Indiana Banks and Branches and Banking & Finance and Old National

Old National striving to be 'Indiana's bank'

May 18, 2009

Old National Bancorp rolled into Indianapolis nearly a decade ago with a single commercial banking office to mark its presence.

Now, thanks to its March acquisition of 65 Charter One branches, the Evansville-based parent of Old National Bank has built one of the deepest retail penetrations in the region.

The acquisition underscored a shift at the 175-year-old Hoosier stalwart away from roots in its hometown and rural areas mostly in southwestern Indiana, Illinois and Kentucky.

Even though its nearly $8 billion in assets makes Old National the state's largest homegrown bank, it's difficult to increase revenue without grabbing market share in the state capital, President and CEO Bob Jones acknowledged.

"It's a bigger economy, clearly," Jones said. "There's a lot more growth opportunities."

Jones joined the bank in August 2004 after spending 25 years at Cleveland-based KeyCorp., leaving as head of its McDonald Investments Inc. subsidiary.

He set out to reduce Old National's costs, revamp its risk assessment procedures, and redesign its strategy to invest in higher-growth markets.

Then in March came its $15.9 million acquisition of the Charter One branches from Providence, R.I.-based Citizens Financial Group, which is owned by Rhode Island-based Citizens Financial Group Inc., a subsidiary of The Royal Bank of Scotland.

Old National now has more than 180 branches in Indiana, making it the state's third-largest bank in terms of retail locations behind New York-based Chase and Pittsburgh-based PNC Financial, which acquired National City Corp. last year.

Only five of the 62 Charter One locations are outside Indianapolis—in Lafayette, South Bend and Fort Wayne. Counting existing Old National branches in the Indianapolis area, the bank now boasts 74, again trailing only Chase and PNC. The purchase enabled Old National to leapfrog such local rivals as Milwaukee-based M&I Bank, which acquired First Indiana Bank Corp. for $529 million in 2007, and Ohio competitors Fifth Third Bank and Huntington National Bank.

Perhaps more important, the acquisition is testament to Jones' goal of making Old National "Indiana's bank."

Old National filled an important gap when it extended its reach in central Indiana, said Stephen Geyen, a bank analyst at Stifel Nicolaus & Co. Inc. in Minneapolis.

"The strategic goal for the company is that they want to be the premier bank of Indiana," he said. "In order to achieve that goal, they needed a larger footprint in Indianapolis."

But the Charter deal is not without risk, analysts argue. Its branches mostly are in stores operated by Kroger, Marsh Supermarkets, Starbucks and Wal-Mart, and are not considered lucrative.

The Charter locations brought Old National an additional $400 million in deposits and $5 million in loans—paltry sums for the number of branches involved.

Mike Renninger, principal of Carmel-based bank consultancy Renninger & Associates LLC, said Old National will need to grow the branches.

"It's not universally accepted that in-store branches are a good strategy," he said. "You have to be more sales-oriented. It's kind of like a kiosk."

However, Renninger said Old National's familiar name and the fact it is a homegrown company should help attract customers.

Acquiring existing branches along with customer deposits and loans is cheaper than building from scratch, analysts said.

Loan defaults have whittled Old National's assets and profits.

The bank peaked in 2002 with $9.6 billion in assets and $118 million in earnings. Last year, the assets had shrunk to $7.8 billion and profit to $62.5 million.

Loan loss reserves were built to $67.1 million last year from $56.5 million as the economy slowed and businesses and consumers increasingly struggled to pay back their loans.

Yet the bank is healthy enough to have repurchased in March all of the $100 million in preferred, non-voting stock it sold to the U.S. Department of Treasury after deciding it did not need assistance from the Troubled Asset Relief Program.

Old National originally entered the central Indiana market in 2000, after buying Muncie-based ANB Corp. for $212.4 million. The downtown Indianapolis commercial banking office opened the same year, led by banking veteran Steve Beck.

Beck left Old National three years later and now is managing director of the local office of suburban Chicago-based Geneva Capital Group Inc. Although Beck never worked for Jones, he supports Jones' growth strategy and said the bank needed a shot of new blood.

"The truth of the matter is, they were good at $500 million banking but they didn't know anything about running a bigger bank," Beck said. "Bob came in and he's [changing that]."

Other acquisitions include Old National's purchase in early 2007 of St. Joseph Capital Bank for $75.6 million. The Mishawaka institution had $500 million in assets.

Despite what Jones has accomplished in nearly five years, he admits the bank has "obvious holes."

Jones is targeting northern Indiana, Indianapolis and areas extending down Interstate 65 to Louisville for future acquisitions.

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