Published in Finance

Chemical, Huntington acquisitions signal renewed momentum in M&A market

BY Sunday, February 07, 2016 10:06pm

A pair of deals would give Chemical Financial Corp. and Huntington Bancshares Inc. larger footprints in Michigan and could renew the momentum for bank M&A in the state.

The reason: Interest remains high among banks to at least explore a deal with a peer because they’re being pressured to drive growth and efficiencies as regulatory compliance costs rise and as organizations feel the need to invest in mobile banking technologies.

Chemical Financial’s $1.1 billion proposed acquisition of Troy-based Talmer Bancorp Inc. and Huntington’s $3.4 billion acquisition of FirstMerit Corp. “should assist community bank boards in their efforts to determine the future of their respective banks as a buyer or seller and take appropriate steps in that regard,” said Jason Byrd, a managing director at Charter Capital Partners in Grand Rapids.

“They will continue to spur the conversations that banks are having,” Byrd said. “It will be those community banks that are sub-$1 billion (in assets) that want to thrive that will push for consolidations in the market.”

Rajesh Kothari, managing director of Cascade Partners LLC in Southfield, expects to see more deals as well, both by regional and super-regional banks seeking to make acquisitions to drive growth, and by smaller community banks looking for partners.

“I don’t think the tide is going to stop. You’re going to continue to see that trend,” Kothari said. “As we talk to the regional banks and the local banks, they’re looking to position themselves, and valuations are attractive to go find a bigger partner because the reality is, it takes a lot to grow these days and the infrastructure costs are significant.”


AN ERA OF SERIAL ACQUIRERS?

Future activity could even include additional deals by both Huntington and Chemical, Kothari said. Chemical has executed a number of transactions over the years, including three deals in the prior 15 months, to significantly expand its Michigan footprint.

“I don’t think either one of them is done,” he said. “They’re both going to continue to be acquisitive.”

Even as it proceeds with the Talmer deal, Chemical Financial remains in acquisition mode, although it may ease up for the next two years or so, said Chairman, President and CEO David Ramaker.

The Talmer acquisition is by far the largest deal that Chemical Financial (Nasdaq: CHFC) has ever cut, and “we have to stay focused on this merger and bringing our two companies together,” Ramaker said.

“You have to make sure you do that right, so our focus is really going to be on execution, but acquisition will always continue to be part of our strategy,” he said. “We’ll be extremely selective in the near term.”

In 2015, Chemical Financial completed deals for Holland-based Lake Michigan Financial Corp., the parent company of The Bank of Holland and The Bank of Northern Michigan, and Monarch Community Bank in Coldwater. In late 2014, it acquired Northwestern Bancorp in Traverse City.

The cash-and-stock deal with Talmer (Nasdaq: TLMR) will give the Midland-based Chemical Financial more than $16 billion in assets and 266 offices, mostly in Michigan and northeast Ohio. The merger will move Chemical Financial into the Southeast Michigan market for the first time and extend the bank’s reach outside of Michigan.

Chemical Financial presently has 185 offices in the Lower Peninsula with assets of $9.18 billion.

Talmer Bancorp, the holding company for Talmer Bank and Trust, has 51 branches and lending offices in Michigan, plus locations in Ohio, Illinois, Indiana and Nevada with about $6.6 billion in assets. In West Michigan, Talmer has offices in Grand Rapids, Portage, Holland, Muskegon and Grand Haven from when it bought the assets of the former Michigan Commerce Bank in early 2014 from the bankrupt Capital Bancorp.

Talmer became a public company just two years ago with a $200 million IPO. Wilbur Ross Jr., an early investor whose W.L. Ross & Co. put $50 million into the bank in 2010 when it was known as First Michigan Bancorp and had a single office, sold his stake in Talmer in 2015.


CROSSING A MILESTONE

Recent acquisitions have made Chemical Financial a “meaningful player” across the state, said Byrd of Charter Capital. The latest deal makes Chemical Financial a “very meaningful” player as well in Southeast Michigan, where Talmer has most of its state footprint.

“They are definitely carving out their piece of the market and they are absolutely going to be a competitive force in the state,” Byrd said.

Ramaker will serve as president and CEO of the merged bank. Talmer Bancorp Chairman Gary Torgow will become chairman, and President and CEO David Provost will join Chemical’s board of directors.

Under terms of the transaction, shareholders at Talmer will receive $15.64 per share and 0.4725 shares of Chemical Financial stock for each of their shares. Pending regulatory and shareholder approvals, including the approval by Chemical shareholders to issue additional stock for the deal, the two banks expect the merger to close in the second half of 2016.

For the acquisition, Chemical was advised by the investment banking firm of Sandler O’Neill + Partners and the law firm of Warner Norcross & Judd LLP. Talmer was advised by the investment banking firm of Keefe, Bruyette & Woods and the law firm of Nelson Mullins Riley & Scarborough LLP.

The Talmer deal comes as Chemical nears a milestone of $10 billion in assets that brings with it increased regulatory requirements and cost. Ramaker previously had said he wanted to pursue a deal that put the bank past the $10 million threshold “in a significant way.”

Acquiring Talmer easily accomplishes that goal while moving Chemical into the southeast Michigan market.

“I truly believe we are creating Michigan’s community bank,” Ramaker said. “This is transformational.”


M&A ENVIRONMENT REMAINS FAVORABLE

In the other proposed merger, the combination of Huntington (Nasdaq: HBAN) with FirstMerit (Nasdaq: FMER) would create a bank with $100 billion in assets and locations across eight states in the Midwest.

Huntington already ranks as one of the largest banks operating in Michigan and is among the market leaders in West Michigan. It ranked sixth among 142 banks in Michigan in the FDIC’s 2015 Summary of Deposits with 246 offices statewide and $15.16 billion in deposits.

FirstMerit ranked ninth in Michigan in the 2015 Summary of Deposits with 138 offices in Michigan and $5.10 billion in assets. In West Michigan, FirstMerit has single locations in Grand Haven, Holland, Muskegon and Portage, plus several offices in and around Lansing.

Across the U.S., higher regulatory compliance costs and pressures on banks to grow have driven M&A activity and interest.

In a 2015 survey conducted by Bank Director Magazine, 62 percent of respondents said the present environment is more favorable for bank M&A and 32 percent of executives and directors at banks with less than $1 billion in assets said they need to hit the milestone to stay competitive as the industry consolidates.

In Michigan, Ramaker expects consolidation to continue and “would be surprised if there’s not” more mergers.

Among the possible buyers is Mercantile Bank Corp. in Grand Rapids.

In response to a question during a conference call with analysts last month to discuss quarterly and annual results, Chairman and CEO Mike Price said the bank remains open to another deal after the 2014 merger with the former Firstbank Corp.

There also remains “a lot” of talk across the industry about bank M&A in the state, Price said.


MORE MERGERS OF EQUALS?

One potential barrier for future deals is that some banks are not looking to buy a smaller peer.

The appetite among larger community banks to buy a bank below $1 billion in assets is “limited (because) the complexity of getting a deal done does not vary that widely,” Byrd said. “So in that market, sub-$1 billion, I believe when the actual transactions do come together, you will see similarly sized banks coming together under merger of equals structures.”

Directors and shareholders at some small community banks want to get the efficiencies that a merger can bring, yet they do not want to lose their community identity, Byrd said. He believes that has “pushed off” consolidation in the lower end of the market.

“At some point, I believe that many of these community banks will need to find a partner,” Byrd said.

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