DBRS Confirms Ratings of Old National Bancorp & Related Entities – Senior at BBB (high)

DBRS has today confirmed the ratings for Old National Bancorp (Old National or the Company) and its related entities, including Old National’s Issuer & Senior debt rating of BBB (high). The trend for all ratings remains Stable. The rating action follows a review by DBRS of Old National’s operating performance, financial fundamentals and future prospects.

Despite the deteriorating economy, Old National’s credit fundamentals remain relatively solid. The rating confirmation and Stable trend recognizes the Company’s pressured, yet relatively sound asset quality, its strained earnings generation capacity, its healthy liquidity and moderate capital base. The ratings also reflect a deeply rooted community-based banking franchise which is underpinned by ample core deposit funding.

Despite the declining economy, Old National’s asset quality remains relatively sound and benefits from its sufficiently granular and diversified loan portfolio and below peer median level of commercial real estate (CRE) exposure. Although credit metrics deteriorated somewhat during Q1 2009, they compare favorably to similarly rated peers. Specifically, non-performing assets (NPAs) increased to 1.81% of loans at March 31, 2009, from 1.40% at December 31, 2008, while Q1 2009 net charge-offs decreased slightly to a moderate 1.07% of average loans, from 1.14% for the prior quarter. Both credit quality metrics fall below the medians for its rated peer. DBRS notes that the bulk of the sequential quarterly increase in NPAs was mostly related to commercial and CRE non-accruals. At March 31, 2009, the Company’s loan loss reserves represented a moderate 85% of NPAs, yet adequately cover current charge-off levels. Given the economy, DBRS anticipates further deterioration in Old National’s loan portfolio.

Old National’s earnings continue to be negatively impacted by heightened credit costs and more recently by securities impairment charges and a narrower net interest margin (NIM). The decrease in NIM reflected the steep decline in interest rates, a higher securities component and an increase in non-accruals. Partially offsetting, Old National’s relatively high level of fee revenues (40% of total revenues for Q1 2009) provide a degree of earnings stability.

The Company’s liquidity position remains sound and is underpinned by a core deposit base which accounts for approximately 112% (at March 31, 2009) of net loans. A sizeable 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 $269 million (book value) in non-agency mortgage backed securities, with market values of $209 million at March 31, 2009. Moreover, the Company maintains $58 million (book value) of pooled trust preferred securities, with market values of roughly $17 million. DBRS notes that within these portfolios are $46.5 million (book value) of non-agency MBS and $45.2 million of pooled trust preferred securities, which are rated below investment grade.

On March 31, 2009, Old National repurchased the $100 million in preferred shares that it had sold to the U.S. Treasury. DBRS notes that the buyback somewhat reduced the Company’s loan loss absorption capacity. Nonetheless, Old National’s Tier 1 and Total risk based capital ratios were solid and above “well capitalized” levels. Meanwhile, the Company’s tangible common equity to tangible asset ratio was moderate at 5.23%. In light of the economic downturn, DBRS anticipates that the Company will augment its capital position over the intermediate term, especially given the reduction of its common stock dividend by roughly 70%.

DBRS believes that the principal challenges faced by Old National are to sustain sound asset quality, improve its core profitability and build-up its capital, to avoid weakening of its fundamentals.

Old National, a bank holding company headquartered in Evansville, Indiana reported $8.4 billion in assets at March 31, 2009.

Note:
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.