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SNL: Latest Midland States Bancorp Deal-10/17/17

Latest Midland States Bancorp Deal Lands Company in Community Bank Sweet Spot

With its second deal announcement in 2017, Midland States Bancorp Inc. is continuing its acquisitive streak by keying in on a transaction expected to enhance liquidity and bolster earnings.

On Oct. 16, the Effingham, Ill.-based company announced it will acquire Belvidere, Ill.-based Alpine Bancorp. Inc. in a cash-and-stock deal valued at about $181.0 million, making it the fourth-largest community bank in the state, according to executives.

“This will be our 12th announced acquisition since 2008, so we have a very good process in place for evaluating, negotiating and integrating acquisitions that add value to our franchise,” Vice Chairman, President and CEO Leon Holschbach said on an Oct. 17 call to discuss the deal.

Stephens analyst Terry McEvoy noted in an interview that the Alpine deal comes on the heels of Midland completing a similarly sized transaction in June — the nearly $173 million buyout of Centrue Financial Corp.

Midland also announced it completed a $40 million private placement of subordinated debt to certain institutional investors. The company will use the funding for the cash portion of the Alpine deal. “This debt issuance will help us maintain strong capital ratios following the acquisition, so that we can continue to execute on our organic and acquisitive growth opportunities,” Holschbach said.

The two deals together would tack on more than $2 billion in assets and push Midland to around the $6 billion-asset level, giving it heft to absorb costs, more deposits to fund loan growth and business-line diversity to bolster earnings when lending is slower, McEvoy said. The deal will also add a boost to its wealth management business, giving it just under $3.0 billion in assets under administration, the company said.

Jon Winick, president of bank consultancy Clark Street Capital in Illinois, said that with the latest deal Midland would get into a sweet spot of sorts for larger community banks. It would be big enough to spread regulatory costs and other expenses over a broader base, compete for larger loan deals and attract the attention of more institutional investors. But yet, at around $6 billion in assets, it still would have plenty of room for growth before reaching the $10 billion threshold, a point at which banks face more regulatory scrutiny and compliance costs.

“So Midland is getting into a range where they can really benefit from economies of scale,” Winick said in an interview.

Alpine will provide Midland with about $1.0 billion in assets under management, and the seller would also provide Midland with about $830 million in gross loans and $1.1 billion in deposits, based on June 30 data. The target has a loan-to-deposit ratio of 73%, leaving plenty of room to put more deposits to work via loans to the combined company’s larger customer bases. Alpine’s deposits, too, are lower-cost at 19 basis points, McEvoy noted. Core deposits compose 94% of Alpine’s total deposits, executives said.

According to Holschbach, Alpine’s loan portfolio is “very similar” to Midland’s. He said there will be “almost no change” in the overall mix once the two portfolios are combined, but it will reduce the company’s commercial real estate regulatory ratio to 233%.

Alpine “appears to be a solid community bank with a very strong deposit base,” McEvoy said. “I think this is a nice move. It’s good to see them back with another deal that will help them really build out the business.”

Although analysts on the call sounded mostly positive regarding the deal’s metrics, some questioned whether projected cost savings, at 36%, could be higher. Midland will gain 19 branches in the transaction, but Holschbach said there are no branch consolidation opportunities. He said the greatest opportunity for cost savings will stem from consolidating systems.

Holschbach said Midland will focus on the Alpine deal in the “near horizon,” but will continue building capital for future transactions.

“And frankly, the stronger our stock price gets, the more likely we’ll look at opportunities to boost capital with [an] equity raise,” he said.

The deal is expected to be 10% accretive to 2019 EPS. Tangible book valued dilution of about 6% is estimated to be earned back in 3.5 years, using the crossover method.

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