With The First Midwest Merger Done, Old National Bancorp Needs Execute On The Opportunity

Banks undergoing significant mergers are typically put in the penalty box now due to concerns about regulatory delays and real post-deal synergies, but the close of Old National Bancorp’s (NASDAQ:ONB) merger of equals with First Midwest hasn’t really helped much. These shares have continued to lag peers since my last update, with the shares up about 4% against closer to a 10% positive move in the peer group and a similar 4% move in the S&P 500.

I have decidedly mixed feelings on Old National shares at this point. On one hand, the valuation doesn’t seem ambitious or aggressive to me, even in the context of long-term term earnings growth in the neighborhood of 4%. On the other hand, neither of these two banks stand out on customer service or long-term core growth, and the Chicago-era lending market is getting increasingly competitive.

 

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With The First Midwest Merger Done, Old National Bancorp Needs Execute On The Opportunity

Old National Showing Some Loan Growth, But Execution Of Its Upcoming Merger Is The Major Driver

 

On its own, Old National Bancorp (ONB) is more of an “is what it is” sort of bank, with a well-earned reputation for conservative underwriting, but pretty lackluster return, growth, and share price performance track records. That can work for some investors, but now there’s a major driver on the horizon above and beyond the recovery from the pandemic lows – the successful execution of the merger-of-equals with First Midwest Bancorp (FMBI) and the possibility that this could signal a greater willingness from the bank to take a more aggressive approach to growth.

Not only could the First Midwest deal start Old National on a more exciting future trajectory, the shares look pretty conservatively-valued today. The stock has typically traded at around 12x to 13x forward earnings, and while that modest discount to other banks of similar size isn’t necessarily unreasonable (with a lower growth outlook) and neither is a slight discount for the risks of the FMBI deal, a 10.4x forward PE on my ’22 EPS estimate seems low to me.

 

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Old National Showing Some Loan Growth, But Execution Of Its Upcoming Merger Is The Major Driver

A Small Bank Deal With A Big Premium

The M&A scene for U.S. banks has been big on rumors (like Santander (NYSE:STD) and M&T Bank (NYSE:MTB)) and the acquisition of small, failed institutions, but there has been relatively little in terms of willing deals among two solvent parties. Old National Bancorp (NYSE:ONB) shook that up in a big way on Wednesday by buying Monroe Bancorp (Nasdaq:MROE) at a sizable premium. 

The Deal
At the time of the announcement, Old National was offering almost $84 million in stock to acquire Monroe Bancorp, a deal that works out to 1.275 shares of Old National for every share of Monroe. At the prices of each stock prior to the open of trading Wednesday, that represented an eye-popping 148% premium for Monroe shares. The deal does include a collar, though, such that if Old National's stock moves above $10.98, Monroe shareholders will get $14 of Old National shares.

Although the deal was designed with a target price of $13.35 in mind for Monroe shares, as of this writing the market has pushed Monroe's price up to only about $11.30. Do not let the "only" mislead, however; that still represents over 100% appreciation for the stock. At this price, the trailing price-to-book ratio is 1.27; a strong premium relative to larger Midwestern banks like Fifth Third (Nasdaq:FITB), TFS Financial (Nasdaq:TFSL) or Marshall & Ilsley (NYSE:MI). 


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