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Thursday, 15 March 2012 11:02

Regulations drive consolidation in banking industry

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WEST MICHIGAN — The small community bank may very well go extinct as the banking industry reacts to recent changes in federal regulations.

Bankers and industry experts cite the 2010 Dodd-Frank Act — the largest overhaul of the nation’s banking regulations in decades, passed in the wake of the 2008 financial crisis — as a key driver of the expected increase in merger-and-acquisition activity in the coming years.

In essence, industry insiders say the law could reshape the competitive landscape and contribute to a new wave of consolidation in the industry that could surpass what occurred more than a decade ago. The most likely acquisition targets are small community banks that were hit hard by the recession and cannot readily afford the higher costs of regulatory compliance that cut into the bottom line.

Jon Chism“In the long term, it’s going to be much more expensive to do business,” said Jon Chism, a partner in the Grand Rapids office of Plante Moran PLLC who focuses on banking.

Chism and others say the financial burden of complying with Dodd-Frank, combined with pressure to grow earnings at a time of tepid growth potential for lending, will prompt some small community banks to seek a merger, or at least examine joint ventures to share administrative functions such as compliance or information technology.

“There are a bunch of things making it harder and harder for smaller banks to compete effectively,” Chism said. “I think that some of the community banks are going to look at it as the best thing to do is join with someone else.”

The amount of consolidation — and the potential subjects of mergers and acquisitions — is subject to speculation.

Attorney Phillip D. Torrence, managing partner of Honigman Miller Schwartz and Cohn’s Kalamazoo office who handles mergers and acquisitions, believes as many as 30 banks in Michigan could go through a merger or acquisition in the next five years. The most likely prospects for acquisition are community banks with assets of $500 million or less, he said.

“You need to be at a half-billion dollars to have the scale needed to deal with a lot of the compliance costs under the new regulatory regime,” Torrence said.

Stephen Geyen, a brokerage analyst with Minneapolis-based Stifel Nicolaus & Co. who follows Midwest banks, sees “very aggressive” merger and acquisition activity in the years ahead in Michigan and across the nation.

Philip Torrence“There will be significant consolidation,” Geyen said. “It’s just a matter of how quickly.”

Nationally, the co-founder of a Virginia firm, Martin Friedman of FJ Capital Management, recently issued a white paper that predicts a new wave of consolidation involving small and mid-cap banks that will rival or exceed that of the mid- to late-1990s.

Among the potential buyers are Fifth Third Bancorp and Midland-based Chemical Financial Corp., which two years ago acquired Byron Center-based OAK Financial Corp., the parent company of the former Byron Bank. The $83.9 million deal significantly increased Chemical Financial’s presence in the Grand Rapids-area market.

Chemical Financial Chairman, President and CEO David Ramaker has repeatedly indicated that the bank wants to make further acquisitions.

In Chemical Financial’s recent earnings release for the fourth quarter of 2011, Ramaker said the bank “will look to further capitalize on anticipated consolidation opportunities in Michigan’s banking industry” as it works also to further improve credit quality and grow loans.

Chemical Financial, with $5.34 billion in assets, has 142 offices in 32 counties in the Lower Peninsula.

At Fifth Third Bancorp, CEO Kevin Kabat told investors at a Goldman Sachs conference in December that the Cincinnati, Ohio-based bank wants to pursue acquisitions, though probably not until market conditions improve.

His reported goal is to increase the number of markets where Fifth Third has a top-three market share, which could preclude any West Michigan deals. Fifth Third, which has more than 1,300 offices in 12 states, holds the largest market share in West Michigan in terms of deposits.

In a January conference call with brokerage analysts to discuss 2011 results, Fifth Third CFO Daniel Poston said he expects some opportunity may transpire for the bank in 2012, though probably not until the latter part of the year.

“It’s not something that we are going to push before its time. I think we will be very disciplined,” Poston said.

The recession limited bank mergers in recent years. There were no acquisitions in Michigan in 2011, though two banks did consolidate charters into sister banks within their parent corporations, according to the Michigan Office of Financial and Insurance Regulation.

