Old National Bancorp wants analysts to cut 1997 earnings estimates because of expected loan losses from auto lending.
The Evansville, Ind.-based bank said profits would be depressed by a $5 million after-tax charge to cover one-time losses related to $50 million in subprime auto loans bought between early 1996 and early 1997.
Old National said it still expects to record a profit in the fourth quarter, and it believes it will earn between $2.28 and $2.31 per share for the year. That compares with analysts' estimates of $2.41.
The $5.6 billion-asset Old National acquired the problem loans as it was trying to expand its fledgling consumer finance subsidiary, Consumer Acceptance Corp., said chief financial officer Steve H. Parker. Consumer Acceptance, launched in early 1996, has five offices in Indiana and specializes in auto, home equity, and small secured consumer loans.
Mr. Parker said Old National has sold nearly half of the $50 million in auto loans it acquired last year. It also fired a company earlier this year that had been contracted to service the loans, he said.
Despite the trouble with auto finance, Mr. Parker said the company believes it can still build its consumer finance business. "With the right management, the right controls and criteria, we think it's a business that can be quite successful," he said.
Consumer Acceptance has a portfolio of $75 million, with auto loans making up about 75% of the loans, Mr. Parker said. The company doesn't publicly break out revenues for Consumer Acceptance because they have been minimal, Mr. Parker added.
Old National chairman John N. Royse said the losses don't signal a collapse of credit quality at the Indiana company.
"This is an isolated loss that stems from a deviation from our normal loan underwriting and servicing standards," Mr. Royse said. "We have frequently stated that the strength of our company is our credit quality and strong credit culture."
Analyst Joseph Duwan with Keefe, Bruyette & Woods Inc. said Old National's announcement appears to be unique to the company and to the troubled subprime auto lending business. The trend among banks in the second half has been improving credit quality, he added.
"It's been looking pretty positive," Mr. Duwan said. "I think this is kind of an isolated case. I don't think we're expecting anything too negative in terms of consumer chargeoffs this quarter."