At Old National Bancorp (ONB) in Evansville, Ind., surpassing $10 billion in assets and drawing more regulatory oversight is inevitable.
So the $9.6 billion-asset company wants to delay that event until it can find a big deal to justify more supervision. Management faces a challenge after agreeing to buy the $681 million-asset Tower Financial (TOFC) in Fort Wayne, Ind.
The plan, for now, is to run off securities and sell mortgages to manage asset levels, says Robert Jones, Old National's president and chief executive. The company is also looking to surpass $12 billion in assets so it can absorb revenue it would lose from the Durbin Amendment's cap on interchange fees.
"I don't want to be half pregnant at $10.1 billion," Jones says. Old National estimates that added regulation could cut annual income by $12 million. Durbin is "the elephant in the room," he adds.
Old National will be a test case for other banks looking to maneuver around the $10 billion threshold, says Scott Siefers, an analyst at Sandler O'Neill. Most banks have either sold or announced big acquisitions prior to crossing the regulatory line.
Tower "takes them a hair over," Siefers says. "Thankfully they have a plan, and I have little doubt they'll be able to manage it successfully."
In some ways, Old National's hands-on approach to its assets mirrors past efforts by Bank of America (BAC) to control deposit levels to avoid creeping over the 10% regulatory threshold on national deposits.
"It is bizarre that people even have to have this conversation," says Siefers, who agrees with the B of A comparison. "But the rules are the rules, and you do the best you can to manage against them."
Earlier this month, Old National agreed to sell two branches, along with loans and other assets, in separate deals with MainSource Financial Group (MSFG) in Greensburg, Ind., and River Valley Bancorp (RIVR) in Madison, Ind.
Some might question the timing of the Tower deal, but the $108 million transaction caps a nearly nine-year courtship for Old National. James Ryan, director of corporate strategy at Old National, frequently traveled to Fort Wayne to make it clear to Tower's management that a deal was plausible if they ever decided to sell.
"You have to date and, in some cases, you have to date a long time until your partner is ready," Jones says.
Patience paid off at Old National, which holds just 0.3% of the deposits in Fort Wayne, Indiana's second-biggest city, according to the Federal Deposit Insurance Corp. Its market share will jump to 9% when it buys Tower, the area's fifth-largest bank.
Tower's seven branches would also bridge a gap separating Old National's operations in central Indiana and southwest Michigan.
Old National's deal for Tower, set to close early next year, continues a period of aggressive acquisitions. In the last year, it has bought 24 Bank of America branches and Indiana Community Bancorp in Columbus. Despite a flurry of activity, Old National has "plenty of room" to keep searching for acquisitions, Ryan says.
Acquisitions are "a big part of our story," Ryan says. "We're putting a lot of resources into it."
As to the location of Old National's next target, Michigan is a solid bet. The state's banking market is ripe for consolidation, and 20 of the B of A branches Old National bought are there. Ryan says management considers Kalamazoo and Grand Rapids as excellent markets.
Old National's management team also has ties to Michigan. Jones was born in Detroit. Ryan and Christopher Wolking, the company's chief financial officer, worked at the former Old Kent Financial in Grand Rapids. Fifth Third Bancorp (FITB) in Cincinnati bought Old Kent in 2001.
Another possible move could involve expansion in Warsaw, Ind., where Tower recently opened a branch. Old National has no branches there, but Jones calls it one of Indiana's best markets.
Old National has no interest in expansion around Chicago, where consolidation is slowly heating up. The company picked up some branches there two years ago, when it bought the failed Integra Bank. Old National quickly sold those branches to First Midwest Bancorp (FMBI).
"My epitaph will be, 'He did not want to go into Chicago,' " Jones said during a conference call in May.
"I love the city," Jones added. "It's got great restaurants and great entertainment, but it's got to be the most difficult banking market in the country.