Indiana Banks and Banks and Branches and Banking & Finance and Old National

Sale of storied bank reflects industry's difficult times

February 4, 2012

The Keach name has been synonymous with Indiana banking for more than a half century. So when John Keach Jr., CEO of Indiana Community Bancorp, announced late last month that his insti-tution was being acquired by Old National Bancorp, it spoke volumes about the challenging state of the banking industry.

Keach has worked for Indiana Community’s banking unit—the 103-year-old Indiana Bank & Trust Co.—for 37 years. His grandfather, Glenn, joined the bank in 1939, rising to CEO. And his father, John Sr., spent 22 years atop the bank.

“I have been around here all my life. So it is more difficult. But it is the right decision to make,” Keach, 59, said days after the Jan. 25 announcement of the deal.

In the $79 million transaction, shareholders of Columbus, Ind.-based Indiana Community are getting 1.9 Old National shares for each share of Indiana Community—an exchange ratio that gives Indiana Community stockholders a nearly 60-percent premium to where their shares were trading the day before the deal was announced.
 

keach-john-mug.jpg Keach

But Keach never would have done the deal if he hadn’t looked into the future and wondered how—given the lackluster economy and increasing costs for everything from employee benefits to regulatory compliance—Indiana Community would generate robust earnings growth.

“The overall operating environment continues to increase from an expense standpoint, while at the same time it has become more and more difficult to show incremental increases on the revenue side,” Keach said.

Banks statewide feel his pain, said Mike Renninger, a banking consultant with Renninger & Associates in Carmel.

“It has been a protracted recovery. It has been a slow recovery, so banks have had difficulty finding quality loan growth,” Renninger said. “The key word is quality.”

Keach said navigating this climate requires greater scale. His bank has $985 million in assets and 17 branches, including three in the Indianapolis market. Evansville-based Old National is far larger, with $8.9 billion in assets and more than 180 branches.

Old National also has something else—a formidable capital base at a time many of its competitors, including Indiana Community, still are licking their wounds from the financial crisis. Indiana Community last fall charged off more than $13 million because of a spate of soured commercial loans in the Indianapolis area.

Old National’s financial might has allowed it to be an opportunistic buyer. It purchased Bloomington-based Monroe Bancorp for $83 million a year ago and scarfed up remnants of Evansville-based Integra Bank Corp. when it failed last summer.

The Indiana Community deal is expected to immediately boost Old National’s earnings, in part because of cost-cutting, Old National CEO Bob Jones said on a Jan. 25 conference call with analysts.

“As we look at transactions like this, we do so as we look at a very slow economic recovery,” he said. “At a time where prudent growth is challenging,” the deal provides a relatively low-risk opportunity to boost earnings, he said.

Banks won’t need to rely as heavily on deal-making to grow profits if the economic recovery turns robust. That would make companies of all stripes more eager to borrow, and increase the likelihood they’ll repay the loans they take out.

But that doesn’t look imminent. Meanwhile, community banks are under intense pressure from regulators to shed problem loans and write down the value of collateral. They’re also bracing for an onslaught of new regulations stemming from the Dodd-Frank Act, the financial-reform legislation passed by Congress in 2010.

“The headwinds for all banks are pretty stiff,” Renninger said. “The regulatory burden that has been coming at them is so burdensome that there are a number of banks wondering how they will maintain respectable levels of profitability.”

All eyes on Lilly’s solanezumab

Eli Lilly and Co. executives are doing everything in their power to downplay expectations for the company’s developmental Alzheimer’s drug, solanezumab, but it’s a hopeless cause.

The company gave it only a brief mention in its quarterly earnings release distributed early Jan. 31, noting an independent safety monitor had given researchers the OK to continue late-stage trials. But it dominated the Q&A session company management held later in the day, and nearly all the analysts’ reports that followed.

Everyone agrees the drug is a long shot, and the clearance to continue testing doesn’t validate the drug’s effectiveness. More detailed information on that is expected in the second half of the year.

But analysts can’t help but think, “What if?” Barclays Capital upped solanezumab’s odds of success from 15 percent to 25 percent and said it might reach peak sales of $4 billion a year. Bernstein Research wrote: “Should results come out positive, the financial upside for [Lilly] could be tremendous,” perhaps leading to the doubling of the stock price.•

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