Bremer Bank Merger Will Increase Operational Efficiency And Expand Footprint In High-Growth Markets

Key Takeaways

• Strategic growth in core deposits and disciplined loans is set to boost revenue and net interest income while maintaining competitive costs.
  
• Mergers with CapStar and Bremer Bank may drive revenue growth and enhance operational efficiency post-integration.
  
• Leadership changes, merger integration risks, and possible regulatory shifts may affect operational stability, revenue predictability, and capital allocation for Old National Bancorp.

Catalysts

Operates as the bank holding company for Old National Bank that provides various financial services to individual and commercial customers in the United States.

• Old National Bancorp's strategic growth in low-cost core deposits and disciplined loan growth is expected to enhance revenue and net interest income as these deposits fund loan growth while maintaining a competitive cost of funds.
  
• The mergers with CapStar Bank and Bremer Bank are anticipated to expand Old National's footprint in high-growth markets, potentially leading to increased revenue and operational synergies post-integration.
  
• The repricing dynamics in loans and securities are expected to stabilize or improve the net interest margin in 2025, which could positively impact earnings.
  
• The integration of the Bremer Bank partnership, expected to be completed with full cost savings realized by 2026, is projected to improve operational efficiency and reduce expenses, leading to improved net margins.
  
• The strong capital position and the potential flexibility it provides may allow for further growth investments or returning capital to shareholders, which could enhance earnings per share over the medium term.

Old National Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Old National Bancorp's revenue will grow by 19.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.7% today to 44.1% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $3.14) by about January 2028, up from $523.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 14.4x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 9.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Old National Bancorp Future Earnings Per Share Growth

Risks

• The merger with Bremer Bank, while potentially beneficial, involves integration risks and 100% of the projected cost savings are not expected until 2026, which could impact short-term expenses and net margins.
  
• Leadership changes, such as the retirement of the President and COO, Mark Sander, could affect the execution of strategic initiatives, potentially impacting operational stability and earnings.
  
• The assumption of rate cuts and reliance on fixed asset repricing for improving net interest margin may not materialize as expected if economic conditions change, which could affect net interest income.
  
• Continued exposure to capital market dynamics, as evidenced by outsized payoffs and decreased line utilization impacting loans, introduces volatility, affecting loan growth and revenue predictability.
  
• The potential for additional regulatory changes or capital requirements for banks nearing the $100 billion threshold could necessitate higher capital reserves, impacting capital allocation and return on equity.

Valuation

• The analysts have a consensus price target of $27.61 for Old National Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 6.5%.
• Given the current share price of $23.58, the analyst's price target of $27.61 is 14.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.