DBRS Comments on Q3 Earnings of Old National Bancorp – Senior at BBB (high)

DBRS has today commented that the ratings of Old National Bancorp (Old National or the Company), including its Issuer & Senior Debt rating of BBB (high) are unaffected by the Company’s Q3 2009 earnings results. The trend on all ratings remains Stable.

Old National’s earnings were down in Q3 2009 over Q2 2009, with still elevated provisions for loan loss reserves and weakening revenues, as net interest margin (NIM) narrowed by 6 basis points (bps) to 3.53%. Partially offsetting these headwinds, non-interest expenses declined modestly. The Company reported net income available to common shareholders of $4.0 million, down from $9.6 million for the prior quarter and $17 million for Q3 2008. Net-interest income contracted moderately, due to NIM contraction. Meanwhile core non-interest income, which excludes non-recurrent gains and losses, including a $1.4 million loss on the sale of $258 million of leases, was negatively impacted by lower service charges on deposits, and contraction of wealth management and mortgage banking revenues. The decrease in non-interest expenses predominantly reflected the absence of the Q2 2009 $4.0 million FDIC special assessment fee. On an annual, quarterly basis, earnings were down, due to a 78% increase in provisions for loan loss reserves, a 16% increase in non-interest expenses, mainly related to the Charter One branch acquisition (closed March 2009), and a 26 bps narrowing of NIM.

Despite the challenging economy and high unemployment, Old National’s asset quality remains relatively sound. The Company’s non-performing assets (NPAs) increased to 1.96% of total loans, from 1.87% at June 30, 2009, a solid performance versus its similarly rated peers. Meanwhile, net charge-offs (NCOs) for the quarter, were fairly flat at 1.17% of average loans, versus 1.18% during Q2 2009. Although not a trend, DBRS notes one positive sign was that NPAs and NCOs were down slightly on an absolute basis. Old National’s largest nonaccrual loans were evenly split between CRE and commercial and industrial (C&I) loans. NCOs reflected CRE and C&I exposures, and to a lesser degree, consumer loans. At September 30, 2009, the Company’s allowance for loan loss reserves to NPAs was moderate at 86%.

During Q3 2009, Old National’s NIM narrowed by 6 bps to a still fairly good 3.53%, due to lower asset yields and average earnings assets. The decline in average earning assets was spurred by lower loan balances, mostly offset by higher levels of securities. Old National’s balance sheet is slightly asset sensitive.

The Company’s liquidity position is solid and underpinned by a core deposit base that accounts for 124% (at June 30, 2009) of net loans. A securities portfolio, which represents 37% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve Discount Window, round out Old National’s liquidity profile. Although the bulk of the Company’s securities portfolio is relatively low risk agency issued or guaranteed securities, Old National does hold some riskier securities, including $231 million (book value) of non-agency mortgage backed securities, with a market value of $184 million, and $46 million (book value) in trust preferred securities, with a market value of $24 million. DBRS notes that during Q3 2009, Old National recognized a $5.1 million other than temporary impairment (OTTI) charge within its non-agency collateralized mortgage obligations and pooled trust preferred securities portfolios. DBRS notes that there is the potential for future OTTI related charges, which could pressure the Company’s earnings.

During Q3 2009, the Company augmented its capital position with $196.4 million in net proceeds, from its issuance of common stock. At September 30, 2009, Old National’s Tier 1 and Total risk based capital ratios were 14.1% and 16.5%, respectively, up from 10.2% and 12.6%, respectively, at June 30, 2009. Meanwhile, the Company’s tangible common equity to tangible asset ratio increased to a high 8.5%, from 5.5%.

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.