Market stability, a restoration of earnings and improved balance sheets have made it easier for some banks to fashion a deal, especially if their share price has risen and they are acquiring a bank with a valuation and share price that has yet to rebound, Torrence said.

“Most of the banks are trading at a fairly steep discount to book value, or nearly to book,” Torrence said.

Improved performance even has the chairman and CEO of Grand Rapids-based Mercantile Bank Corp., Mike Price, speculating about future deals.

A return to profitability in 2011 at least gives Mercantile Bank — which closed offices in Ann Arbor and Novi during the recession — the ability to examine a deal in the future, should the “right opportunity” present itself, Price said.

Given the pressure some banks are still feeling, combined with the costs of complying with Dodd-Frank, Price sees consolidation within the industry as inevitable.

“It’s got to happen,” he said.

Just a few weeks ago, Michigan City, Ind.-based Horizon Bancorp announced an agreement to acquire Heartland Bancshares Inc. and its Heartland Community Bank in Franklin, Ind. in a $14 million stock transaction. Horizon Bancorp, with $1.54 billion in assets and record earnings in the fourth quarter, has seven offices in Southwest Michigan and entered the Kalamazoo-area market last year with the opening of a deposit and loan office in Portage.

One downside to the consolidation wave is the loss of locally-owned institutions in small communities and the potential for an asset base controlled from outside of the region or the state, Torrence said.

An upside, though, is that some of the mid-sized banks in Michigan have the opportunity to eventually become a regional or super-regional bank, and “that’s good for the state and good for businesses in the state,” Torrence said.

New banks not expected

A new wave of bank consolidation that’s predicted for the years ahead is unlikely to spur the same kind of creation of new community banks that occurred from the mergers involving West Michigan-based institutions between the late 1990s and the early 2000s.

The period saw Huntington Bancorp acquire FMB Corp. in Zeeland; First of America Corp. in Kalamazoo acquired by National City Corp., which was later acquired by PNC Bank; and Old Kent Financial Corp.’s merger into Fifth Third Bancorp.

There were also a number of deals involving banks large and small that altered the West Michigan banking landscape, such as Fifth Third’s 1999 acquisition of the former Ottawa Financial Corp. in Holland, the parent company of the AmeriBank, plus Chemical Financial Corp.’s acquisition of Shoreline Financial Corp. in St. Joseph in 2000 and its 2001 acquisition of Bank West in Grand Rapids.

Four West Michigan banks — Holland-based Macatawa Bank Corp., Grand Rapids-based Mercantile Bank Corp., Community Shores Bank Corp. in Muskegon and Kalamazoo’s Keystone Community Bank — directly trace their roots to those three large mergers, as executives with the acquired institutions eventually departed to strike out on their own.

A repeat of that scenario is far more difficult today, given the heightened regulatory requirements, the costs of complying with Dodd-Frank and the likely difficulty in raising needed capital.

“For anyone wanting to start a bank, there are pretty significant hurdles to overcome,” said Stephen Geyen, a brokerage analyst who follows Midwest banks for Stifel Nicolaus & Co. “The regulations today are much tougher than they were 10 years ago.”

The last banks formed in West Michigan were Grand River Bank in Grandville, which opened in April 2009, and Kalamazoo-based First National Bank of Michigan six years ago.

There were two new banks proposed in Michigan in late 2010, in Detroit and Port Huron. The applications for both, one of which earned approval from state regulators, were withdrawn in 2011.

“The world has changed. It’s not as easy as it used to be to do this,” said Phillip D. Torrence, managing partner of Honigman’s Kalamazoo office. “It’ll be a while before any new banks are formed again.”

Torrence expects that commercial lenders and executives either displaced or those who choose to leave after a bank merger will find ample opportunity with an existing institution, rather than risk forming their own bank in an uncertain period.

Read 2941 times Last modified on Sunday, 12 August 2012 11:01

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