Mergers and acquisitions within the banking industry are expected to maintain a steady pace in the new year.
The continued consolidation of like-sized community banks is likely the norm for 2017 deals, as buyers seek to bulk up in part to mitigate the rising cost of regulatory compliance, said attorney Jeff Ott, a partner at the Grand Rapids office of Warner Norcross & Judd LLP who specializes in bank M&A.
Banks stocks are “doing pretty well right now,” which favors M&A activity, Ott said. A buyer with a good share price won’t have to use as many shares in a transaction, making it less dilutive, he said.
“From that perspective, where banks stocks are right now makes it conducive to continued M&A in the bank world,” Ott said.
The banking industry has been steadily consolidating for years, especially small community banks that feel greater pressure from increased regulatory burdens, low interest rates that cut into margins, limited growth potential, and the need to invest in technology to respond to demand for digital banking.
Those pressures — even with President-elect Donald Trump’s promise of regulatory relief for banks — are not going away, Ott said.
“There will be continued pressure on small banks to get bigger and I think what you’d probably see are smaller banks looking at ‘merger of equal’ type transactions with other small banks to get them to a size where the regulatory expenses get spread out,” he said.
Michigan could also see M&A activity in 2017 involving out-of-state banks moving into the market or expanding their presence by buying a community bank here, Ott said.
A significant rollback of regulations enacted in the mid-2010 Dodd-Frank Wall Street Reform and Consumer Protection Act can lessen that factor as a driver of M&A, he added.
“That would ease the burden and relieve some of the pressure to try and get bigger for some of these smaller banks. It’s just a question of if they roll anything back, what will roll back and how much,” Ott said.
However, he doubts a repeal or rollback of Dodd-Frank would deter or delay some banks from cutting a deal, given the other factors driving transactions in the industry.
“As long as bank stocks hold where they’re at right now in terms of price, if people find a good match, they’re probably going to move forward with a transaction regardless of what’s going on in Washington,” he said.
Rising interest rates also would help net interest margins and ease another factor that pressures small banks to seek deals, although John Kerschen at Grand Rapids-based Charter Capital Partners views that as temporary relief.
“You might see a little bit of a bump in the interest margins,” Kerschen said. “But then you’re going to be faced with the same challenges.”
Those challenges include the need for continuous technology investments to keep up with larger competitors and the growing consumer appetite for digital banking, Kerschen said. Like Ott, Kerschen believes M&A activity in 2017 will primarily involve community banks seeking economies of scale.
“It’s just very difficult to support that cost structure,” Kerschen said.
Chemical Financial Corp.’s $1.7 billion acquisition of Talmer Bancorp Inc. that closed Aug. 31 was easily the largest deal in 2016 between Michigan-based banks. As a result of the transaction, Midland-based Chemical now has nearly $18 billion in assets.
State regulators overall approved seven bank mergers through November 2016 and another was pending. Most of the deals involved small community banks getting together, such as Ludington-based West Shore Bank Corp.’s August acquisition of West Michigan Bank & Trust in Frankfort for $8.3 million in cash.
Another significant merger affecting the Michigan market involved Columbus, Ohio-based Huntington Bancshares Inc.’s $3.4 billion deal for Akron-based FirstMerit Corp., a transaction that closed in August.
Nationally, the annual M&A survey conducted by Bank Director magazine found reduced optimism for mergers in 2017. Just 45 percent of bank executives and directors surveyed in August and September viewed the environment as more favorable for deals. That’s down 17 percentage points from the prior year’s survey.
Among the 206 respondents, 46 percent told Bank Director that their bank was “likely” or “very likely” to acquire another bank by the end of 2017. A quarter of respondents said they were open to selling their bank, were considering a sale, or actively seeking a buyer.
The survey results indicate that “M&A remains a primary catalyst for the strategic plans of many banks,” stated Bank Director CEO Al Dominick.