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Monday, 02 September 2013 22:00

Gaining Scale: Mercantile, Firstbank merger creates ‘formidable competitor’ in market

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Mercantile Bank Corp. grew up by catering to small businesses and touting its hometown ties to become one of the top banks in the Grand Rapids-area market.

Now, under the proposed $151.5 million merger with Alma-based Firstbank Corp., Mercantile Bank is poised to become the third-largest bank headquartered in Michigan. Executives say the merged bank will have the ability to serve larger businesses, compete more effectively against larger banks, and could pursue acquisitions in the future.

“This is definitely a transformational deal,” said John Barber, an analyst and vice president of equity research at Keefe, Bruyette & Woods in New York City who follows banks in the Midwest.

Barber believes the deal “makes sense in a lot of ways.”

“The combined entity is going to be a formidable competitor in Michigan, more so than they were before,” Barber said. “Having more scale is going to help these guys. … Being a larger institution, I think, is definitely one of the benefits of the deal.”

A combined bank allows both to dilute the burden and cost of regulatory compliance and enables Mercantile to lower the cost of deposits that support lending, in turn boosting profitability, Barber said. Prior to the recession, Mercantile Bank relied heavily on wholesale deposits, but has since reversed that dependency and now generates about 80 percent of deposits locally.

The combined bank would operate under the Mercantile Bank name — a reminder of its commercial banking focus — and remain headquartered in Grand Rapids. The bank would have 53 offices throughout the central Lower Peninsula with assets of nearly $2.8 billion and deposits of $2.3 billion.

The stock transaction requires approval from shareholders at both corporations, as well as regulatory approval, and could close by year’s end. Shareholders at Mercantile and Firstbank will likely vote on the merger proposal this fall, executives say.

Barber believes the deal could spur additional M&A activity in Michigan, particularly among community banks with $200 million to $1 billion in assets that were distressed a few years ago and have yet to fully recover from the recession.

An increasingly burdensome and costly regulatory landscape, an interest rate environment that remains “still pretty tough” and limits margins, and the improved valuation of some banks that makes it easier to fashion a stock transaction could collectively drive the increased M&A activity that has been forecast for more than year but has yet to materialize.

“I think the pace has got to pick up from here,” Barber said. “You combine all of those factors and it’s setting up for an increase in consolidation.”

So far, the only activity of consequence to the West Michigan market has been Evansville, Ind.-based Old National Bank’s acquisition this spring of 20 former Bank of America offices in Southwest Michigan, and Midland-based Chemical Financial buying six Independent Bank offices in Battle Creek and 15 branches in Northeast Michigan in 2012.

Executives at both Chemical and Old National have indicated they have a taste for further acquisitions.

At Mercantile and Firstbank, executives bill their deal as better positioning the combined bank for long-term growth as a larger institution.

“Our goal is to be the ‘bank of choice’ in the markets in which we compete,” Mercantile Bank Chairman and CEO Mike Price said.

Price and his Firstbank counterpart describe the deal as a “merger of equals” involving two high-performing banks that share similar corporate cultures and lack any branch overlap.

The combined bank would rank 12th in deposit market share among all banks operating in the state and have a solid presence in the Michigan’s three largest markets outside of Detroit: Grand Rapids, Lansing and Kalamazoo.

“The new Mercantile will be of a size and scale to compete against the largest banks in our markets today,” Price said. “This is a fantastic opportunity for both companies to create Michigan’s premier community bank.”

Price will serve as president and CEO of the merged bank and will become chairman after one year. Firstbank CEO Thomas Sullivan, a 40-year industry veteran who’s been with the bank for 21 years, will serve as board chairman for a year.

As a larger bank, Mercantile would have a higher legal lending cap of up to $60 million, although Price said it likely would self-impose a lower internal ceiling.

The merger also would enable Mercantile to sell business services such as treasury management and payroll within the Firstbank footprint and to compete more on price for commercial loans. However, the CEO stresses that Mercantile plans to adhere to its community-banking roots.

“We certainly are going to be a relationships bank. There’s no doubt that’s what we do well,” Price said. “(But) it gives us more opportunity if we want to sharpen that pencil to go after those credits and be a little more aggressive.”

Likewise, he added, “we certainly could target larger customers that maybe we couldn’t handle before,” although serving small business will remain the bank’s “wheelhouse.”

