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.

The ratings confirmation and Stable trend recognizes the Company’s relatively sound asset quality, resilient earnings power, solid capital and ample liquidity. The ratings also reflect a deeply rooted community-based banking franchise which is underpinned by substantial core deposit funding.

Despite the protracted economic downturn, Old National’s asset quality remains relatively sound and benefits from a sufficiently granular and diversified loan portfolio, including a manageable level of commercial real estate (CRE) exposure. Old National’s asset quality metrics compare favorably to its similarly rated peers. Positively, Old National’s non-performing assets (NPAs), classified loans and special mention loans declined during the quarter. Specifically, NPAs decreased to 2.05% (excludes residential loans and leases held for sale) of total loans at June 30, 2010, down from 2.13% at March 31, 2010. Nonetheless, net charge-offs (NCOs) increased moderately during 2Q10, to a still manageable 0.90% of average loans, up from 0.72% for 1Q10. DBRS comments that the Company’s allowance for loan loss reserves to nonaccrual loans was adequate at 104%. DBRS anticipates that macroeconomic headwinds will continue to challenge Old National’s credit quality over the intermediate term. However, DBRS expects that future credit quality erosion will be manageable.

Old National’s earnings power remains resilient, despite the challenging economic environment. Indeed, the Company has only suffered one quarterly loss since the economic downturn began. Although earnings remain pressured by elevated credit costs and a relatively high expense base, Old National’s ample fee revenues, which represent roughly 41% of total revenues, provide earnings stability. In light of steadying credit costs, Old National reported net income of $10.5 million for 2Q10, up from $10.1 million for the prior quarter. On a linked-quarter basis, higher earnings reflected a 14% decrease in provisions for loan loss reserves and stable noninterest income, partially offset by a 0.3% decline in net interest income (fully taxable equivalent basis or FTE) and a 1% increase in noninterest expense.

The decline in net interest income (FTE basis), reflected a 2.5% decrease in average earnings assets and a 7 basis point widening of net interest margin (NIM) to 3.40%. Lower average earning assets reflected lower levels of loans, offset by a slight increase in securities. The wider NIM was attributed to the Company’s improved liability mix and lower liability costs. Higher noninterest expense mostly reflected costs associated with the closure of five branches in Indianapolis and an early termination fee related to the prepayment of $49 million of wholesale funds. During 2Q10, the Company took $6 million in securities gains, which was partially offset by $2.8 million of other than temporary impairment (OTTI) charges, the bulk of which was related to non-agency MBS and, to a far lesser extent, pooled trust preferred securities. DBRS notes that recently enacted rules related to financial regulatory reform will pressure the Company’s bottom line. Moreover, as with all banks, a protracted economic downturn will continue to pressure loan demand from quality borrowers.

Old National’s capital position is ample and provides substantial loss absorption capacity and support for future growth. At June 30, 2010, the Company’s tangible common equity, and Tier 1 and Total risk based capital ratios were 9.03%, 15.09% and 16.97%, respectively. DBRS notes that Old National repaid its TARP related funds during 1Q09.

Old National’s substantial funding position is underpinned by a robust core deposit base that accounts for 138% of net loans. The Company’s securities portfolio which represents 37% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out its liquidity. Old National’s investment portfolio consists mostly of low risk, agency issued securities. Nonetheless, DBRS notes that the Company does have some riskier securities, including $194.8 million (book value) of non-agency mortgage backed securities, with a market value of $164.7 million, and $40.0 million (book value) of trust preferred securities, with a market value of $20.7 million. DBRS comments that there is the potential for future OTTI related charges. Furthermore, the securities portfolio does contain some extension risk. At June 30, 2010, the duration of the securities portfolio was 3.4 years.

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

The applicable methodologies are Rating Bank Preferred Shares and Equivalent Hybrids, published in June 2009 and the press release "DBRS clarifies its Approach to Rating Bank Subordinated Debt and Hybrid Instruments" published in December 2009; Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.