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Old National Bancorp cracking into Minnesota with Twin Cities deal

Old National Bancorp is reprising its role as a Midwest serial acquirer with a deal that breaks into the Twin Cities.

The company announced Aug. 8 plans to buy St. Paul-based Anchor Bancorp Inc. and unit Anchor Bank NA in a cash-and-stock deal valued at roughly $303.2 million. It marks the company's first foray into Minnesota.

The Evansville, Ind.-based company reported $15 billion in assets as of June 30. It completed a string of deals in 2013 and 2014 in order to cross the $10 billion asset threshold, but it had been on the sidelines since completing its $463.2 million deal with Anchor BanCorp Wisconsin Inc. in May 2016.

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"Certainly, when you're an active acquirer, at some point, you've got to focus internally and take care of your own house and assimilate the deals that you've done," FIG Partners analyst John Rodis said in an interview. "I think they were happy and content with the markets that they were in, so I think they could wait for the right deal to come along. I guess for them, this is the right deal."

Rodis said while the deal isn't huge, the pricing makes sense, and it shows the company is now able to be more selective about the types of transactions it engages in.

"It's not a game-changer or anything like that," he said. "But it's a nice add-on deal at a reasonable price."

On a second-quarter earnings call, the company hinted at a re-entrance to the world of M&A. At the time, Chairman and CEO Robert Jones said the company was looking at more banks on the "banking Tinder app."

On a call to discuss the deal, executives said the demographics within the Minneapolis markets are compelling and "actually stronger than what we saw in Wisconsin," where they said the company has had "great success."

"It is a new market for them, but obviously, they're already in Wisconsin," Rodis said. "So it is contiguous. The Twin Cities' markets seem really vibrant, so I think that's good for them. What they're looking for is demographically attractive markets."

Since September 2016, the company said it has grown its Wisconsin commercial loans by 7.1% and experienced a 60% increase in its commercial pipeline.

They also touted Minneapolis' heavy commercial density, noting it is home to 16 Fortune 500 companies. Executives said Anchor Bancorp, which has more than $2 billion in assets, will allow the company to enter the markets with immediate scale. Jones said it will also help with remixing the company's balance sheet and reducing its dependency on indirect mortgaging.

"Two-thirds of the state's population is in the Twin Cities, so it's really the place to be in Minnesota," Jones said.

When the deal closes, Old National will become the seventh-largest deposit holder in the Minneapolis and St. Paul markets — the third largest metropolitan statistical area in the Midwest.

The company stated the deal is valued at 189% tangible book value, and 18x the last 12 months' earnings per share. Tangible book value dilution of 3.6% is expected to be earned back in 3.1 years using the crossover method. "The pricing was attractive for them," Hilliard Lyons analyst Andrew Stapp said in an interview. "My guess is it was a negotiated transaction, because of its favorable pricing."

Stapp said the deal isn't "all that big for them," but he doesn't expect them to announce another deal in 2017.

"I wouldn't be surprised at all if they do announce a deal next year," he added.

The deal is expected to be 9.2% accretive to 2019 estimated earnings per share, after fully phased-in cost savings. On the call, Stapp questioned executives about cost savings projected at 36% of Anchor's noninterest expense base.

"It's just higher than I usually see in out-of-market deals where you don't have a presence and there's no branch consolidation opportunities," he said later. "But their response was that the previous Anchor deal was also an out-of-market deal, and the cost savings in that deal were 32%."

Jones replied on the call that the companies have "a lot of common vendors" and that there are plenty of opportunities for back-room cost savings.

"We hold people accountable to get to the savings they get," Jones added. "So I feel very comfortable the model is accurate, and we'll make sure we get to that number."

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