KBW’s Barber says the potential does exist for some erosion in the community-banking style that made both Mercantile and Firstbank. “The culture,” he said, “is still important to any bank.”

The two should have the ability to retain what enabled both to grow over the years and get to this point, Barber said.

“You look at Mercantile and Firstbank: They’ve both been successful in their own right, and you don’t want to change something that’s not broken necessarily,” Barber said. “These guys are still a community bank at heart, and I don’t expect that to change.

“I look at (the merger) more as an enhancement than something that is going to change the culture.”

Formed in 1997 out of the former FMB Corp. acquisition by Huntington Bancshares a year earlier, Mercantile Bank has seven offices in Grand Rapids, Holland and Lansing with assets of $1.34 billion.

Firstbank has 46 offices in the central Lower Peninsula, including Keystone Community Bank that has seven offices in the Kalamazoo area, and assets of $1.45 billion. Firstbank moved into the western side of the state with the 2005 acquisition of Keystone Community Bank and the subsequent 2007 purchase of Ionia County State Bank.

The combined bank would operate across two geographic regions that allow for local decision-making and for pricing products regionally.

“Grand Rapids and Mt. Pleasant and Kalamazoo are three distinct markets, and we want to keep giving our employees that flexibility to make the tweaks to the market,” Price said. “That’s important.”

In looking to the future, Sullivan told brokerage analysts that the deal could lead to additional acquisitions in the years ahead.

“Once we’ve completed all the hard work that goes with putting these two companies together, we believe that there are going to be other opportunities for us, either within our footprint or adjoining the new footprint, that could represent opportunities for us to continue to grow the franchise through acquisition,” Sullivan said.

The bank, however, has “no interest” in moving into Southeast Michigan, he said. “I don’t anticipate that being of any interest to our company right now.”

Once the deal is done and the two banks are integrated, “we will be in a position to, we think, be a potential aggregator going forward,” Price said. There’s “no question” that Southeast Michigan, he said, “would be at the bottom” of any list of target markets.

“We probably would look other places first,” Price said.

Mercantile at one point had an office in Oakland County in suburban Detroit. The bank closed that office, plus a location in Ann Arbor, and pulled out of those markets as it coped with deep losses incurred during the recession. The downturn and resulting losses led to Mercantile reducing its asset base to about half of its pre-recession size.

Under the proposed terms of the merger, Firstbank shareholders would receive one share of Mercantile common stock for each share of Firstbank common stock they own.

After the closing, Mercantile shareholders will own approximately 52 percent of the stock in the combined company with Firstbank shareholders owning the remaining 48 percent. Mercantile plans to pay a dividend of $2.00 per share to its shareholders before the close of the merger. The deal is expected to be accretive to Mercantile’s earnings per share in 2014 and 2015 by 20 percent and will generate “modest” cost savings of about $5.5 million in the first year.

The deal came together as Firstbank was weighing options for venturing into the Grand Rapids area, a banking market that Sullivan considers the best in the state. Among its options were to start with a lending office and then develop a local branch network, or to pursue a merger or acquisition.

“The next logical step for our company was to look to enter the Grand Rapids market,” Sullivan said. “Michigan’s economy is not going to grow in a very robust fashion. We’re certainly doing a lot better than we were, but the Grand Rapids market presented a big growth opportunity for us, so the question really became what was the most effective and efficient way for us to enter the Grand Rapids market?

“We were looking for the right opportunity, and the ability for our company to join (forces) with Mercantile … it really fits the needs of our company.”

At the same time, Mercantile has been looking “at opportunities to make our company better” and grow its footprint, Price said.

As with so many deals in the business world, the merger between Mercantile Bank and Firstbank originated at a lunch months ago between Sullivan and Price, longtime friends who often served together on boards at trade groups. They met to discuss their companies and the strength of each.

From that first conversation, “the comfort level just grew,” Price said, and they began talking about a possible merger.

“We just thought the timing was right given where both companies were looking to the future,” Price said.

The first meeting “led to a whole bunch of conversations about the potential for joining our two companies together,” said Sullivan, who emphasized the “merger of equals” that he and Price use to define the deal as well as a shared corporate culture.

“It’s a rather unique combination of factors in play here,” Sullivan said. “Mergers of equals are not very common, but in this situation, both companies fit together and mesh together very well.”

Read 4589 times Last modified on Monday, 02 September 2013 21:08

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