Eddy Arriola, the chairman and CEO of Apollo Bancshares in Miami, says his company is not looking to sell. Buyers are circling anyway — a reflection of intensifying interest in mergers and acquisitions as banks pursue scale and diversification in the face of fierce competition and rising expenses.
Arriola said that once the $1 billion-asset Apollo popped up on an attendance list for a February conference, meeting requests started flooding in. The lender operates in a high-growth market and is just big enough that an out-of-market community bank buying it would gain a substantial foothold in South Florida.
“The amount of people who want to meet is through the roof,” Arriola said in an interview. “If I went to every event at this conference, I’d get bombarded. If I tell an investment banker I’m open to one meeting, he’ll schedule 10. That’s how active it is right now.”
This rush to find merger partners, though, is not just about an acquiring bank’s desire to enter new markets or add new business lines. Federal regulators’ amped-up scrutiny of bank mergers has raised fears that M&A activity could stall later this year, and that’s creating a sense of urgency to cinch deals now, according to bankers and industry advisors.
In a way, the chill is already happening.
The Fed in December approved
Meanwhile, the Justice Department's Antitrust Division is considering revising its bank merger guidelines to "to guard against the accumulation of market power" and the Federal Deposit Insurance Corp. appears poised to impose its own crackdown out of concern that industry consolidation may be harming consumers.
Some lawmakers in Congress are amplifying the president’s message. House Financial Services Committee Chair Maxine Waters, D-Calif., in December called on leaders of the Fed, FDIC and the Office of the Comptroller of the Currency
Waters wants reviews of approval processes as well as public hearings for large deals.
Some critics such as Waters fear that allowing regional banks to become even bigger raises the chance that, if one were to fail, an even larger bank would need to absorb it. That’s what happened in the aftermath of the financial crisis — a handful of megabanks were created and there was more concentration of risk in a few companies, critics say.
Others, including Gruenberg, have expressed concern that consolidation curbs competition and can leave markets underbanked, since buyers often shutter overlapping branches to cut costs.
Any formal changes are expected to initially focus on large bank deals. But community bankers say that, after the financial crisis, regulations designed to address systemic issues involving the biggest banks eventually reached the smallest lenders in the form of more rigorous regulatory reviews. There is simmering concern that the same dynamic could play out with M&A.
“Added scrutiny always seems to trickle down — and slow things down,” Dave Kusler, president and CEO of the $60 million-asset Bank of Hazelton in North Dakota, said in an interview. “So the idea that this reaches community banks in 12 or 18 months or so, that is certainly possible.”
Arriola agreed. If anything, however, that worry translates into urgency rather than caution when it comes to M&A this year, he said. Community bank buyers are motivated to pursue deals now before potential regulatory roadblocks arrive.
“There is massive consolidation underway in our industry,” Arriola said. “Banks on both sides of deals have good reason to pursue it and investors are very open to it, so I think we only see more this year.”
M&A momentum
Merger-and-acquisition activity among U.S. banks gathered momentum in 2021 — following a
There were 208 bank M&A deals announced in 2021, compared with 111 the year before, according to data from S&P Global. Total deal value nearly tripled, from $27.8 billion in 2020 to $77.6 billion last year.
Buyers say they are eager to pack on revenue-generating assets to offset high technology costs in the evolving
Opportunities abound across the country, acquirers say. Many
The motivations on both sides of the deal table explain why activity is poised to increase this year, said Mark Hardwick, CEO of First Merchants Corp. in Muncie, Indiana.
“The demands of this business now are real and especially challenging for the smallest banks,” Hardwick said. “This is true as it relates to technology and the economies of scale needed to invest in digital platforms and services that people increasingly need and expect.”
The $15.5 billion-asset First Merchants announced its
Hardwick said First Merchants is braced for a longer review period than with past deals and said other bank buyers should assume the same. “You always have to be aware of any important changes within the regulatory framework,” he said. “But the reasons to pursue M&A are firmly in place, and I think buyers will find a way this year, maybe even more this year, because of the regulatory issues, and the overall numbers will be very high.”
