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First Midwest Bancorp keeping an eye on deposit costs, ag lending

Analysts expect community bank M&A in the Midwest to stay active as companies look to fill in geographic gaps and gain scale. But at least one active acquirer in the region is wary of higher-cost deposit franchises and is steering clear of more exposure to agriculture lending.

On Aug. 28, Chicago-based First Midwest Bancorp Inc. announced it will acquire Milwaukee, Wis.-based Bankmanagers Corp. and its subsidiary Park Bank for about $195 million.

First Midwest has been focusing on Milwaukee, CFO Patrick Barrett said in an interview. The bank started with commercial loan production offices and then acquired asset manager Northern Oak Wealth Management Inc. in a deal that closed in January. Park Bank would give it a retail network and customer base.

"Adding a branch franchise and a more robust commercial banking franchise for us really just rounds out the whole bank," said Barrett. "We have a Milwaukee presence that can deliver our entire bank, in the same way that we do for Chicago."

Analysts said they were not surprised by the deal, given First Midwest's earlier transaction there.

"First Midwest is a very well-communicated buyer," said Christopher McGratty, a bank analyst with Keefe Bruyette & Woods, who was positive about the deal. "They have a pretty good execution history, in terms of closing deals and getting the cost savings."

Kevin Reevey, a Midwest bank analyst at D.A. Davidson, also praised the deal, saying that Park Bank was a "nice commercial banking franchise" and has a "pretty decent deposit base."

With costs of funds rising in the first half of 2019, many deals have been based on attaining cheaper funds, but First Midwest's Barrett said the bank already has low deposit costs and wants to ensure deals do not increase them.

Park Bank has nearly $1 billion in assets, and the acquisition will put First Midwest over $18 billion on a pro forma basis. But Barrett said that even with the size, the bank is still relationship-driven and acquires community banks as part of its strategy.

"Our history is definitely that of a community bank," he said. "Being in-footprint is important for us."

First Midwest will likely continue to be a consolidator in the region. "Chicago is one of the most over-banked markets in the country," said Barrett. "We announce and close an acquisition at least once a year."

Smaller banks throughout the Midwest are looking to expand their footprints as well, including Muscatine, Iowa-based Central Bancshares Inc., which announced it will acquire Walcott, Iowa-based Walcott Trust and Savings Bank, a two-branch bank that fills in Central Bancshares' market.

The main driver for the acquisition was geographic expansion, President and CEO Gregory Kistler said in an interview. "Having a larger asset base to spread out the costs of technology and compliance ... [is] certainly important to us," he said. "But so is expanding our customer base and our geographic area."

Unlike First Midwest, Central Bancshares and Walcott Trust both have a large portion of loans in agriculture, with about a quarter of each bank's loans in the sector. "We have a great farm customer base," said Kistler, "but we are certainly keeping an eye on what's going on."

With uncertainty around tariffs and bad spring weather, concerns in the agriculture industry may stifle acquisitions in the Midwest, analysts said.

First Midwest's agriculture loans make up less than 5% of its book, according to S&P Global Market Intelligence data. Barrett said the bank has avoided increasing agriculture lending. "We have not been growing that in recent years because of the pressure on farmers," he said.

"If you've got a big ag book, it's probably less of an appeal to a buyer because of the uncertainty," said KBW's McGratty.

But the sheer number of banks in the region will keep acquisitions close to the national level, analysts said. McGratty pointed out that acquisition volumes in the Midwest are similar to national rates.

"We will definitely see more acquisitions in the Midwest," D.A. Davidson's Reevey said. "There are just a ton of small banks out there."