Old National Bancorp Chairman and CEO Jim Ryan said his company’s path to a merger of equals with First Midwest Bancorp began with a January conference call with First Midwest Chairman and CEO Michael Scudder.
That call “lasted a lot longer than we anticipated,” Ryan said, and led to a follow-up, in-person meeting in Evansville, Indiana, where the $23.7 billion-asset Old National is headquartered.
“We were together for half a day and had a nice dinner,” Ryan said Tuesday on a call with analysts. By the end of the evening, “we were finishing each other’s sentences.”
Ryan and Scudder consummated those discussions Tuesday, announcing that Old National and the $21.2 billion-asset First Midwest, based in Chicago,
The deal is the latest example of similarly sized banks merging to gain scale needed to make larger loans and invest in the customer-facing technologies that can help midsize banks compete more effectively with larger institutions.
In April, the $33 billion-asset Webster Financial in Waterbury, Connecticut,
Though Tuesday’s deal was billed as a merger of equals, Old National would be the surviving entity and its shareholders would own about 56% of the combined company’s shares.
The combined bank will rank as the sixth-largest Midwestern banking franchise, with a presence in six of the region’s largest markets, including St. Louis, Milwaukee, Minneapolis, Indianapolis and — most critically for Old National — Chicago.
Old National, which has just three branches in Illinois, would gain more than 90 branches and roughly $14 billion of deposits when the deal closes late this year or early next year.
“Our shareholders will benefit from a more efficient, more powerful organization,” Ryan said. “We felt this was a fantastic, maybe once-in-a-lifetime opportunity.”
Ryan will serve as the combined company’s CEO, while Scudder will serve as executive chairman. First Midwest President and Chief Operating Officer Mark Sander and Old National Chief Financial Officer Brendon Falconer will fill the same roles.
Chicago will serve as home to the commercial lending and community banking operations, while the holding company and bank will be headquartered in Evansville. Both the holding company and bank will take the Old National Brand.
The executives acknowledged that the job of closing a deal this size — it’s by far the largest in both banks’ histories — could extend into early 2022, though they added they’re shooting for a completion date later this year.
“We hope to close in the fourth quarter, then get to work on conversion in the first quarter of 2022,” Ryan said.
In the meantime, First Midwest and Old National will focus on minimizing disruption and keeping their bankers from jumping to rival banks.
“Good bankers can find five or six jobs if they want to. We have to give them a reason to work here,” Sander said.
He added that the combined company will have “more capital, more capabilities, more products and a desire to grow.”
“From a commercial banker's perspective, I don’t know how they can’t think this is a really good thing,” Sander said.
Ryan said that Old National has experienced good success attracting bankers from larger financial institutions over the past year “mostly because they want to serve clients in an easier way but still be successful.”
“Now, they’ll be able to reach for even bigger deals,” Ryan said.
Old National and First Midwest have been active acquirers, completing a collective 16 deals since 2010. Prior to Tuesday, Old National’s largest deal was its May 2016 acquisition of the $2.2 billion-asset AnchorBancorp Wisconsin in Madison. First Midwest closed its biggest deal in January 2017, acquiring $2.5 billion-asset Standard Bancshares in Hickory Hills, Illinois.
“This transaction is bigger than we expected but is also a sign of the times in today’s operating environment and the need for scale," Hovde analyst John Rodis wrote Tuesday in a research note.
Ben Gerlinger, who covers Old National for Hovde, commented in his note that the deal would mark Old National’s entry into Chicago, thus filling “a significant void that ONB likely needed to fill in order to be considered a true first-class, Midwest commercial bank.”
“Our board spent a lot of time thinking about whether Chicago was the right fit for our company,” Ryan said. “We got very comfortable very quickly. If you look at the number of small businesses that call Chicago home, if you look at the wealth that’s in this marketplace, it’s incredible.”
Beyond simple geography, the deal would join Old National’s mortgage and Small Business Administration lending business lines with First Midwest’s larger commercial banking operation. With more capital and a larger balance sheet behind it, the new Old National will be able to overhaul critical digital offerings like commercial treasury management.
“It would be hard for banks our size to build those systems and make the necessary investments,” Ryan said. “Together, we can do it.”
Old National is projecting earnings per share of $1.68 in 2022, representing 22% accretion. It is estimating 8% tangible book value dilution with an earn-back period of just over three years.
The deal is valued at about $2.5 billion. Under the terms of the all-stock deal, First Midwest shareholders will receive 1.1336 Old National shares, worth approximately $21.60, for each of their First Midwest shares. The combined company’s market capitalization would be about $6.5 billion.
While the company is projecting cost savings of $109 million, representing about 11% of the combined noninterest expense base, none will come from branch closures. Ryan called the two companies’ footprints “very complementary,” and said he did not want to risk losing any bankers.
“We need as many people out interfacing with the public as possible,” Ryan said.
