Mercantile-Firstbank Deal Could Spark More Michigan M&A

It is only natural to ask "What comes next?" after news breaks of any bank merger.

In the case of the $1.34 billion-asset Mercantile Bank, which agreed this week to buy Firstbank, the answer is to expect more deals.

The combination of Mercantile (MBWM) in Grand Rapids and Firstbank (FBMI) in Alma, expected to close in December, would create the third-largest bank in Michigan, measured by both market capitalization and statewide deposit share. It would also result in an excellent platform for future acquisitions, says Thomas Sullivan, the $1.5 billion-asset Firstbank's chief executive.

"As this [deal] comes together, we think we have the internal capability and skills to make the combination go smoothly," Sullivan, who is slated to become the combined company's chairman, said in a conference call Thursday. "Once we finish the hard work of this merger, we think there will be other opportunities for us, either inside our footprint or adjoining it, to continue growing by acquisition."

The community banking sector has long been said to be on the verge of an epic consolidation, with larger players lining up to swallow hard-pressed smaller competitors. However, Michigan banks have largely watched dealmaking spurts in other parts of the country from the sidelines. The last acquisition involving a Michigan bank closed in April, when $24.5 billion-asset FirstMerit of Akron, Ohio, completed its $912 million purchase of Citizens Republic in Flint.

Another deal involving two banks in Farmington Hills collapsed in June when the $266 million-asset Oxford Bank canceled plans to sell itself to Level One Bancorp. It has been almost three years since Michigan saw significant merger-and-acquisition activity, says John Donnelly, managing director of Donnelly Penman & Partners, a Grosse Pointe, Mich., investment bank. But after the Mercantile-Firstbank announcement, he says, the logjam is likely to break soon.

"It will be a wake-up call," Donnelly says. "Tom Sullivan and [Mercantile Chief Executive] Mike Price are well-respected by their peers. I think other bankers are going to be thinking, 'if these two guys did it, maybe we should do it.'"

Bank M&A in the Midwest is being watched closely. The 26 deals in the region were second to the Southeast's 29 in the first half of the year, according to Dealogic. Meanwhile, the Chicago market may also be heating up thanks to the $9.4 billion-asset MB Financial's announcement in July that it would pay $680 million for the $5.9 billion-asset Taylor Capital.

Other Michigan banks appear to be looking to buy. In May, Chemical Financial in Midland filed a $100 million shelf registration to ensure it would have access to capital in case a deal presented itself.

"There haven't been any deals in Michigan so far in 2013, but we think it is going to happen," says Lori Gwizdala, the $6 billion-asset Chemical's chief financial officer, told American Banker at the time. "There was no immediate need to raise capital, but with this sitting on the shelf we are ready should the right opportunity arise."

Mercantile wants to expand in central and western Michigan, Price says. It has little or no interest in moving into the metro Detroit market. "We're going to be a potential aggregator going forward, but if we were to put together a list of the regions we'd like to go into, southeastern Michigan would be at the bottom," he says.

For Firstbank, the allure of connecting with Mercantile was the entrée to Grand Rapids it provided. Grand Rapids is Michigan's second-largest city, and unlike the well-documented struggles the state's largest municipality, Detroit, is experiencing, Grand Rapids' economy is projected to grow throughout the remainder of 2013 and in 2014.

"This gives us a unique opportunity to enter Grand Rapids with a branch network that would have taken us years to grow on our own," Sullivan says.

"Firstbank wins big because they are now a Grand Rapids bank, and Grand Rapids is a premium location," Donnelly says.

The transaction is structured as a one-for-one stock swap. Firstbank shareholders will receive one Mercantile share for each share they currently hold. Based on its closing price Wednesday of $18.77, Mercantile is paying $151.5 million for Firstbank.

Firstbank and Mercantile are terming the deal a merger of equals, and its board will be split evenly between Mercantile and Firstbank directors. However, Mercantile investors will own 52% of the stock. Mercantile says it will pay its shareholders a special $2 dividend before the deal closes.

The combined company will take the Mercantile name, and it will be based in Grand Rapids. It will be a "powerhouse" with $2.8 billion of assets, $2.3 billion of loans and $2 billion of deposits, Price says. He will serve as president and chief executive; Mr. Sullivan will be chairman.

The merged company will enjoy a significantly larger lending limit than either Mercantile or Firstbank has now. Its legal lending limit will be $60 million per customer relationship, and its effective, or in-house limit, "will be north of $30 million," Price says.

For Mercantile, which has been one of the most active commercial lenders in western Michigan since its creation in 1997, the capacity to make bigger loans should spur significant growth, Price says.

"We can go deeper with our existing relationships and grab business we were not able to accommodate in the past because of our size," he says.