp.
Performance in Detail
Old National’s total revenue for the fourth quarter was $140.5 million, up 11.9% year over year. However, it lagged the Zacks Consensus Estimate of $146.2 million.
Total revenue for 2014 amounted to $531.5 million, up 5.8% year over year. Nevertheless, the figure came below the Zacks Consensus Estimate of $550 million.
Taxable equivalent net interest income was $94.4 million, up 10.3% from the year-ago quarter. Net interest margin increased 28 basis points (bps) to 3.83%.
In addition, fees, service charges and other revenues climbed 3.4% year over year to $45.6 million in the reported quarter. LSB acquisition contributed $0.7 million toward the increase. However, investment business revenues remained stable.
Non-interest expenses grew 13.5% year over year to $100.1 million. Fourth-quarter operating expenses include $1.4 million of operational costs related to the acquisition of LSB Financial. Also, it comprises $3.1 million of merger and integrations charges. Notably, the company had incurred $2.5 million of merger and integration charges in fourth-quarter 2013.
Old National’s other expenses to revenue (efficiency ratio) increased to 69.54% from 66.56% in the prior-year quarter. An increase in efficiency ratio implies a fall in profitability.
As of Dec 31, 2014, total loans increased 28.3% year over year to $6.5 billion, while core deposits increased 17.20% to $8.5 billion. The acquisition of LSB Financial contributed $235.1 million to the company’s total loans and $288.5 million to its core deposits.
Credit Quality
In the reported quarter, credit quality reflected a mixed picture. Total non-performing loans, excluding covered loans, came in at $138.4 million, up 24.7% year over year. Further, problem loans rose 46.1% year over year to $233.5 million, while allowance for loan losses was stable year over year at $44.3 million.
However, provision for loan losses came in at $0.7 million, down from $1.3 million in the prior-year quarter, while net loan charge-offs ratio was down 9 bps to 0.07% in the reported quarter.
Capital and Profitability Ratios
Old National’s capital ratios remained comfortably above the standard ratios required for a well-capitalized bank. As of Dec 31, 2014, Tier I risk-based capital ratio, total risk-based capital ratio and Tier 1 leverage capital ratio came in at 12.9%, 13.6% and 8.8%, respectively. Tangible equity to tangible assets was 8.09%, down 43 bps year over year.
Profitability ratios during the quarter were strong. The company’s return on average assets edged up 1 basis point to 1.03%, from 1.02% as of Dec 31, 2013. Return on average equity declined to 8.06% from 8.40% as of Dec 31, 2013. Book value per common share was $12.54 as of Dec 31, 2014, up from $11.64 as of Dec 31, 2013.
Initiatives Undertaken in 2015
On Jan 30, Old National announced a set of actions aimed at improving the company’s operating leverage. Included in the actions is the sale of the bank’s Southern Illinois franchise and 12 branches in Lawrenceville, IL location. In addition, the company announced the sale of 5 other branches in Eastern Indiana and Ohio; along with consolidation of 18 more branches across its franchise. The bank also announced plans to implement an early retirement program.
Our Viewpoint
Based on the consolidation initiatives announced by the company, we believe consolidation-related expenses will add to its existing expense worries. On the other hand, branch sales can help in offsetting such rise.
Nevertheless, the company is well poised to grow organically on the back of higher revenues and increases in loans and deposits. At the same time, healthy capital and liquidity positions keep us optimistic about the company’s inorganic growth plans.
Old National currently carries a Zacks Rank #3 (Hold).
Performance of Other Midwest Banks
Among other Midwest banks, Commerce Bancshares, Inc. (CBSH) reported earnings per share of 62 cents, missing the Zacks Consensus Estimate of 65 cents.
However, Huntington Bancshares Inc. (HBAN) reported fourth-quarter 2014 earnings per share of 21 cents, beating the Zacks Consensus Estimate by 2 cents; while Associated Banc-Corp (ASB) reported fourth-quarter 2014 earnings per share of 31 cents, outpacing the Zacks Consensus Estimate by a penny.
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