First Merchants Corp.'s acquisition of Monroe, Mich.-based MBT Financial Corp. will open the southern Michigan market to the Indiana-based bank, increase its assets to over $10 billion and provide the bank with high-quality, low-cost deposits.

First Merchants highlighted in a slide deck focused on the merger that MBT's cost of total deposits had declined despite recent increases in rates, with the bank reporting a 7-basis-point decrease in interest-bearing deposits costs between the 2018 second quarter and the 2015 third quarter. This decrease put MBT at the fifth-lowest cost of interest-bearing deposits among 116 Midwest banks between $1.0 billion and $3.0 billion in assets, and the bank has reported a negative deposit beta, or the percentage of changes in rates the bank passed on to its customers, since the third quarter of 2015. Its 65% loan-to-deposit ratio as of June 30 makes the target well-positioned for future growth.

"The biggest positive in the deal is the fact that they're picking up this high-quality deposit base, very low cost and it will drop their loan-to-deposit ratio," said Brian Martin, an analyst with FIG Partners, in an interview with S&P Global Market Intelligence.

The deal is priced at 240% of tangible book value per share. It is expected to be 2.7% accretive to 2020 consensus earnings per share, with 2.5% tangible book value dilution at closing, inclusive of all transaction expenses, with an earnback of approximately 3.3 years, according to the deal presentation from First Merchants.

Upon completion of the acquisition, First Merchants will cross the $10 billion threshold, at $11.1 billion excluding organic growth, making it subject to the fee loss associated with the Durbin Amendment, but on a deal call, First Merchants President and CEO Michael Rechin said the bank has been preparing for the change for the "last eight quarters or so."

Expected impact of Durbin will be $4.5 million for First Merchants and $930,000 for MBT, according to a note from Damon DelMonte, an analyst with Keefe Bruyette & Woods. The $11 billion in assets will make First Merchants the second-largest financial holding company in Indiana. DelMonte rated First Merchants at "outperform" with a target price of $53.

Cost savings are anticipated to be 30%, with half phased in during 2019 and the full amount thereafter, according to the investor presentation. During the deal call, Mark Hardwick, First Merchants CFO, estimated that the first quarter of clean expenses will be the fourth quarter of 2019.

First Merchants noted that the deal marks its seventh acquisition in approximately five years. First Merchants chief executive Rechin mentioned that the bank had been looking to Michigan and Kentucky as markets for potential expansion.

MBT will have to pay a termination fee of nearly $12.7 million to First Merchants if the agreement is terminated under certain conditions as outlined in an 8-K filing. And in case the deal is terminated due to an issue related to First Merchants, First Merchants will pay $2.5 million as termination fee to MBT.