The theme, “Consolidation”, is foreign to no one that has worked in the banking industry.  It has been prevalent, and at times unrelenting, for decades. And, while de novo formation in years past once served to partially offset the ongoing consolidation of bank charters across the country, the historical run-rate of new bank creation that once averaged 150 – 200 banks annually entering the industry, has post-crisis trickled to only a handful or so of developing organizations actually coming to fruition. Consequently, an industry that once measured in excess of 20,000 bank charters approximately 30 years ago, has today declined to an aggregate count that hovers near 5,000. And with the banking industry continuing on a consolidation trendline that witnesses 4-5% of its charters “disappearing” annually (meaning roughly 200-250 banks decide to align with competitors every year), it is a safe bet that the industry will continue to shrink dramatically in the coming years.

Here in Michigan, the same trends cited above are also prevalent within its borders. An aggregate charter count that measured north of 300 when I first relocated to the state approximately three decades ago to raise my family, today measures less than 90. And de novo, or new bank, formation that had been a bit of a backstop to this consolidation trend, completely dried-up coming out of the Great Recession. No new banks were created in Michigan after 2009 until a single charter finally came into existence in Southeast Michigan in the Spring of 2019. A decade-long drought that mirrored the experience in many other regions across the United States. And, of note, according to the Federal and State dockets, there are currently zero de novo applications currently pending in Michigan.

We share these numbers in presentations to underscore the ongoing shifting dynamics of the sector, while also looking to highlight the vital nature of community banks to their markets as their scarcity continues to grow. Below is a listing of Michigan bank mergers & acquisitions that have been announced since the beginning of 2019. The seven transactions, coincidentally, reflect a representative cross-section of deals that have been occurring across the country:

•     Four “traditional” announcements, wherein a larger organization acquires a smaller shop, as each buyer looks to extend its geographic reach while augmenting its franchise’s offerings
•     Two “merger of equals” that underscore the current popularity of two banks seeking a classic MOE structure to ideally drive a “1 + 1 = 3” dynamic
•     A credit union buying a bank, as the emerging prevalence of such transactions across the nation does not appear to be abating

To the contrary, as cash once again becomes a viable (and potentially attractive in terms of its stability) component of a deal’s consideration, credit unions have surfaced as conceivably formidable partners and possibly logical players in the industry’s consolidation wave:

It is inevitable that this table will continue to expand as we move through 2020. And in each instance, while structural elements and overriding themes for both buyers and sellers may be very comparable amongst all the participants, there are always unique attributes that ultimately bring individual parties to this decision. Succinctly, there is no “right answer” or “wrong answer” to the question of consolidation….simply, it gravitates toward what makes the most sense for your organization and its multiple constituencies as you determine the bank’s place in the new world order, and how best it can serve its markets while providing a value-add proposition for all its stakeholders.

With many institutions now reporting 4th Quarter and Full Year 2019 results, significant anecdotal commentary across the industry in recent months is slowly morphing into empirical evidence with regard to some of the headwinds facing the banking sector. Fed rate cuts through last Summer have translated into heightened margin pressure, as many organizations report year-over-year and linked-quarter contraction in their NIMs while signaling preliminary expectations of continued compression as they move through 2020. For many of the larger organizations that enjoy research coverage in the investor community, initial earnings forecasts for this year are typically showing anemic (if any) growth year-over year. In some cases, I am actually seeing ’20 EPS expectations below 2019 actuals. I believe, in part, this helps explain muted, and seemingly cautious, trading activity in some corners as the absence of robust core earnings growth has stagnated potential multiple expansion within the banking universe. Credit costs (particularly for larger organizations now required to implement CECL) could prove volatile, and assuredly will be de facto proxies for the assumed comparable impact at smaller organizations that are currently “CECL-free” for the next few years. Add to all of this the uncertainty that is likely to accompany expectations within both the regulatory and political landscape as the presidential election draws near, and it is clear that numerous challenges, aside from trade tensions and an ever-tightening labor market, remain front and center.

Industry-wide, and notably here in Michigan, capital levels remain healthy. Asset quality for most continues to border on pristine, although key charge-off and provisioning metrics clearly have little room to get much better than they have been. Risk management architectures were noticeably strengthened coming out of the last debilitating downturn and should serve most organizations well as the economic cycle inevitably runs its course. As additional 2019 earnings releases hit the tape in the coming weeks, and detailed portfolio and liquidity information becomes available across the industry, we’ll take a more informed analytical look at the forces sure to shape banking in the foreseeable future.

As we speak about banking consolidation in Michigan, I would be remiss if I also did not comment on the recent passing of long-time CEO at the former Chemical Bank, Alan Ott. Mr. Ott systematically built a formidable operation focused on community banking across broad swaths of the state. As highlighted in his obituary and reiterated in heart-felt eulogies during his funeral service, he carefully stitched together 17 acquisitions during his tenure that, when combined with prudent organic growth, helped create a multi-billion-dollar organization with deep roots in its home market of Midland. Mr. Ott, while known to be demanding with expectations that you dare not come to a meeting unprepared, was very kind to me, with both his time and his candid insights on the industry. It is interesting to note that when Mr. Ott ascended to the corner office, I was sitting in a 5th grade classroom on Long Island, NY. By the time he relinquished the reigns of leadership to a cadre of talented bankers he had helped cultivate and nurture over the years, my oldest daughter was sitting in a 5th grade classroom in Birmingham, MI.

When the former Chemical aligned with Talmer, and then TCF, to become what is today a $45+ billion regional entity, the Chemical name joined a long and distinguished list of prominent Michigan bank names taken out of circulation. Given Mr. Ott’s passing, it seems fitting that the Chemical moniker has too disappeared. Because to just about every banker in Michigan, the names “Alan Ott” and “Chemical Bank” were synonymous.

In closing, attached please find our monthly summary of Michigan’s financial institutions. As you and your Board take your organization forward, please do not hesitate to reach out to me and/or my colleagues at ProBank Austin if we can be of any assistance in helping you assess the competitive landscape.  My best wishes for continued success as you move through 2020.