Old Second Bancorp Inc. announced an add-on acquisition that enhances its presence in Chicago, creating a ripple in the city's otherwise quiet merger market and providing one of the first examples of tax reform's impact on bank M&A.
Aurora, Ill.-based Old Second agreed to acquire Greater Chicago Financial Corp. and its subsidiary, ABC Bank, both based in Chicago, in an all-cash deal valued at about $41.1 million. The consideration represents roughly 119% of the seller's tangible book value as of Sept. 30, according to the press release.
Old Second Executive Vice President and CFO Bradley Adams said the acquisition will help Old Second continue its march into the city limits from its current western suburb location. He said the Chicago market is still very competitive, but the market's size and a bifurcation between the largest banks and the smallest ones has created a "gap" for a midsized community bank like Old Second to operate in.
The investment community seemed to approve of the deal, its quick earnback of tangible book value of two years and the low intergration risk. ABC Bank is a century-old bank with long-dated customer deposits and relationships, factors that are "always attractive" to acquirers like Old Second and especially in a short-end rising-rate environment, Adams said. ABC Bank is about 15% of Old Second's size, which should minimize any merger or integration risks, wrote Sandler O'Neill analyst Andrew Leisch in a Dec. 27 report. He called it "solidly accretive" and noted some conservative aspects, including cost savings of 30% and a loan mark on the acquired portfolio that exceeds the current allowance.
The deal also carries some implications following the passage of tax reform. Adams pointed out that lowering the corporate tax rate will impact all banks, but the deal is one of the first to follow the announcement. Some of the impact was on the annual acquired run-rate earnings, given that Greater Chicago is an S-corp, and projected earnings-per-share estimates, wrote FIG Partners analyst Brian Martin in a Dec. 27 report. Martin said the deal was "financially attractive," "shareholder friendly" and "makes good strategic sense."
Old Second has previously said that its deferred tax assets would have a valuation allowance applied to it, and Adams said the acquired portfolio's loan losses will create additional DTA, although at a level below where it would have been.
In a Dec. 27 regulatory filing, Old Second disclosed that the newly signed Tax Cuts and Jobs Act will likely cause it to record a fourth-quarter valuation allowance with respect to its deferred tax assets, of $9 million to $11 million.
"Tax reform is a simply a one-time change in the go-forward tax rate that obviously has implications on future earnings and the carrying value of existing DTA," Adams said. "It's something that changes for everybody."
The deal also interrupts the quiet that has fallen over Chicago's bank merger marketplace. Adams remarked that "it's been quieter on the M&A front in Chicago than it has been in some time," and said the bank would consider future opportunities if they presented themselves. The pro forma company will have just under $3 billion in assets and will continue to grow into the sub-$10 billion sweet spot for community banks with regards to efficiencies and economies of scale. ABC Bank management did not return requests for comment.