DBRS Ratings of Old National Unchanged After 3Q12 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 3Q12 earnings. The trend on all ratings is Stable. Old National reported 3Q12 earnings of $19.7 million, down from $27.2 million in the second quarter. Reported third quarter results were impacted by several notable items including: $4.9 million of merger related expenses, $0.8 million of expenses related to the Company’s branch optimization efforts and $2.7 million of securities gains. Old National’s 2Q12 earnings included $0.8 million of merger related expenses, $1.7 million of expenses related to ongoing efficiency initiatives and $6.2 million of securities gains.

Key highlights in the quarter from DBRS’s perspective were $94.4 million of organic loan growth, which came despite the sluggish economy, and further declines in net charge-offs (NCO’s) and core nonperforming loans. However, Old National, like most peers, was negatively affected by the still challenging operating environment. As a result, net interest margin (NIM) and net interest income declined QoQ. Also, criticized balances (even excluding the impact of the Indiana Community acquisition) increased for a second straight quarter highlighting borrowers’ diminishing capacity to deal with a slowing economy.

Excluding securities gains, total revenues, on a fully-taxable equivalent basis, declined $6.0 million from 2Q12 to $115.6 million. Net interest income (FTE) decreased 2.2% QoQ to $77.5 million primarily due to a decline in the accretion of purchase accounting discounts. Average loans increased by 3.1% from 2Q12, though due to the closing of the Indiana Community acquisition late in the quarter, period end loans were up 11.3% from June 30. Reflecting lower yields on earning assets, Old National’s reported NIM contracted 17 bps from 2Q12 to 4.09%. Excluding the accretion-related impact, Old National’s core NIM declined 3 bps to 3.47%. Given the current rate environment, DBRS expects further modest NIM compression in coming quarters.

Excluding securities and derivatives gains, the $4.1 million decline in fee revenues from 2Q12 was primarily due to losses on OREO properties (after gains in 2Q12) and an increase in the write-down of the Company’s FDIC indemnification asset. Reported expenses increased $3.0 million from 2Q12 to $89.0 million largely due to acquisition-related costs. Positively, Old National’s core expenses, which exclude among other things, the Integra-related OREO expense, M&A expenses and expenses related to branch and ATM network optimization, increased only slightly to $82.5 million. DBRS notes that Old National expects to incur additional expenses in coming quarters as part of its ongoing efficiency initiatives and costs related to BSA compliance. For 3Q12, the reported efficiency ratio was 75.3%, which was up from 69.2% in 2Q12.

Old National’s asset quality continues to trend generally better, yet remains pressured by the protracted slow growth economy. Nonaccrual loans, excluding those acquired from Indiana Community declined $5 million from 2Q12. Meanwhile, NCO’s (excluding residential loans held for sale and covered assets) remain minimal as Old National reported net recoveries of 0.03% (annualized) of average loans, down from NCOs of 0.09% in 2Q12. Offsetting these positives somewhat, DBRS notes that criticized loans, excluding covered loans and the impact of Indiana Community, were up for the second straight quarter, increasing $7.7 million QoQ to $110.8 million. Classified balances also ticked higher in 3Q12. DBRS comments that, although adequate in light of consistently low loss rates and the fair valuing of acquired portfolios, Old National’s loan loss reserves represented a low 29% 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 its $2.8 billion, good-quality securities portfolio bolsters liquidity. With respect to capital, at September 30, 2012, Old National’s tangible common equity ratio was a high 9.05% and its estimated Tier 1 capital ratio was 12.9%. The decline in capital ratios from the second quarter was due to the closing of the 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: Alan G. Reid
Initial Rating Date: 3 October 2005
Most Recent Rating Update: 12 October 2012

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