Published in Finance

Bank M&A expected to surge next year after pandemic lull

BY Sunday, December 19, 2021 05:50pm

The new year could bring a continued acceleration of M&A in the banking industry.

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Nearly half of the executives responding to an annual M&A outlook survey by Bank Director said their bank was likely to make an acquisition in 2022 if they could find a willing target. That’s a rate the trade publication calls a “significant increase” from the 33 percent a year earlier who said they would likely buy another bank in 2021. The latest outlook is also “more in line with the pre-pandemic environment.”


As well, M&A interest grows with the size of the bank, as 63 percent of executives at institutions with $10 billion or more in assets said they were “very” or “somewhat” likely to make an acquisition. Among banks with $1 billion to $10 billion in assets, 60 percent may do a deal by the end of 2022, according to Bank Director’s survey results.

On the selling side, more than 40 percent of the nearly 230 CEOs, CFOs and directors answering this year’s survey said the digital revolution and inability to keep pace may lead their bank to sell. Nearly half of executives said their board or management team would consider a merger of equals.

“In an environment characterized by digital acceleration, high competition for customers and talent, and continued low interest rates, a strategic combination may prove too compelling for some to pass up,” according to the survey.

Attorney Michael Bell, co-chair of the Financial Institutions Practice Group at Honigman LLP, also expects a strong M&A market in 2022 for the financial services industry.

Bell, who specializes in credit union acquisitions of community banks, is working on nine signed deals that he expects to close before the end of 2021 or in early 2022. He’s working on another 10 to 15 deals across the U.S. that may move to buy-sell agreements early next year, most of which involve credit unions buying community banks.

That’s about twice as many deals as Bell typically works on, signaling “a busy year,” he said.

Much of the present activity comes from pent-up demand from the COVID-19 pandemic dampening deals in 2020 and the first half of 2021, Bell said.

“We had a slight lag in ’21. The first quarter of this year was slow. There was a buildup (of pent-up demand) in ’20 and a buildup this year, and all of these forces have caused the back half of this year to explode. That explosion is pushing into ’22,” he said. “I have tremendous buildup in that regard, let alone what I expect to happen next year.”

‘Everybody’s scaling up’

Other drivers contributing to M&A activity include aging management and directors retiring, plus owners or investors who are “ready for their equity event” and are deciding to sell, especially at smaller banks of $1 billion in assets or less, Bell said. He sees particularly strong M&A activity in 2022 among financial institutions with $1 billion or more in assets acquiring smaller banks.

“For the most part, it’s the bigger buying the smaller, filling in gaps in their geography or their talent or their capability base,” Bell said. “I also see a ton of activity bank-to-bank where the banks are scaling up. Everybody’s scaling up.”

The past year saw one of the largest recent mergers affecting the West Michigan marketplace when Columbus, Ohio-based Huntington Bancshares Inc. acquired Detroit-based TCF Financial Corp. in a $22 billion deal that closed June 9. The deal created the second-largest bank operating in Michigan with $40.81 billion in deposits at midyear, according to the 2021 FDIC Summary of Deposits.

Other mergers affecting the Michigan market include the pending sale of Troy-based Flagstar Bancorp Inc. to New York Community Bancorp Inc. for $2.6 billion, and a $323.5 million deal announced in November for Farmington Hills-based Level One Bancorp Inc. — which has an office in Grand Rapids — to merge into Indiana-based First Merchants Corp.

Michigan City, Ind.-based Horizon Bank in September acquired 14 offices in the central and northern Lower Peninsula that TCF Bank had to divest to secure regulatory approval for the Huntington Bank merger. The branch acquisitions came with $846 million in deposits and $215 million in loans and nearly doubled Horizon Bank’s office footprint in Michigan.

In a smaller deal, St. Joseph-based United Federal Credit Union closed in the spring on the acquisition of the former Edgewater Bank.

Bell expects that once pent-up demand burns off in 2022, bank M&A will return to typical levels.

“It has to normalize. Markets do. I can’t imagine this continues,” he said.

Interest rates

Banks and their clients will also face a rising interest rate environment in 2022 that will affect what borrowers pay on their loans. Amid solid economic growth and higher inflation, many economists expect the Federal Reserve to begin raising the federal funds rate, now at zero, perhaps as early as midyear.

The University of Michigan’s U.S. economic outlook for 2022 forecasts the first increase in the federal funds rate to come in June, “followed by gradual increases, with the effective federal funds rate climbing to 1.1 percent by the end of 2023.”

Bankers in recent interviews with MiBiz doubted that higher interest rates will deter commercial lending activity. Businesses generally are already anticipating higher interest rates in 2022 and will still proceed with a planned acquisition or expansion, bankers say.

Huntington Bank Regional President Krista Flynn believes that even with quarter-point increases “here and there” in the federal funds rate over the couple of years, interest rates will still remain historically low for borrowers. As well, Flynn believes that higher interest rates “are not going to have as much effect as they did years and years ago,” she said.

“It’s just less of an impact on a business, and the more I talk to clients, the more they say: ‘We’re going to function well. We’re planning for those things, we have a stronger balance sheet than we’ve ever had, and small movements on rates are not going to impact how we strategize on our business,’” Flynn said. “It’s just not the big impact that the big swings used to be years and years ago.”

Read 3111 times Last modified on Friday, 17 December 2021 12:15