DBRS Comments on Q2 Earnings of Old National Bancorp – Senior at BBB (high)

DBRS today commented on the Q2 2009 earnings of Old National Bancorp (Old National or the Company). Old National reported net income available to common shareholders of $9.6 million for the quarter, up from $5.5 million for the prior quarter, yet down from $19.5 million for Q2 2008. On a sequential quarterly basis, earnings benefited from a 31% decrease in provisions for loan loss reserves and an 11% increase in fee revenues, partially offset by a 4 basis points (bps) narrowing of net interest margin (NIM) to 3.59%, a $5.5 million increase in other than temporary securities impairment charges, and a 12% increase in non-interest expenses. The bulk of the increase in expenses was related to a $4.0 million special assessment fee by the FDIC and the additional operating costs associated with the March 2009 acquisition of 65 Charter One Indiana branches. On an annual quarter basis, earnings were negatively impacted by 110% increase in provisions, a 16% increase in non-interest expenses, and a 26 bps narrowing of NIM. DBRS views the results and current credit fundamentals as in line for its ratings – BBB (high) for Issuer & Senior Debt – and Stable trend.

Despite the recession, asset quality remains relatively sound. Old National’s non-performing assets (NPAs) remained flat at 1.87% of total loans over the two most recent quarters, up from 1.54% at June 30, 2008. Meanwhile, the Company’s net charge-offs (NCOs) for the quarter, were up slightly to 1.18% of average loans from 1.07% for the prior quarter, and down from 1.35% for Q2 2008. The linked quarter increase in NCOs reflected higher amounts of commercial and industrial (C&I) exposures, partially offset by a decline in commercial real estate (CRE), residential mortgages and consumer loans. Although NPAs were flat with the prior quarter, non-performing loans reflected higher amounts of residential mortgage and consumer loans, partially offset by lower levels of CRE and C&I nonaccruals. At June 30, 2009, the Company’s allowance for loan loss reserves to NPAs was moderate at 83%. Given the recession, DBRS anticipates further asset quality erosion over the intermediate term.

Old National’s Q2 2009 NIM narrowed by 4 bps to 3.59%, due to lower asset yields, partially offset by lower interest bearing liability costs. The Company’s is moderately asset sensitive, due to the shift in the Company’s loan portfolio to one and three month LIBOR based re-pricing at the end of 2008 and into Q1 2009.

The Company’s liquidity position remains solid and is underpinned by a core deposit base that accounts for approximately 112% (at March 31, 2009) of net loans. A securities portfolio, which represents 33% of total assets and access to the Federal Home Loan Bank and the Federal Reserve Discount Window, round out Old National’s liquidity profile. DBRS notes that there is the potential for future OTTI related charges within Old National’s securities book, as the Company holds $247 million of non-agency mortgage backed securities, with a market value of $190 million, and $50 million in trust preferred securities, with a market value of $24 million.

On March 31, 2009, Old National repurchased the $100 million in preferred shares that it had sold to the U.S. Treasury (Treasury), as part of the Treasury’s Capital Purchase Program. DBRS comments that the preferred stock buyback somewhat reduced the Company’s loss absorption capacity. Nonetheless, at June 30, 2009, Old National’s Tier 1 and Total risk based capital ratios were solid at 10.2% and 12.6%, respectively. Meanwhile, the Company’s tangible common equity to tangible asset ratio increased to 5.5%. In light of recession, DBRS anticipates that the Company will augment its capital position over the intermediate term, especially given the reduction in its common stock dividend by roughly 70%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.