Banking M&As on the Rise. What's it Mean To You?

01/26/2016 9:40 am EST

Focus: FINANCIALS

Michael Berger

President & Founder, Technical420.com

As a follow-up to last week's article in which he forecasted increased consolidation in the banking industry during 2016, Michael Berger, of Technical420.com, points to this recent acquisition deal to emphasize his point.

Last week, in an article published on MoneyShow.com, we forecasted increased consolidation in the banking industry during 2016. In the article, we said this would be most prevalent in banks with less than $1 billion in assets, by banks with less than $10 billion that fall under Dodd Frank/Durbin limits.

Our thesis started to come to fruition Tuesday after Huntington Bancshares, Inc. (HBAN) agreed to acquire Ohio-based FirstMerit Corporation (FMER). HBAN is the third largest lender in Ohio and this acquisition will help them increase market share in the Midwest. The combined company is expected to have nearly $100 billion in assets.

Although FMER is much smaller than HBAN, the company has been a rival to HBAN throughout the years. This acquisition will increase HBAN's market share in Ohio, Michigan, and Pennsylvania, while expanding operations in Wisconsin and Illinois. Between those five states, FMER has 367 locations and approximately 400 automated teller machines.

Beyond Rates, M&A Activity to Drive Stock Performance

Last week, we said that beyond higher interest rates, M&A activity would be a driver of stock performance in the banking industry during 2016. Shares of FMER are up more than 10% in pre-market trading after HBAN agreed to acquire the company for $3.4 billion in cash and stock.

HBAN is paying an over 30% premium to FMER shareholders and the company is offering a lot of stock to get the deal done. Each FMER shareholder is set to receive 1.72 shares of HBAN and $5 in cash per share if the deal closes.

Stock Performance

HBAN announced fourth quarter earnings last week and shares are down almost 5% since then. During the quarter, HBAN saw strong fee income growth and reported better than expected earnings. Although HBAN beat on earnings, the company's net interest margin contracted 7 basis points and this negatively impacted net interest income.

FMER announced fourth quarter earnings Tuesday morning and the company recorded its 67th consecutive quarter of profitability. During the quarter, FMER saw continued loan growth but the company missed on earnings. FMER reported $0.33 in earnings per share which is below Wall Street's estimate of $0.34. Before the acquisition closes, FMER plans to focus on organic growth, loan portfolio growth, and balance sheet strength.

Positioned as a Leading Midwest Banking Institution

We think HBAN is positioned as one of the best banking institutions in the Midwest. The company has seen the number of new checking accounts increase through its fair-play consumer banking strategy. From a commercial banking standpoint, HBAN has increased its breadth of its products through various initiatives. The success of these initiatives have helped HBAN penetrate both the consumer and commercial market.

During the last month, HBAN and FMER have seen shares fall 19% and 21%, respectively. HBAN and FMER are both trading in oversold territory and below its 20-, 50-, and 200-day moving averages. Although FMER missed on earnings, we expect shares to rally more than 10% after the acquisition announcement.

Michael Berger, Founder and President, Technical420.com

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