How one M&A deal at Midland States led to another — its biggest yet

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Sometimes all it takes is a successful deal to coax a bank to pursue another.

Midland States Bancorp in Effingham, Ill., felt so good about its recent integration of Centrue Financial, an institution it bought in June, that it decided to buy Alpine Bancorp in Belvidere, Ill., for $181 million in cash and stock.

The company has completed eight bank acquisitions since 2009. Alpine would be the ninth and, with $1.3 billion of assets, would be the company’s biggest acquisition.

Midland States will have nearly $6 billion in assets after it buys Alpine, roughly doubling in size from just two years ago. Alpine will also increase the size of Midland States’ assets under management by 50%, to $3 billion.

“We’ve positioned ourselves to see a significant increase in our earnings power and the level of returns we can generate,” Leon Holschbach, Midland States’ president and CEO, said during a conference call Tuesday to discuss the deal.

The Centrue integration, which took place in September, “went really well and gave us the confidence to take on the next one,” added Jeff Ludwig, president of Midland States' bank.

The latest deal should be 5% accretive to Midland States' 2018 earnings and add 10% the next year. It will likely take 3.5 years for the company to earn back the expected 6% dilution to its tangible book value.

The acquisition “checks multiple boxes that should enhance” Midland States’ franchise value, Michael Perito, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients. “This deal should continue to enhance the higher-multiple revenue streams of the bank.”

Specifically, Alpine provides scale in wealth management and adds a strong deposit base, Perito said, adding that Alpine has a 73% loan-to-deposit ratio.

Alpine’s wealth management business, with more than 1,600 client accounts, is particularly attractive. “This deal will make the steady, recurring revenue from wealth management a larger contributor to our overall mix,” Holschbach said.

Midland States acquired $400 million in wealth management assets from Sterling Bancorp in Montebello, N.Y., in a deal that closed last year. Overall, wealth management generated $6.3 million in revenue in the first half of this year.

Alpine Bank, founded in 1908 and controlled by the Fundgerburg family since the 1920s, has 19 branches in northern Illinois. It is the biggest bank in Rockford, Ill., based on the most recent deposit share data from the Federal Deposit Insurance Corp. Alpine earned $5.7 million in the first half of this year; total loans rose by 6% from a year earlier, to $830 million.

Midland States is also familiar with Alpine and its markets, Andrew Liesch, an analyst at Sandler O’Neill, wrote in a note to clients.

“Midland States knows Alpine’s management team well and it has partnered with it on loans in the past,” Liesch said. “It also has some customers in Rockford, but this transaction provides it a physical presence.”

Midland States will pay a price roughly equal to 172% of Alpine’s tangible book value. The deal is expected to close in the second quarter. Rob Funderburg Jr., Alpine’s chairman, has been invited to join Midland States’ board after the deal is completed.

The company plans to cut Alpine’s annual noninterest expense by 36% without closing any branches. Midland States also said it expects to incur about $19 million in merger-related costs.

“I am very proud of what we have accomplished ... and the deep customer relationships we have built throughout the communities that we serve,” Funderburg said in a press release announcing the deal. “We believe that combining with Midland will enable us to further enhance the banking experience and capabilities that we can provide to our customers.”

Midland States, which went public last year, completed a $40 million private placement of subordinated debt to help finance the Alpine acquisition.

The subordinated debt will be a drag on Midland States’ net interest margin, Lietsch said. He also warned that Midland States’ margin could narrow after the deal closes because Alpine has a larger percentage of securities on its balance sheet.

Costs associated with the placement “will be a drag for a couple of quarters until we can get the Alpine acquisition done,” Ludwig said. “But we felt it was prudent to take the debt early.”

The likelihood of Alpine shareholders rejecting the deal is minimal because the Funderburg family owns more than 70% of the company’s outstanding shares.

Midland States is interested in more deals once it integrates Alpine.

“For the next nine to 12 months we’re going to be real focused on getting both these banks integrated and running very well,” Ludwig said.

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