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Old National Bancorps (IN) new CEO has put in place the right strategies for
targeted revenue growth, so now it is simply an issue of consistent execution over the
next several quarters
Analyst interview covering:
Old National Bancorp (IN) (ONB)
One Main Street
Evansville, IN 47708
Fred A. Cummings
Equity Research Analyst, Managing Director
KeyBanc Capital Markets
Interview conducted by:
Lynn Fosse, Senior Editor
July 17, 2006
Fred A. Cummings
Equity Research Analyst, Managing Director, KeyBanc Capital Markets
Fred A. Cummings is a Managing Director, Equity Research Analyst, with KeyBanc Capital
Markets, a division of McDonald Investments Inc. He is responsible for all aspects of
research of regional banks and thrifts.
Cummings joined the Company in 1989 as a junior analyst, and subsequently held the titles
of Associate Vice President, Vice President, First Vice President and Senior Vice
He graduated with honors from Oberlin College in Ohio, where he earned a Bachelor of Arts
degree in economics.
Cummings is a member of the Cleveland Society of Security Analysts, as well as the Bank
and Financial Analysts Association. He serves as a board member for the Western Reserve Academy
(assistant treasurer), Inroads Northeast Ohio Alumni Association and The Ohio Foundation
of Independent Colleges.
He was named a 1998 All-Star Analyst by The Wall Street Journal and one of 30 young
leaders of the future by EBONY Magazine.
CEOCFO: Mr. Cummings, please tell us about your background?
Mr. Cummings: Ive been in the business now for 17
years. I went to Oberlin College in Ohio, and earned a Bachelor of Arts degree in
economics; then joined what was McDonald Investments right out of college in June of 1989.
Ive been covering Midwestern banks since that time.
CEOCFO: I want to speak with you specifically about Old
National Bancorp today; why is that a bank of interest for you?
Mr. Cummings: Old National Bancorp is a bank of
interest because it is an interesting turnaround story and this is a bank that had been
plagued by credit issues during the last credit cycle back in 2000 and 2001. They had
major credit issues and as a result, it cost their CEO his job. They brought in a new CEO
in the fall of 2004 and he has been very proactive at reducing the risk profile of the
company and lowering the cost structure and then trying to instill a sales culture into
this franchise. Therefore, the stock has been an underperformer and typically that can
represent an opportunity, when you have a new CEO who brings a fresh perspective.
CEOCFO: What is your assessment of the company today?
Mr. Cummings: I think the company is making very good
progress on the credit side; their non-performing assets have been trending down, their
net charge-off levels have improved. On the revenue side, they are making good progress in
terms of generating commercial loan growth. However, that progress on the commercial side
has been offset by continued sluggishness on the retail side of the balance sheet. For
example, their home equity and the residential mortgage portfolios continue to decline,
which is off-setting the progress that they have made on the commercial side. They have
done a nice job of stabilizing their net interest margin; however, here in the 2nd
Quarter, the margin was flat when management was expecting the margin to be up slightly.
So while they are making progress in turning the bank around, the underline earnings
growth remains a challenge given this flat yield curve environment and the disappointing
trends within the consumer loan portfolio. Therefore, reduced our earnings estimates for
both 2006 and 2007, following the release of 2nd quarter earnings. In large
part, it reflected a lower earning asset growth assumption for both years.
CEOCFO: Do you think that is a reflection of the economy in
general, particularly in the geographic area that they are in, or is there something that
a bank could do that they are not doing?
Mr. Cummings: I think that the economy as a whole has
clearly slowed there in the Evansville, Indiana market, where they are located. It is
clearly a slow growth region, that has constrained their ability to grow the loan
portfolio, and I think that it is prudent for them not to overreach. However, they are in
a few more attractive markets like Indianapolis and Louisville. I believe that they will
improve in both of those markets. The big challenge for Old Nation Bancorp is overcoming
the naturally slow growth region in which they operate. What they need to do a better job
of is one, generating small business loans and two, doing a better job in the home equity
business. Three, which is the most challenging thing and that, is growing their lower cost
transaction accounts in the face of an environment where consumers are moving money out of
transaction accounts into higher yielding CDs. Therefore, if they did those three things
well, they would indeed improve shareholder value.
CEOCFO; Do you feel management is up to the task?
Mr. Cummings: I do; I know Bob Jones well as he used to
work here at KeyBanc and he is a good, solid banker. It is going to take longer than he
would like to get the revenue growth he has targeted, but I think that they have the right
strategies in place and now it is simply an issue of consistent execution over the next
several quarters. Not to say that they are going to be the fastest growing bank in the Midwest,
but they at least need to grow on line with the industry, which would probably grow in the
neighborhood of 6 to 8%.
CEOCFO: What are the macro issues that are affecting the
Mr. Cummings: I think the biggest issue today facing
all banks is this fat to inverted yield curve, which is at best restraining net interest
margins, and in most cases causing contraction. That is the biggest macro factor affecting
all banks. The second macro factor is that the consumer in response to higher gas prices
is retrenching and in many cases, we are seeing consumers pay off their home equity lines
of credit. That is clearly impacting Old National as well as other banks. The consumer is
also retrenching because of higher interest rates and those are the two primary negatives
from a macro side. One can also add the competitive environment in the markets in which
Old National operates, particularly a market like Indianapolis, where there is a lot of
competition. It is very difficult to move market share when you have that many capable
CEOCFO: What should potential investors be looking for as
signs that things will change?
Mr. Cummings: We are looking for a couple of things.
First, we are looking for continued improvement in the non-conforming asset levels and I
think that is critical. They have to continue to make progress there and to the extent
that they do, we will have more confidence in their ability to maintain low charge-offs as
the economy slows. Secondly, we are looking for signs of success in the small business
initiative that they are talking about and that should be reflected in improved loan and
core deposit growth. As for a number of small business customers, they deposit quite a bit
of money and sometimes they deposit more money than they use for loans. We are also
looking for continued improvement in expenses, as Old National is a company with a pretty
high cost structure and they will have to keep expenses down in order for them to hit
their earnings objectives. In short, what we would like to see is Old National have
the ability to attain the consensus earnings expectations that Wall Street has for the
CEOCFO: In closing, what specifically would you like to see
from Old National Bancorp as the move forward?
Mr. Cummings: I think that Old National will probably
need to do some acquisitions to improve its geographic footprint and specifically, we
would like to see them strengthen their presence in the Indianapolis market.
The research analyst primarily responsible for the content of this public
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