The proposed combination of First Defiance Financial in Defiance, Ohio, and United Community Financial in Youngstown, Ohio, is a textbook example of how similar-size community banks might look to compete over coming years.
The companies on Monday billed their $473 million deal as a way to boost scale, cut costs, bolster leadership and guard against challenges from declining interest rates and a flat, or inverted, yield curve.
“We look at this as a very transformative partnership,” Donald Hileman, president and CEO of the $3.3 billion-asset First Defiance said during a conference call to discuss the merger.
After the deal closes, expected early in 2020, the bank would have about $6.1 billion in assets and a bigger balance sheet evenly balanced between loans and deposits. It will also have nearly 80 branches in Ohio, Michigan, Indiana, Pennsylvania and West Virginia.
The new company should have added heft in commercial and consumer lending, along with each market. The hope is that doing so will free up resources to invest in technology upgrades and more products.
Notably, a more prominent mortgage operation will allow the company, which will be rebranded, to capitalize on refinancing and home buying activity as rates fall. Loan rates at many banks are resetting faster than on deposits after the Federal Reserve cut rates in July.
Gary Small, United Community’s president and CEO, said nearly 30% of the combined banks’ loan book would consist of residential mortgages.
“We like that percentage quite a bit,” added Small, who will eventually succeed Hileman as the company’s CEO. “That book will serve us well in this down rate environment.”
Mortgages made up about 18% of First Defiance’s loan portfolio at June 30.
First Defiance-United is the latest deal this year to involve similar-sized companies. Others include the proposed BB&T-SunTrust Banks merger and the combination of TCF Financial and Chemical Financial that recently closed.
Analysts said a declining rate environment is likely to influence more M&A as banks brace for potential further Fed cuts.
“We model two more cuts this year,” said Kevin Fitzsimmons, an analyst at D.A. Davidson. “That just makes it harder for banks to make money on their core spread businesses. So, I think it is and will continue to be a driver [or M&A] because there is increasing pressure now to get scale.”
Robert Bolton, president of Iron Bay Capital, agreed that size increasingly matters and that buyers likely will remain active over the coming year. He did caution, however, that lower rates and uncertainty tied in the looming presidential election could motivate some buyers and sellers to pause M&A plans temporarily at given points.
But overall, Bolton said M&A drivers, including the need for more talent, remain intact. He said that companies in high-growth mode view M&A as a way deepen leadership and talent benches.
“Are you staffed up to your next phase of growth?” Bolton said. “That’s an important question these buyers are asking right now.”
The First Defiance-United Community tie-up exemplifies this.
The banks plan to mesh together their market leadership and executive teams.
“We're very comfortable with the management depth and capacity to handle the size of our organization going forward,” Hileman said.
While the company will remain in Defiance, its bank will be based in Youngstown.
“We have several significantly-sized, diverse business lines,” Small said. “We're operating in geographies where we have no overriding concentration and that just makes for very durable and predictable performance going forward.”
