Old National Bancorp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Old National Bancorp is a regional bank holding company that provides financial services to commercial and retail customers across several states in the Midwest.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Old National Bancorp (ONB) is a regional bank headquartered in Evansville, Indiana. It operates through a network of 270 banking centers, primarily concentrated in the Midwest region of the United States. ONB offers a range of financial services including commercial, consumer, and mortgage banking. It also provides wealth management, investment management, and insurance services.

Revenue Distribution: ONB derives revenue from interest income (primarily from lending) and noninterest income (fees and commissions). Their loan portfolio is heavily focused on commercial real estate, commercial and industrial loans, along with consumer credit loans. A significant portion of their revenue (roughly half) comes from net interest income. The company had a total interest income of $701 million for the twelve months ended September 30, 2022, with loans accounting for $747.6 million. For the nine months ended September 30, 2023, this number had increased to $1,050 million with total loans generating $1.040 billion of this total interest income. Net interest income comes from the earnings on loans and investments less the interest paid on deposits and other debts. Non-interest income, which has been a smaller percentage ( roughly 20%) of the overall revenue in recent years has grown significantly this year. They had non-interest income of $316.5 million for the twelve months ended September 30, 2022, and this increased to $384 million for the first nine months of 2023.

This growth in non-interest income can be attributed to recent acquisitions. They have been focusing on expanding the scope of their operations into areas of wealth management, treasury, financial advising, and insurance.

Industry Trends: The banking industry is marked by increasing competition, rising interest rates, regulatory scrutiny, and the increasing adoption of digital banking. A few years back, smaller banks were focused on acquiring other smaller banks to increase scale to compete with the larger banks but now are focusing on providing better customer experiences with digital transformation to streamline their processes. Economic uncertainty, including inflation and the potential for a recession, is a present challenge to all banks. Consolidation within the industry seems likely, with larger players absorbing smaller banks. However, there also seems to be a focus on community banking in response to the large banks becoming unpopular with certain demographics.

Recent Earnings Call - 10/20/2023 : The banking sector is facing rising rates and a more competitive landscape, but the management is confident of the bank’s business model.

Competitive Landscape: Old National operates in a competitive industry with many national and regional players, ranging from huge Wall Street Banks to smaller, community focused regional banks and credit unions. Their biggest competitors are other banks, and, to a lesser extent, brokerage firms, digital payment companies, and non-bank lenders, which puts them in a position of fierce competition. The big banks such as JPMorgan, Bank of America, and Wells Fargo have considerable size and scope over smaller banks such as ONB. Old National is often competing with other regionals in their area, so those are often seen as direct competitors.

What Makes ONB Different: While it operates in a somewhat crowded and competitive market, ONB distinguishes itself from many of its competitors via its focus on community and relationship banking. Management seems very focused on providing a human element to banking, and having face to face connections with their customers, which they feel are beneficial. In addition, ONB has expanded into some of the higher profit areas of financial services such as asset management, financial advising, and insurance. They are also trying to offer more digital solutions to streamline banking processes. The leadership seems to understand the changing environment in the banking sector and are making the necessary moves to prepare the bank.

Financial Analysis:

The following uses data for the twelve months ending September 30, 2023 unless otherwise noted:

Revenue: Total Revenue increased 33.8% from 1.071 billion to 1.435 billion from the same period last year (2022), which the company attributes to both organic growth and the recent acquisitions.
Net interest income increased by 44.8% from 759.1 million to 1.099 billion for the nine months ending September 30.
Non-interest income increased by 21.1% from 238.2 million to 384.6 million for the nine months ending September 30.
Operating Expenses increased from $694 million to $801 million over this period, however, due to acquisition costs, the increase was greater than usual.
Net income increased from $203 million to $267 million over this period.
Return on assets stood at 1.01% in 2023.
Return on average tangible common equity was 11.98%.
Net interest margin was 3.38%
The efficiency ratio was at 62.7%.

Moat Rating : 2 / 5 ONB does not have a strong moat. It operates in a highly competitive industry with low barriers to entry and commoditized products. Its customer base is spread across several locations, and even if they are loyal to ONB, there isn’t much preventing them from changing. The bank’s moat is reliant on its focus on relationship banking and having a loyal customer base. Furthermore, the management seems to understand that the core banking business is going to get more and more competitive, so are making the required moves into adjacent, but higher margin businesses such as wealth management. They have a high enough geographic coverage to give them some ability to make their processes more efficient. However, these attributes are not enough to create a strong and enduring economic moat for the bank, which has historically had ROIC around 10-15 percent and it is currently 11.9%. This leads to a moat score of 2.

Risks to the Moat:

Increased Competition: The banking industry is intensely competitive, and new entrants—including fintech companies—could disrupt the sector. These may lead to pricing pressures and reduced net interest margins.
Technological Disruption: The growing reliance on online banking and mobile platforms may undermine the value of branches, and banks that do not adapt will have their moats eroded.
Economic Downturn: A recession, economic uncertainty, or rising interest rates could negatively affect ONB’s loan portfolio, impacting its profitability and solvency. This is especially true when considering a very concentrated portfolio of CRE loans.
Acquisition risks: The recent acquisitions have increased the bank’s size and assets, but not all acquisitions perform well, and they all carry an increased level of risk.
Credit Risk: Despite their focus on relationship banking, economic uncertainty might mean that several of their large loans go into default or have their value deteriorate.
Regulatory Changes: Banks are heavily regulated, and any changes in regulations could significantly impact their operating model and costs.

Business Resilience: ONB appears to have a moderate level of resilience. Its focus on community banking and having a large, stable customer base mean that it should be able to weather the fluctuations in the market. However, as all banks are connected, it is more susceptible to the overall economic environment than other industries. Their investments in newer and adjacent business lines also help make them a more resilient company. They are moving towards digital transformation, that should provide more options and keep them up to date.

Understandability : 2 / 5 The banking industry is generally more difficult to understand due to the complex nature of loans, assets, liabilities, and accounting rules. It is hard to determine what type of loans are in the loan portfolio and the general impact this may have. Furthermore, the bank is also going more and more into other adjacent markets that are quite complex and require special knowledge to understand fully. While the business itself and its processes are easily definable, it is harder to know the exact underlying drivers of its profits and costs, requiring detailed knowledge of financial analysis. This is why a understandability rating of 2 is given.

Balance Sheet Health: 3/5 While the company is profitable and has a positive economic outlook, there are also a few important risks that are hard to quantify. The company is levered, and relies on debt and deposits to fuel operations, which makes the company more vulnerable to financial and economic events. They also have higher leverage with a debt/equity ratio of 0.7. The recent acquisitions also have increased the value of non-tangible assets, such as goodwill, which may or may not perform as expected. The company is also showing a decreased efficiency ratio over previous years, and this does not appear to be improving. Overall, the company appears to have sound fundamentals, however, the aforementioned risks also weigh heavily on the company’s long-term prospects.