DBRS Ratings of Old National Unchanged After 2Q12 Results – Senior at BBB (high); Trend Stable

DBRS, Inc. (DBRS) has today commented that its ratings for Old National Bancorp (Old National or the Company), including its BBB (high) Issuer & Senior Debt rating, are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. Old National reported earnings of $27.2 million for the second quarter, up $5.5 million from the previous quarter. Second quarter results were bolstered by securities gains of $6.2 million, up from gains of $0.5 million in the prior quarter. Still, in DBRS’s view, the Company’s quarterly results were solid in light of the challenging environment and reflected mostly positive underlying trends. Asset quality continued to generally improve in the quarter, supporting a $1.7 million QoQ decline in the loan loss provision, and the Company reported solid organic loan growth. In addition, pipelines remained strong at quarter-end. Importantly, Old National also reported an increase in core profitability QoQ. Excluding securities gains and merger-related expenses, income before provisions and taxes increased $0.7 million over the second quarter to $33.1 million.

Total revenues, on a fully-taxable equivalent basis, increased $1.3 million from 1Q12 to $127.8 million. Excluding securities gains, however, revenue declined around $4.4 million as higher spread income was offset by adjustments to the indemnification asset. Net interest income (FTE) increased 2.5% QoQ to $79.2 million primarily due to an increase in average earning assets as well as higher accretable yield. Reflecting the latter, Old National’s reported net interest margin (NIM) expanded 6 bps from 1Q12 to 4.26%. Nonetheless, excluding the accretion, Old National’s core NIM was still a relatively high 3.50% for 2Q12, down just 2 bps from 1Q12.

The $6.3 million QoQ decline in noninterest income, excluding securities gains, to $42.1 million was primarily due to movement in the Company’s FDIC indemnification asset. In 1Q12, the indemnification asset was written up by $4.8 million while in 2Q12 it was written down by $4.0 million. Other key fee lines were mixed. Relative to 1Q12, service charges were flat, mortgage banking revenues and investment product sales revenues were up and ATM fees were down. Reflecting some seasonality, wealth management fees increased in the second quarter while insurance income declined.

Reported expenses declined $5.3 million from 1Q12 primarily due to lower Integra-related OREO expense. Old National’s core expenses, which exclude among other things, the Integra-related OREO expense, M&A expenses and also $1.7 million of efficiency-related expenses, increased $1.1 million to $79.1 million. This increase was largely attributable to annual merit increases that went into effect in the quarter as most other expense line items were similar to 1Q12. Old National continues to carefully manage expenses as part of its Simple, Easy, and Fast program and targets an efficiency ratio of around 65%. For 2Q12, the reported efficiency ratio was 69.2%.

Old National’s asset quality continues to trend better, yet remains pressured by the protracted slow growth economy. Nonperforming assets (NPAs) (excluding residential loans held for sale and covered assets) fell $9.3 million (or 7.7%) from 1Q12, and as a percent of total loans, NPAs declined to 2.64% at June 30, 2012, from 2.94% at March 31, 2012. Meanwhile, net charge-offs (excluding residential loans held for sale and covered assets) decreased to a very low 0.09% of average loans for 2Q12, from 0.33% for 1Q12. Offsetting these positives somewhat, DBRS notes that criticized loans, excluding covered loans, increased $26 million QoQ to $103.1 million, reversing a trend of four straight quarterly declines in criticized balances. Classified loans, on the other hand, continued to trend lower. DBRS comments that, although adequate in light of current loss rates, Old National’s loan loss reserves represented a relatively low 50% of nonperforming loans (excluding Integra covered loans) at quarter end.

Old National’s capital and funding profile remains strong. The Company’s robust core deposit base comfortably funds the entire loan portfolio and a securities portfolio that represents 32% of total assets bolsters liquidity. With respect to capital, at June 30, 2012, Old National’s tangible common equity ratio was a high 9.40%, its estimated Tier 1 capital ratio was 14.6% and its Total capital ratio was 15.7%. Capital is expected to moderately contract in 3Q12 upon the closing of the of Indiana Community Bancorp acquisition.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 3 October 2005
Most Recent Rating Update: 26 January 2012

For additional information on this rating, please refer to the linking document under Related Research.