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MutualFirst Financial deal expected to improve liquidity

Muncie, Ind.-based MutualFirst Financial Inc. is acquiring state peer Universal Bancorp in a deal that executives say will increase lending in vibrant markets and that analysts say will improve liquidity.

The cash-and-stock deal is valued at about $65.6 million in aggregate and is expected to create a company with $2 billion in assets. MutualFirst will gain 13 branches in central and southern Indiana for a total of 40 in the state, allowing the company to gain a foothold in the lucrative Greater Indianapolis and Bloomington metropolitan statistical areas.

On an Oct. 5 call for analysts and investors, MutualFirst President and CEO David Heeter said Bloomfield-based Universal Bancorp's "attractive core deposits and stable markets" played a key role in the deal, and he touted the area's low-cost deposit franchise.

"Their cost of funds will improve our margin," Heeter said. "We think that's really important, particularly as we try to capitalize on the vibrant markets for lending."

D.A. Davidson analyst Kevin Reevey wrote that "scale and core deposits" are the major benefit of the deal, noting that 95.2% of Universal unit BloomBank's deposits are core.

Universal President and CEO William McNeely said most of the company's transaction accounts are in excess of 10 years old.

"We've been very sticky with our people," McNeely said. "It has a lot to do with the customer service and making sure that they get taken care of, and that will continue. And so we expect those customers to continue to be with us and those balances to grow."

Heeter said BloomBank had a loan-to-deposit ratio "just north" of 83% as of June 30. FIG Partners analyst Brian Martin noted that MutualFirst has been "constrained from a liquidity perspective," with a loan-to-deposit ratio of about 100%.

"After this transaction, we expect to be somewhere between 96% and 97%, which allows us to continue to grow as we have been able to grow over the last few years," MutualFirst CFO Christopher Cook said. He said the company will be well-capitalized moving forward and will have "plenty of capital" to execute other opportunities.

Martin wrote that the deal offers "strong [net interest margin] expansion with the ability to deploy excess deposits." An executive on the call said it could increase NIM by 15 to 20 basis points, not accounting for other factors like accretion.

Since BloomBank has traditionally been a commercial real estate lender, Heeter said he recognizes the risks but is not concerned about lending concentrations. He said the quality of their lending portfolio is "what we would expect."

Heeter said the deal will leverage MutualFirst's size, allowing it to improve efficiency and lend "strength and size" to the relationships BloomBank has established.

MutualFirst is anticipating cost savings of 25% of BloomBank's noninterest expense base to be realized in 2019. Cook said the company will probably "reduce headcount without closing locations" and is expecting savings associated with its core processing.

After cost savings, the deal is expected to be 13% accretive to EPS. Using the crossover method, tangible book value dilution of 3.1% is expected to be earned back in 2.2 years.