DBRS Ratings of Old National Unchanged After 2Q13 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 2Q13 results. The trend on all ratings is Stable. Old National reported 2Q13 net income of $28.5 million, up from $23.9 million for 1Q13, and from $27.2 million for 2Q12. Earnings for 2Q13 equated to a 1.18% return on average assets and a 9.51% return on average common equity, up moderately from last quarter’s results.

Highlights for the quarter included resilient earnings, loan growth, continued improvement in asset quality, and the maintenance of sound capital and liquidity positions. On a linked-quarter basis, 2Q13 earnings reflected a recapture of provision for loan loss reserves, lower non-interest expense and stable total revenues. Importantly, and strengthening its franchise, on July 12, 2013, the Company closed on its acquisition of 24 Bank of America branches located in Northern Indiana and Southwestern Michigan.

Improved linked-quarter earnings reflected a $4.5 million beneficial swing in provisions for loan loss reserves, and a 3.7% decrease in non-interest expense to $86.9 million. Specifically, the Company reported a $3.7 million recapture of provisions for loan loss reserves, as compared to $845,000 in provisions for the prior quarter. Lower sequential non-interest expense, in part, reflected a number of non-core items. On an adjusted basis, excluding non-core items, expenses were down 1.1% (DBRS calculated) sequentially, reflecting lower levels of salaries and employee benefits and professional fees. DBRS notes the Company recently announced that it would consolidate eighteen branches, which should benefit the bottom line by improving its efficiency.

Reflecting a 2.4% increase in average earning assets, net interest income increased 0.25% to $79.2 million, despite a 7 basis point narrowing of net interest margin (NIM; FTE basis) to 3.97%. DBRS notes that the high NIM, in part, reflected material contributions from continued accretion of purchase accounting adjustments from its Integra Bank, Indiana Community Bancorp, and Monroe Bancorp, acquisitions. Meanwhile, higher average earning assets were driven by a 5.4% increase in average investments ($165.1 million) and a 0.7% increase ($36.3 million) in average loans. The increase in average loans mostly reflected a 6.6% ($82.9 million) increase in commercial exposures.

Modestly lower QoQ non-interest income of $46.2 million reflected a 14.7% decrease in insurance premiums, due mostly to the non-recurrence of seasonal insurance contingency income in 1Q13. Most other core fee line items improved sequentially, including wealth management fees, deposit service charges, investment product fees, and mortgage banking revenue. Overall, total revenues were unchanged linked-quarter at $125.4 million.

Old National’s asset quality continued to improve. Excluding covered loans and loans held for sale, net charge-offs (NCOs) and non-performing assets (NPAs) declined sequentially. Specifically, NPAs decreased to a still relatively high 3.02% of ending loans at June 30, 2013, down from 3.46% at March 31, 2013. Meanwhile, NCOs remain minimal at 0.01% of average loans for 2Q13, down from 0.10% for 1Q13. 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 32% of nonperforming loans at quarter end.

The Company’s liquidity and capital profile remain strong. Old National’s deposit base comfortably funds the loan portfolio, as evidenced by its loan to deposit ratio of 75.7%. Moreover, $3.1 billion of mostly good-quality investment securities bolsters liquidity. Nonetheless, there is extension risk in the portfolio, which DBRS will continue to monitor. Finally, despite the repurchase of 500,000 common shares, capital remains strong. Indeed, at June 30, 2013, Old National’s tangible common equity ratio was a high 8.65% and its estimated Tier 1 capital ratio was 14.4%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]