New York, February 03, 2020 -- Moody's Investors Service (Moody's) has affirmed the ratings of
Old National Bancorp (Old National) and its bank subsidiary Old National
Bank and changed the rating outlook on both entities to stable from negative.
Old National Bancorp has long-term issuer and senior unsecured
ratings of A3. Old National Bank has long- and short-term
bank deposit ratings of Aa3 and Prime-1, respectively,
and a standalone Baseline Credit Assessment (BCA) of a2.
Moody's said that while the ratings affirmation reflects its unchanged
assessment of the bank's standalone credit profile, the change
in outlook to stable from negative reflects the strengthening of its financial
metrics that has occurred since the close of its recent acquisitions.
Affirmations:
..Issuer: Old National Bancorp
....Long-term Issuer Rating,
Affirmed A3, stable from negative
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3, stable from negative
....Senior Unsecured Shelf, Affirmed
(P)A3
....Subordinate Shelf, Affirmed (P)A3
....Junior Subordinate Shelf, Affirmed
(P)Baa1
....Pref Shelf, Affirmed (P)Baa1
....Pref Shelf Non-cumulative,
Affirmed (P)Baa2
..Issuer: Old National Bank
....Long-term Issuer Rating,
Affirmed A3, stable from negative
....Long-term Counterparty Risk Assessment,
Affirmed A1(cr)
....Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Local currency and foreign currency Long-term
Counterparty Risk Rating, Affirmed A2
....Local currency and foreign currency Short-term
Counterparty Risk Rating, Affirmed P-1
....Long-term Deposit Rating,
Affirmed Aa3, stable from negative
....Short-term Deposit Rating,
Affirmed P-1
....Adjusted Baseline Credit Assessment,
Affirmed a2
....Baseline Credit Assessment, Affirmed
a2
Outlook Actions:
..Issuer: Old National Bancorp
....Outlook, Changed to Stable from
Negative
..Issuer: Old National Bank
....Outlook, Changed to Stable from
Negative
RATINGS RATIONALE
Old National's return to stable outlook from negative reflects significant
improvements in key credit metrics previously weakened following three
sizeable, out-of-footprint bank acquisitions between
2016 and 2018. These metrics returned to 2017 levels, or
better in 2019.
The affirmation of Old National's ratings and a2 BCA reflects Moody's
unchanged view of the bank's standalone credit profile and Moody's
expectation that Old National will maintain its strong financial profile,
characterized by low problem loans, solid capitalization and profitability,
and a stable liquidity profile. Asset quality has been a longstanding
strength of the company, underpinned by its conservative credit
culture and the lack of material concentrations. However,
with the acquisition of Anchor BanCorp Wisconsin Inc. in May of
2016, Old National's commercial real estate (CRE) loan exposure
increased to 210% of tangible common equity as of 30 September
2019, whereas prior to Anchor Wisconsin it was roughly one-third
lower. Moody's believes that this risk is partially mitigated
by the credit mark taken in the transaction and Old National's ability
to effectively manage the moderate concentration.
Old National's capitalization is sound, and the ratings affirmation
and stable outlook reflect Moody's expectation that it will be maintained
over the next 12-18 months. Moody's estimated the
tangible common equity/risk-weighted asset ratio to be 12.1%
as of 31 December 2019. This ratio had decreased from 11.3%
as of year-end 2015 to a low of 10.6% as of year-end
2017, following the close of the acquisition of Minnesota-based
Anchor Bancorp, Inc. (ABI) in November of 2017, which
like Anchor Wisconsin involved both cash and stock consideration.
Capitalization subsequently increased, returning to 11.3%
as of 30 September 2018, and has consistently increased since that
time. The acquisition of Klein Financial Inc. in late 2018
increased capitalization with its 100% equity financing.
For several years, Old National's profitability was constrained
by elevated expenses driven by its expansion. Old National improved
its profitability to a strong return on average assets of 1.2%
in 2019. Results for 2019 were challenged by lower interest rates
as well as expenses associated with the Klein integration and its ONB
Way program. Through the ONB Way initiative, the bank is
targeting a number of revenue and efficiency improvements over the next
one to two years. The company was still able to improve its cost-to-income
ratio (calculated by Moody's) to 62% for the first three
quarters of 2019, versus 71% for the year 2018. Since
the Klein acquisition, Old National management has been more internally
focused on optimizing its business through execution of its ONB Way enhancements,
which should be supportive of sustained, solid profitability.
Regarding overall liquidity, Old National's market funding
has been consistent, while its balance sheet liquidity has improved
after weakening through 2017. Prior to 2017, Old National's
loan growth often outpaced deposit growth, which was in part related
to acquisitions. This resulted in a reduction in its liquid assets
relative to tangible banking assets, but this metric has since increased
to 28% as of 30 September 2019.
Old National's exposures to environmental and social risks are low and
moderate, respectively, consistent with our general assessment
for the global banking sector. We do not have any particular concerns
with Old National's governance. The company shows an appropriate
risk management framework commensurate with its risk appetite.
Factors that Could Lead to an Upgrade
A lower CRE concentration, higher capitalization and a stronger
funding and liquidity profile are necessary for a higher BCA and ratings.
Factors that Could Lead to a Downgrade
Downward movement of the BCA and ratings could occur if the bank's capitalization
falls or it shows increased asset risk, for example through a higher
CRE concentration or out-of-market acquisitions.
Loan growth in excess of deposit growth would also be negative.
The principal methodology used in these ratings was Banks Methodology
published in November 2019. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rita Sahu, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
