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Sunday, 07 January 2018 00:38

After a pause in 2017, bank M&A expected to pick up

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After a pause in 2017, bank M&A expected to pick up Infographic by Rachel Harper

John Donnelly considers Independent Bank Corp.’s proposed $63.1 million deal to buy Traverse City-based TCSB Bancorp Inc. as indicative of the bank mergers likely to occur in Michigan next year.

After a “quiet year” in 2017 until Independent Bank announced the TCSB deal in early December, investment banker Donnelly expects M&A activity “to pick up a bit” in the new year.  The managing director of Grosse Pointe-based Donnelly Penman & Partners Inc. sees activity coming from banks with $1 billion to $5 billion in assets buying community banks with $150 million to $500 million in assets, a window in which the Independent Bank-TCSB deal fits.

“That’s a good template,” Donnelly told MiBiz. “There may be mergers of equals, but they’re very, very difficult to do.

“The larger banks, their currencies are trading at a much higher multiple than the smaller community banks, so they can afford to pay more. That’s putting the larger banks — the $1 billion to $5 billion banks — really at a competitive advantage, versus two community banks trying to get together.”

Just a handful of Michigan bank transactions closed or were announced last year. They include the Independent-TCSB Bancorp deal that’s targeted to close at the start of the second quarter in 2018, and Michigan City, Ind.-based Horizon Bancorp’s $95.1 million acquisition of Wolverine Bancorp Inc. in Midland that closed in June.

Both deals bring the buyers into new geographic markets.

For buyers, acquisitions can better drive growth and improve earnings compared to investing heavily to expand their footprints into new markets, Donnelly said.

“I think bankers are realizing that well-done M&A is a quicker and potentially more efficient way to grow versus organic growth,” he said.

In part, the comparatively lower M&A activity among banks in 2017 can be attributed to active acquirers digesting large transactions that closed during the previous year, including Midland-based Chemical Financial Corp.’s $1.7 billion deal for Talmer Bancorp in Troy.

That deal took two key acquirers off the M&A market as they spent 2017 focused on integration, Donnelly said. 

Evansville, Ind.-based Old National Bancorp, another previous buyer in the Michigan market, focused on a community bank acquisition in Minnesota and integrating a bank it bought in Wisconsin in 2016.

Both Chemical Financial, at $19.3 billion in assets, and Old National, with assets of $15 billion, have reached a size at which they are less likely to focus on acquiring small community banks, Donnelly said. Those two banks stepping back creates space in the market for other M&A players, he added.

“You’re having a redefining of the marketplace,” Donnelly said. “2017 may have been kind of a transition year.”

‘EAT OR BE EATEN’

Despite the M&A activity of recent years that reduced the number of banks in Michigan and potential acquisition targets, attorney Michael Moore, a principal in the banking practice at Miller, Canfield, Paddock and Stone PLC’s Grand Rapids office, still sees plenty of opportunity in the market.

Moore believes “there’s going to be at least continued discussions” between banks.

“I believe we still have too many financial institutions in Michigan. I think there’s going to have to be a lessening, so you’re going to have to eat or be eaten in some circumstances,” Moore said. 

M&A activity in 2017 also may have been tempered by bankers waiting to see how the new Trump administration approached the industry, Donnelly said. The anticipation of tax reform that came just before the end of the year also could have played a role in pausing the dealmaking among banks, he said. 

Nationally, nearly half of the directors and executives surveyed by Bank Director magazine said they see a more favorable environment for M&A in 2018, and 55 percent said their bank was likely to buy another bank by the end of the year.

Among survey respondents, 44 percent said increasing bank valuations made it more difficult for them to compete for or attract acquisition targets.

Despite slower M&A activity in Michigan in 2017, many of the forces that have driven deals over the last several years remain in place. They include the high costs of federal regulatory compliance and capital requirements enacted after the 2008 financial crisis, although federal regulators under President Trump have eased how stringently they enforce regulations. 

The significantly improved financial condition of banks years after the Great Recession and the greater confidence in both the economy and the banking system have many banks in a better position to buy or pursue a sale, Donnelly said.

FOCUSED ON ORGANIC GROWTH

The deal for TCSB Bancorp was the first acquisition in years for the Grand Rapids-based Independent Bank (Nasdaq: IBCP). The deal expands the bank into the northwest Lower Peninsula and came about after TCSB Bancorp decided earlier in the year to seek a sale.

TCSB Bancorp CEO Connie Deneweth cited regulatory compliance costs as a factor in pursuing a sale during 2017. TCSB is in much better financial condition today compared to eight years ago “and we felt like a strong community bank and partner,” Denewith said in a December conference call with Independent Bank investors to discuss the merger.

Deneweth and Independent Bank CFO Robert Shuster have known each other for years from their days as CPAs. Their connection led to discussions between the two banks and, ultimately, the transaction that they announced in early December.

Even with the TCSB Bancorp deal, Independent Bank remains primarily focused on organic growth, said President and CEO Brad Kessel. However, if the right opportunity arises for a subsequent acquisition, the bank would consider it, he said.

“We’ve outlined sort of our priorities and we continue to look at organic growth as being the primary strategy by which we’re going to grow our company,” he said in the December conference call. “So that will continue to be the case now. If there are other opportunities and where it all makes sense, we will look at those opportunities. But at this point, we are really focused on a smooth integration with Traverse City State Bank and taking care of all these customers and bringing the employee base across.”

Grand Rapids-based Mercantile Bank Corp. (Nasdaq: MBWM), with 49 offices across the central and western Lower Peninsula and $3.25 billion in assets, takes a similar approach to M&A.

Three and a half years after acquiring the former Firstbank Corp., Mercantile Bank remains open to another deal, if it makes sense and under the right circumstances, said President and CEO Robert Kaminski.

“From an M&A standpoint, we consider ourselves opportunistic, and culture is very important to us, and if the right opportunity came along we’d certainly look at an acquisition,” Kaminski said. “Is it something that necessarily is going to happen tomorrow? Probably not.”

PRICING CONCERNS

For its part, Midland-based Chemical Financial (Nasdaq: CHFC) remains an active player in M&A across the Midwest.

However, in an October conference call to discuss quarterly results, President and CEO David Provost told brokerage analysts he was a “just a little concerned about the pricing. And we haven’t really gotten to second base on anything.”

“I’m just really concerned about the pricing, and we have always been very value-oriented in everything that we’ve done, looking for what’s going to create shareholder value,” Provost said. “We’re at a good asset size, so we don’t have to do a deal to do a deal. So if there’s a right opportunity in the market, we will take a serious look at it.” 

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