Published in Finance
Dealmaking in the banking industry, at a glance: Bank Director annually surveys banking executives across the nation to gauge M&A activity for the coming year. Here are highlights from the 2020 survey. Dealmaking in the banking industry, at a glance: Bank Director annually surveys banking executives across the nation to gauge M&A activity for the coming year. Here are highlights from the 2020 survey. SOURCE: Bank Director 2020 Bank M&A Survey

Bank execs could face fewer deal prospects in 2020

BY Friday, January 03, 2020 05:07pm

Bank M&A may ease in 2020, as fewer executives surveyed by the trade publication Bank Director view the market as favorable for deals.

The survey shows bankers today face different barriers to deals than in years past, when high prices got in the way. More executives now see fewer good banks to buy or that are willing to sell, according to Bank Director.

“While acquisition drivers remain much the same, the barriers to completing a deal have shifted over the past five years. Bank leaders have frequently bemoaned high price expectations on the part of the seller as a deal barrier in past surveys,” Emily McCormick, vice president of research for Bank Director, wrote in a report on the survey results for 2020. “Of even greater concern is the rising percentage of respondents who say there is a lack of suitable targets in markets they are in or want to enter.”

Bank Director annually surveys more than 200 CEOs, directors and senior executives in the banking industry to gauge M&A for the coming year.

A little more than 30 percent of respondents said they see a more favorable market in 2020 for bank M&A, which is down from 54 percent a year earlier. Twenty-eight percent said the current environment is less favorable for deals, versus 18 percent in the Bank Director survey a year ago.

Three-quarters of respondents said they prefer to grow organically rather than pursue an acquisition, the same rate as in 2019.

In Michigan, one of the limiting factors for M&A that will continue in 2020 has been the lack of sellers, said attorney Michael Bell, a partner at Royal Oak-based Howard & Howard PLLC. Banks that want to sell have generally already cut a deal, leaving few good prospects for active buyers, Bell said.

“Michigan’s only limited by the lack of sellers. If there are sellers, there will be plenty of deals,” he said. “There are plenty of buyers.”

Those Michigan-based buyers may look elsewhere for a deal if they can’t find a good acquisition target within the state that’s willing to sell, said Bell, who specializes in the acquisition of banks by credit unions or private investors.

He expects activity for those kinds of deals to remain heightened. He cites two recent deals in the U.S. in which credit unions are buying banks, including Suncoast Credit Union’s December transaction for Miami-based Apollo Bank, the largest-ever deal transaction involving a credit union acquiring a bank.

The most recent bank transaction in West Michigan came Oct. 1, 2019 when Sparta-based ChoiceOne Financial Services Inc. (OTC: COFS) completed an $89 million deal for Lapeer-based County Bank Corp., the parent company of Lakestone Bank & Trust. Integration of the two community banks should occur by late in the second quarter of 2020.

CEO Kelly Potes told MiBiz at the time the deal closed that ChoiceOne would consider another transaction to supplement organic growth if the right opportunity were to arise and “as it makes sense for us strategically.”

Through the deal, the merged bank now has 29 ChoiceOne and Lakestone Bank & Trust offices in West Michigan and Southeast Michigan, with combined assets of more than $1.3 billion.

Becoming ‘deal ready’

In the largest transaction in recent years involving a Michigan bank, the former Chemical Financial Corp. and TCF Financial Corp. of Minnesota closed in August on a $3.6 billion deal. The deal created a bank with more than $46 billion in assets and 500 offices in nine states across the Midwest, and involved TCF merging into Chemical Financial, which took on the TCF name and remains based in Detroit.

TCF executives told an investor conference last month that they continued to be interested in further M&A, although integrating the two banks this summer remains their priority.

“It’s probably too early for us to be jumping into the deal market right now, but we’ll monitor that and see how the situation evolves,” CFO Dennis Klaeser said at the BancAnalysts Association of Boston Conference. “We’re going to be monitoring the marketplace and acting appropriately.”

The conversion of the two banks’ I.T. systems “isn’t necessarily the trigger point” for more M&A by TCF, according to Klaeser.

TCF Financial seeks to maintain a strong capital position should another opportunity come along, executives said. Part of the bank’s corporate development strategy is to “remain disciplined for opportunities including whole banks, lending or deposit platforms, or portfolios,” according to an investor presentation.

“We’ve said in the past we want to be deal-ready. It’s not about that we’re looking for the next transaction. It’s that as we’re making decisions internally, you make it so that it becomes easier for the next transaction. That’s more of our attitude than saying we’re already looking for another transaction,” CEO Craig Dahl said at the BancAnalysts conference.

Culture matters

Grand Rapids-based Mercantile Bank Corp. (Nasdaq: MBWM) maintains that it would entertain a deal if presented with the right fit. That’s a position Mercantile Bank has held for some time following the merger five years ago with the former Firstbank Corp. of Alma.

“We remain interested, certainly, in opportunities that come along, and we have, from time to time, seen some opportunities cross our desk. But as we often talk about, culture is very, very important to us, and those types of things weigh very, very significantly on our assessment of M&A opportunities,” Mercantile CFO Chuck Christmas said when asked about dealmaking during an October conference call with brokerage analysts to discuss third quarter results.

“It probably shrinks the universe when compared to what it might be for other organizations,” Christmas said. “I think there’s certainly lots of talk out there, lots of conversations. But I think from our standpoint, we’re staying the course. We’re looking at opportunities that come down the pike, and we’re being very selective and opportunistic as any of those opportunities may continue down the road in future dates.”

‘No reason to stop’

In this year’s Bank Director survey conducted with accounting and consulting firm Crowe LLP, 60 percent of respondents cited buying an attractive deposit base as being among their top three reasons for wanting to buy. Increasing earnings per share was cited by 52 percent of respondents, and 41 percent listed supplementing or replacing organic growth and rationalizing operating costs over a wider base as being among their top reasons.

For banks that have done a recent deal, Bell at Howard & Howard sees no reason why they should avoid considering another merger or acquisition.

“If you have the operational formula, there’s no reason to not be buying,” he said. “Once you do it, there really isn’t a reason to stop.”

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