DBRS Ratings of Old National Unchanged After 4Q12 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 4Q12 results. The trend on all ratings is Stable. Old National reported 4Q12 earnings of $23.0 million, up from $19.7 million for the third quarter. Improved earnings were driven by solid contributions from its acquisitions, including its most recent transaction, Indiana Community Bancorp (Indiana Community; closed September 15, 2012), a $5.6 million change in the FDIC indemnification asset and higher gains on securities.

Linked-quarter results were somewhat noisy and included several non-core items. During 4Q12, the Company reported $4.2 million in securities gains, $2.0 million of integration expense, $2.6 million of branch optimization expense, $1.9 million of debt extinguishment expense and a $1.0 million contribution to the ONB Foundation. Meanwhile, third quarter results were impacted by $4.9 million of merger expenses, $0.8 million of expenses related to the Company’s branch optimization efforts and $2.7 million of securities gains.

The Company’s spread income continues to benefit from purchase accounting accretion, as loans from its acquisitions have performed better than expected. Although accretion contributions from its older acquisitions of Monroe Bancorp and Integra Bank N.A. will decline over time, the Company anticipates that this will be offset by higher future accretion from Indiana Community. During the quarter, spread income increased $10.3 million, or 13.9%, to $84.4 million, driven by a 25 bp expansion in net interest margin (NIM) to a high 4.34%, and a 6.9% increase in average earning assets. The wider NIM mostly reflected a 32 bp increase in accretion of purchase accounting discounts related to its three recent bank acquisitions. Meanwhile, the Company’s core NIM, which excludes purchase accounting adjustments, narrowed 7 bps to a still solid 3.40%, primarily driven by lower yielding investment securities.

Reflecting the impact of the Indiana Bancorp acquisition, average loans increased $394.7 million, or 8.2%, during the quarter. The QoQ increase in average loans was fairly broad-based, led by a $176.6 million, or 16.2%, increase in commercial real estate, a $133.2 million, or 11.3%, increase in residential real estate and an $85.2 million, or 7.4%, increase in commercial & industrial loans. DBRS notes that loan growth on a period-end basis, was more muted, due to some expected run-off of the Indiana Community loan book, and the difficult business environment. During 4Q12, period-end loans decreased 0.9%. Nonetheless, excluding covered loans, which are being managed down, period-end loans were up a modest 0.6%.

Non-interest income, which was impacted by several non-core items increased by $10.4 million, or 25.4%, to $51.3 million, sequentially, primarily reflecting a $5.6 million swing in change in the indemnification asset and a $1.5 million increase in securities gains. Importantly, core fee-line items on a QoQ basis were mostly improved, led by higher mortgage banking income and insurance premiums and commissions.

Meanwhile, reported expenses increased by $10.4 million, or 11.7%, sequentially, to $99.4 million, primarily driven by the previously mentioned non-core items and expenses related to Indiana Community.

Old National’s asset quality generally improved during 4Q12, yet remains pressured by the protracted slow growth economy. Specifically, non-performing assets (excluding covered assets and residential loans and leases held for sale), decreased $15 million QoQ to $171.8 million, yet represented a still relatively high 3.56% of loans for 4Q12, down from 3.90% for 3Q12. Meanwhile, net charge-offs remain minimal at 0.26% of average loans, at December 31, 2012. Positively, classified and criticized loan balances declined in 4Q12. Finally, 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 31% of nonperforming loans (excluding Integra covered loans) at quarter end.

Old National’s funding and capital profile remains strong. The Company’s deposit base comfortably funds the entire loan portfolio and its $2.9 billion, good-quality securities portfolio bolsters liquidity. DBRS notes that future deposits will be augmented by the recently announced pending acquisition to purchase 24 branches and $778 million in deposits. With respect to capital, at December 31, 2012, Old National’s tangible common equity ratio was a high 9.01% and its estimated Tier 1 capital ratio was 13.7%.

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

[Amended on June 25, 2014 to remove unnecessary disclosures.]