Muncie-based First Merchants Corp. was going after 8.3 percent of the Fort Wayne market’s banking business when it announced plans in mid-February to spend $251.3 million on the rest of Independent Alliance Banks, after buying 12.11 percent of its shares last year for $19.8 million.
A conference call updating securities analysts on the plans took place on Feb. 16, the same day First Merchants announced it would acquire the Fort Wayne-based parent company of IAB Financial Bank.
Terms of the deal provide 1.653 shares of First Merchants for each share of IAB common stock. The companies expect it to close during the second half of the summer after receiving the needed regulatory approvals.
The $251.3-million transaction value for the remaining shares of IAB was based on the Feb. 16 closing price of $42.10 per share for First Merchants’ common stock, which closed two trading days later on Feb. 21 at $41.29.
“We like this transaction; we like the earnback; it’s a really key market for us in the state of Indiana,” Michael Rechin, president and CEO of First Merchants, told the analysts.
“Through Mike Marhenke and Will Thatcher, we feel like we’re going to be retaining and building the talent level of that company. Will Thatcher in particular has been taking on increasing responsibilities, primarily in the all of their lines of business, as well as leadership in the profile of the company externally, in all of the communities that they serve.
“We feel good about that transition because in our model we typically look for leadership on a regional basis to come from the highest level of offices of the companies joining us.”
Headquartered in the state’s second largest metro area, IAB ended last year with earnings of $10.2 million, a net interest margin of 3.31 percent, assets of $1.1 billion, loans of $753 million and deposits of $861 million.
First Merchants ended last year with earnings of $81.1 million, or $1.98 per share, a net interest margin of 3.9 percent, assets of $7.2 billion, loans of $5.1 billion and deposits of $5.6 billion.
First Merchants expects its earnings per share to grow by 2 percent this year and by 5 percent annually thereafter as a result of the IAB purchase, according to a presentation.
The acquisition presents a strategic opportunity for First Merchants in that the Fort Wayne region provides a bridge to significant markets in northwestern Ohio and southern Michigan.
The purchase also builds on earlier moves the company made into the region on a smaller scale.
Since the start of 2000, First Merchants has completed 10 acquisitions, and the first two of those were Decatur Bank & Trust Co., completed in Decatur in May 2000, and Francor Financial, completed in Wabash in July 2001.
And with the acquisition of IAB in the seat of Allen County, “all the sudden we have critical mass in that (metropolitan statistical area, or MSA) market,” Rechin said.
His description of the region’s economy listed a number of strong companies with a headquarters or major presence in Fort Wayne, including Do it Best, Franklin Electric Co., Ray Magnet Wire, North American Van Lines, Indiana Michigan Power, Vera Bradley and Steel Dynamics Inc.
“Some of the larger employers by way of actual FTE are in health care, where they have two really growing and thriving health care systems,” Rechin said.
“And then, as much of the Midwest has, it’s had kind of a wind at their back relative toward manufacturing volume and job growth. So it’s probably been a little healthier than our headquarters market of Muncie, which has been a similar long-time manufacturing hub,” he said.
A key assumption of the transaction is First Merchants can achieve an annual cost savings of $10.9 million or 38 percent in the operation of IAB, and Rechin said about $6.5 million, or close to 65 percent of the take outs would be in the salary and benefits area, with an additional 20 percent coming from professional expenses.
First Merchants has about 1,450 full-time equivalent employees and IAB has about 250. Combining the companies would likely lead to the elimination of some IAB back office positions, as is customary with bank holding company mergers, Mark Hardwick, chief operating officer and chief financial officer for First Merchants, said in a phone interview.
“We have no overlap in the actual customer-facing locations, whether they be banking centers or wealth management offices, and so there will be virtually no changes there,” he said. “The positions that are evaluated hard for savings are really behind the scenes — loan and deposit processing, IT, those kinds of areas, corporate support functions. We have to look at our own operations to see if there are processes that are taking place at IAB that might even be done more efficiently than ours.”
First Merchants is the second largest Indiana-based bank holding company in the state and that will continue when adding the IAB business brings its combined assets to $8.3 billion and the number of its banking offices to 122 in 31 Indiana counties, as well as two counties in both Ohio and Illinois.
“We are excited about the opportunity to become part of the First Merchants family, and we believe this partnership will be good for our clients, shareholders and local communities in which we serve,” Michael Marhenke, president and CEO of IAB Financial Bank, said in a statement.
“For several years our strategic plan has been driven to be the community bank of choice in our marketplace. Our bankers look forward to expanded new product capabilities and lending capacity in continuing to build relationships with our clients as First Merchants,.”
The acquisition came about partly as a result of more frequent dialogue First Merchants executives had following its $20 million investment in IAB with Marhenke, Thatcher and their teams, Hardwick said.
If it never became anything more than an investment, the IAB shares would have had a nice dividend yield relative to other investments a bank can make, he said.
“We were hopeful that if the bank ever considered options where they would join with someone, that by being an owner and sharing ideas about our operating costs that we would be a logical candidate to go deeper,” Hardwick said.
“When they ultimately chose that, they did talk to several institutions to try and make sure that they’re putting their employees and their communities in the hands of someone that they thought was the best fit, which is a combination of a fair price, and conducting yourself after the closing as a responsible corporate citizen.”