Damon DelMonte, an analyst with Keefe, Bruyette & Woods, said he heard similar sentiment echoed throughout earnings calls in recent weeks.
“The bigger banks are already seeing more scrutiny; we know that,” DelMonte said. “The trickle-down concern is always a concern, but I just think there are so many discussions going on and so many banks determined to do deals that the smaller acquisitions, at least, are going to pile up again this year.”
Branching out
For all the attention on banking services potentially lost in the wake of M&A, historical data paints a nuanced picture.
Paul Calem, senior vice president for research at the Bank Policy Institute, said that from 1980 through 2012 the number of banks decreased by more than half, from 14,434 to 6,087. Yet during the same period, the number of bank branches more than doubled, from 38,738 to 84,898, he said in a January report, citing FDIC data.
Since 2012, Calem said, banks have collectively closed more than 10,000 branches amid the shift to online and mobile banking, and this decline was primarily among large banks. Nearly 50 banks accounted for the bulk of the closures, and about half of the branches closed by this group were shuttered by 17 banks that had not engaged in M&A activity.
“Despite being fewer in number, banks not involved in mergers tended to be larger and had a similar proclivity to close branches compared to banks that engaged in merger activity,” Calem said. “Often, banks close branches that have become underutilized … often due to increased customer reliance on digital banking or to migration out of the neighborhoods or communities those branches served.”
To be sure, he and others say, low-income city neighborhoods and rural markets are vulnerable to declining financial services given shrinking populations and relatively few profit opportunities for banks. But the data suggests this is a challenge that festers regardless of M&A activity.
What’s more, bankers say, branch counts over the past decade no longer tell a full story. Americans increasingly manage their daily banking business online, reducing need for physical locations and driving demand for sophisticated digital platforms that transcend geographic boundaries.
Frank Sorrentino, chairman and CEO of ConnectOne Bancorp in Englewood Cliffs, New Jersey, said digital services provide convenience and efficiency while extending banks’ reach to more potential customers.
The $8.1 billion-asset ConnectOne closed a pair of bank acquisitions before the pandemic, packing on nearly $1.5 billion of assets and gaining scale to invest in the bank’s continual efforts to develop digital offerings. Sorrentino said large community banks and regional lenders will continue to pursue deals with similar intentions — and customers, overall, stand to benefit.
At same time, small banks that lack resources can keep pace with larger banks by joining forces with them. “At the smaller end, I think you’ll see an enormous amount of M&A” in 2022, Sorrentino said of community banks.
Sorrentino said increased regulatory attention paid to M&A is likely, but he said it will ultimately support the case for most deals, given digital demand and the necessity of scale in banking.
“Access to banking is critical, but digital is the way to deliver,” he said.
Closing time
Still, when regulatory attention mounts, costs climb and precious time slips away.
Christopher Wolfe, Fitch’s managing director covering North American banks, said that in the near term the closer regulatory reviews could delay large tie-ups, including as U.S. Bancorp’s
The potential implications are significant, Wolfe said.
“To the extent an announced transaction is delayed, deals can lose momentum and waste firms’ time and resources, often at the expense of strategic plans and long-term goals,” Wolfe said. “Failed mergers could also reduce potential earnings and ratings upside and may exacerbate key-person risk if management or staff seek opportunities elsewhere.”
Should scrutiny of small deals intensify in coming years, it would inevitably push more buyers to the sidelines, said Jacob Thompson, a managing director of investment banking at Samco Capital Markets.
For now, regulators seem to be focused on examining larger deals’ possible impact on consumer choice, but Thompson said he expects that in time they’ll look at other factors, like small businesses’ ability to obtain loans after community banks are swallowed up.
“It’s hard to predict the line of demarcation in terms of bank size and how much scrutiny they could eventually face,” Thompson said. “I suspect it will end up being more market specific, situation specific — but the potential for delays and challenges getting deals done down the line does give some people motivation to step up now, get ahead of that.”
