ONB

Business Context and Reporting Period

Company: Old National Bancorp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Old National Bancorp operates as a financial holding company with two primary segments: Community Banking and Treasury. The company focuses on commercial, real estate, and consumer lending, as well as wealth management and insurance services. A significant event during the period was the acquisition of St. Joseph Capital Corporation in February 2007 for $78.1 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: For the three months ended September 30, 2007, net income increased by $1.6 million (7.6%) compared to the same period in 2006. However, for the nine-month period, net income decreased by $9.0 million (14.5%) compared to 2006, largely due to restructuring expenses and lower securities gains.
• Provision for Loan Losses: The company recorded no provision for loan losses in the third quarter of 2007, compared to no provision in the third quarter of 2006. Year-to-date provision was $2.4 million, a significant decrease from $7.0 million in the prior year, reflecting improved asset quality.
• Deposits: Total deposits decreased by $209.3 million (3.4%) year-over-year and $446.9 million (7.1%) from December 31, 2006. This decline was driven by a strategic reduction in higher-cost time deposits and money market accounts.
• Acquisition Impact: The acquisition of St. Joseph Capital Corporation added $330.2 million in loans and $240.5 million in deposits to the portfolio as of September 30, 2007.
• Asset Sales: The company sold 26 financial center properties in September 2007 for $98.2 million, recognizing a gain of $56.3 million (mostly deferred). This was part of a strategy to reduce non-earning assets.

Guidance, Outlook, and Risks

• Management Commentary: Management continues to focus on strengthening the risk profile and enhancing management discipline. Loan and deposit growth remains challenging due to the economic environment and competitive interest rates. The company is cautious regarding the real estate market to lower future credit risk.
• Asset Quality: Nonperforming loans totaled 1.04% of total loans, an increase from 0.88% at year-end 2006, primarily due to the St. Joseph acquisition. However, criticized and classified loans decreased significantly during the quarter.
• Interest Rate Risk: The company manages interest rate risk using Net Interest Income at Risk and Economic Value of Equity models. As of September 30, 2007, the company was within the "green zone" policy limits for all scenarios.
• Liquidity: Liquidity remains strong with $197.2 million in cash and cash equivalents. The company has access to $713.1 million from the Federal Reserve discount window and maintains relationships with capital markets for funding.
• Risks: Key risks include credit quality deterioration due to economic weakness, volatility in interest rates, and the ability to achieve loan and deposit growth in a competitive market.

Investor Verification Checklist

• Asset Quality Trends: Verify the trend in nonperforming loans and the adequacy of the allowance for loan losses (1.35% of total loans) given the economic environment.
• Deposit Stability: Assess the sustainability of the deposit base following the strategic reduction of higher-cost deposits and the impact of the St. Joseph acquisition.
• Noninterest Income Volatility: Review the composition of noninterest income, noting the decrease in securities gains and derivative fees year-over-year.
• Real Estate Exposure: Evaluate the company's exposure to commercial real estate loans, which decreased by $98.6 million year-over-year, and the associated credit risk.
• Capital Adequacy: Confirm regulatory capital ratios (Tier 1 leverage ratio of 7.66%) remain well above minimum requirements despite the cash acquisition.