As year-end 2018 rapidly approaches, I was looking at the landscape of Michigan’s banks across different asset-size classes. In past monthlies, I have sometimes opined on changes to this landscape, particularly as some of the state’s largest entities like NBD, First of America, Old Kent, Michigan National, etc. were merged out of existence. At the same time, other long-time operators across Michigan, coupled with a wave of vibrant de novo banking organizations launched in the 1990’s, have emerged as some of the largest, and better performing, institutions headquartered here.

There has been much talk about the seemingly mythical status of attaining $1 billion in consolidated assets, and all the market riches and investor support that will instantly be bestowed on such heralded operations. Please feel free to insert an appropriate level of sarcasm and/or cynicism to that last statement, as clearly size alone in no way “guarantees” the lofty valuations so many seek. In my more than three decades in the industry, and particularly during my years leading the bank equity research practice for a respected regional brokerage house, I have witnessed multi-billion-dollar institutions that could not string together above-average performance metrics, as well as much smaller traditional community banks that quarter-after-quarter, and seemingly year-after-year, were able to consistently perform while managing prudently run and risk-appropriate organizations in their local markets.

That said, I will not argue that the $1 billion asset threshold does seem to hold certain operational and market value benefit. “Critical mass” is an oft used, and abused, phrase in our industry to justify growth for the sake of, well, growth. Much smarter people than me, over the years, have emphasized the inherent usefulness and value a rationale, adaptable strategic orientation can bring to an organization that prudently charts its course of action. At the same time, I’ve also witnessed those that follow the “if you don’t know where you are going, any port will do”, plan of attack. Not exactly the optimal recipe for success, but clearly a potential framework for underperformance if not outright disaster.

Bottom line, as any successful bank stock investor will attest, reaching $1 billion in assets will not instantaneously anoint you with a premium market valuation with regard to your competitors if you don’t have the underlying performance metrics to support these sought-after, elevated trading multiples. Interesting, and understandable, how it always comes back around to the quality and consistency of core earnings. Deliver, and if the markets are truly efficient, you will be rewarded. But it is also clear that larger organizations typically possess the trading liquidity and market visibility (the Russell Indices immediately come to mind) that seems to potentially “accelerate” the “recognition” that comes with demonstrating solid performance. And, crossing $1 billion appears to be the new line of demarcation in that regard. In the case of Michigan, currently 12 organizations meet this preliminary measurement:

During the course of 2018, this profile has been slightly altered. While Chemical and Flagstar continue to occupy the top two slots with balance sheets in and around the $20 billion-range, some jockeying has occurred downstream with regard to the remaining 10. Independent, Mercantile, and Sterling, all north of $3 billion, have swapped places thus far in 2018, while Macatawa, Isabella, First National in East Lansing, and Bank of Ann Arbor all near the $2 billion level. And, while Crestmark and Monroe announced plans to join forces with larger, out-of-state banks (Crestmark has finalized its merger, while Monroe’s is still pending), mBank and Northpointe experienced growth in the past nine months that elevated them beyond the $1 billion threshold and enabled them to come aboard this asset-size fraternity that also includes the recently publicly minted homegrown Level One in Farmington Hills.

Out of curiosity, I looked at the next “block” of banks across Michigan that currently operate within the $500 million- to $999 million asset size range. There, too, exist approximately a dozen organizations operating in this statistical bandwidth:

This is an impressive “class” with somewhat different challenges and respective operating models depending upon their market dynamics. All are seemingly poised, if so inclined, to continue to prudently grow and prosper for years to come. What course each will take-only time will tell, but clearly that course will potentially adapt as needed. As companies grow, and the banking industry continues to transition in a rapidly-evolving and technologically-oriented manner, I am reminded of an old saying:

“When the past calls, let it go to voicemail.  It has nothing new to say.”

Service quality and customer relationships will always be a cornerstone of the industry, and traditionally, a notable strength of the community banking sector. Utilizing technological advances to address shifting consumer sentiments should ideally better position your organization to reinforce its customer-orientation, while enhancing its ability to efficiently operate and deliver its products and services to the market.

Next year promises to be interesting for the industry, depending upon the direction and magnitude of interest rate changes and shifting economic dynamics, as well as challenges that may intensify as the year unfolds. I am confident that the state’s banking organizations are up to the task. Capital levels continue to be robust; most leadership teams have been battle-tested; risk management architectures have strengthened noticeably since the Crisis; and ideally, the Fed can help choreograph a more modest and short-lived economic slowdown when it surfaces somewhere down the road. Economic cycles are inevitable. Ideally, as we’ve stated in the past, they just need not be catastrophic.

Attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organization forward, do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of assistance in helping you assess the competitive landscape. Best wishes to you and your loved ones for a wonderful Holiday Season! I look forward to re-connecting with all of you as 2019 unfolds.




About the Author