DBRS Comments on Q1 Earnings of Old National Bancorp – Senior at BBB (high)

DBRS today commented on the Q1 2009 earnings of Old National Bancorp (Old National or the Company). Old National reported net income available to common shareholders of $5.5 million for the quarter, down from $6.3 million for the prior quarter and $19.3 million for Q1 2008. On a sequential quarterly basis, earnings were negatively impacted by a 33 basis points (bps) narrowing of net interest margin (NIM) to 3.63%, $3 million in conversion costs related to the Company’s acquisition of Charter One’s Indiana branches (mostly in-store locations), a $2.4 million other than temporary impairment (OTTI) charge related to pooled trust preferred securities and a full quarter’s payment of preferred stock dividends. Partially offsetting were higher gains related to securities sales and a 5.3% increase in non-interest income, which reflected a large seasonal increase in insurance related revenues. DBRS views the results and current credit fundamentals as in line for its ratings – BBB (high) for Issuer & Senior Debt – and Stable trend.

In light of the weakening economy, Old National’s non-performing assets (NPAs) increased to 1.87% of loans, from 1.46% at December 31, 2008, and 1.58% at March 31, 2008. Meanwhile, annualized net charge-offs (NCOs) for the quarter were down slightly to 1.07% of average loans, from 1.14% for the prior quarter, yet up from 0.52% for Q1 2008. The linked quarter increase in NPAs reflected higher amounts of commercial and industrial (C&I) and commercial real estate (CRE) exposures. NCOs were broad based and reflected C&I, CRE and consumer loans. Although Old National reported lower levels of special mention loans at the end of the quarter, DBRS anticipates heightened asset quality erosion, especially given the declining economy and stressed housing market, which has yet to stabilize. At March 31, 2009, the Company’s provisions for loan loss reserves totaled $17.3 million, of which 27% was for reserve build. DBRS comments that Old National’s allowance for loan loss reserves to loans of 1.6% was sufficient to cover the current pace of losses.

Old National’s Q1 2009 NIM narrowed by 33 bps to 3.63%, due to the significant decline in interest rates during December 2008, the Company’s asset sensitive position and higher levels of nonaccruals. Pressuring asset yields during the quarter, Old National’s asset mix shifted to a higher level of liquid assets, as the Company purchased securities with the bulk of the roughly $428 million in deposits it acquired with the Charter One branch (65 locations) acquisition.

The Company’s liquidity position remains solid and is underpinned by a core deposit base that accounts for approximately 100% (at December 31, 2008) of net loans. A securities portfolio, which represents 34% 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 $45.2 million (book value) in pooled trust preferred securities, with market values of $10.2 million. Moreover, the Company maintains non-agency mortgage backed securities with market values below book value.

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. At March 31, 2009, Old National’s Tier 1 and Total risk based capital ratios were solid at 9.9% and 12.2%, respectively. Meanwhile, the Company’s tangible common equity to tangible asset ratio was moderate at 5.23%. In light of the rapidly deteriorating economy, DBRS anticipates that the Company will augment its capital position over the intermediate term, especially given its announcement to reduce 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.