The Midwest is starting to experience a heat wave in terms of bank consolidation.
Huntington Bancshares in Columbus, Ohio, agreed Monday night to buy FirstMerit in Akron, Ohio, for roughly $3.4 billion. A few hours later, Chemical Financial in Midland, Mich., committed to paying $1.1 billion for Talmer Bancorp in Troy, Mich.
Including those deals, eight of the 14 bank acquisitions announced in January featured sellers based in just four states: Illinois, Minnesota, Ohio and Wisconsin.
Consolidation in the region is likely to ramp up as regulatory costs and low interest rates weigh on bank earnings. The pace of consolidation could rely on how well Huntington, Chemical and others handle investor sentiment and regulatory approval.
"There will be a shake out of who can do acquisitions and who can't," said Marty Mosby, an analyst at Vining Sparks and a former banker. "Investors don't really know. These banks haven't been acquirers in quite a while, but this will shape the future of these franchises."
Several factors make the Midwest an ideal candidate for more bank mergers, industry experts said. The region, long viewed as a slow-growth area, has often lagged areas such as the East Coast and Texas in terms of activity. Such slow growth, coupled with persistent challenges such as historically low interest rates, might finally be pushing banks to consider selling.
"These banks can only cut costs so much," said Christopher Mutascio, an analyst at Keefe, Bruyette & Woods. "Those things have run themselves out, and there's not much more you can do. So there will be continued consolidation."
The Midwest also had a high concentration of troubled institutions during the financial crisis, and a number of those banks turned to private equity for capital, said Michael Iannaccone, a managing director at FinPro. Many of those private-equity firms are now looking for a return on their investment.
Private equity has been involved in several deals recently, including American Chartered Bancorp's planned sale to MB Financial and Old National Bancorp pending purchase of Anchor BanCorp Wisconsin, Iannaccone said.
The $6.6 billion-asset Talmer was backed by W.L. Ross to buy banks in the wake of the financial crisis. Talmer went public in 2014.
Banks across the Midwest, and elsewhere, are still looking to spread the cost of compliance and technology over a larger asset base. The $9.2 billion-asset Chemical, for instance, will use scale and savings from Talmer to offset the costs of crossing over $10 billion in assets.
Even larger institutions, like the $25.5 billion-asset FirstMerit, face such challenges.
"You can be a larger bank, but you can still get more efficiencies, especially from the back office and compliance aspects," Iannaccone said. "I think you will see a lot more acquisitions."
Huntington approached FirstMerit about a deal roughly eight months ago, Paul Greig, FirstMerit's chairman and chief executive, said during a conference call Tuesday. Enhanced scale and product capability factored heavily into the decision to sell FirstMerit to the $71 billion-asset Huntington, he added.
Having $100 billion of assets "is very important in an industry that is bearing a fair amount of costs today," Greig said.
Size is also important for investments in digital and mobile channels, said Stephen Steinour, Huntington's chairman and chief executive. He said more consolidation is likely, though he declined to discuss Huntington's future role.
"Our complete focus is on seamlessly integrating FirstMerit," Steinour said when asked about his interest in bulking up in Chicago, where FirstMerit had been expanding its own operations.
The Huntington-FirstMerit merger is expected to create opportunities for smaller institutions. The companies plan to divest about $1.1 billion in deposits, likely in northeastern Ohio, though Huntington must work out specifics with the Federal Reserve Board and Justice Department, Steinour said.
Executives at Talmer and Chemical said they believe the nature of FirstMerit's sale, which will likely include branch closings, will create opportunities to gain clients. In contrast, the executives said they expect less disruption from their merger since there is little overlap in the markets they serve.
"When you do an in-market deal, you get a lot of disruption," David Provost, Talmer's president and chief executive, said during a conference call Tuesday. "The timing was very interesting for both of these announcements, but we feel very comfortable that we will have a great opportunity."
Smaller banks could have other chances to land business in the future as more regionals return to M&A. The banking industry is likely to end up with roughly 10 super-regional banks, Mosby said.
Expect an increase in the number of banks with $20 billion or more in assets, Iannaccone said, adding that he expects to eventually see a dearth of institutions with $1 billion to $15 billion in assets.
More future sellers will likely resemble FirstMerit and Talmer. Both were profitable and healthy. In fact, each had been active acquirers in the wake of the financial crisis.
A surge in financially secure sellers should boost pricing while increasing dilution to the buyer's tangible book value and elongating the time necessary to earn that dilution back.
Those prospects can spook investors and put immense pressure on buyers to successfully integrate a deal and meet expectations, Mosby said. Those that stumble "may become the next seller," he warned.
"We're back to where the management team's ability to deliver on promises and expectations will be very important," Mutascio said.
John Reosti contributed to this story.