Once the dust settles from the recent market turmoil, banks are likely to come off the M&A sidelines and start a wave of dealmaking.
US bank M&A activity plummeted in 2022 as economic uncertainty and rising interest rates dampened deal appetite. Now, recent events such as bank failures and liquidity concerns will drive activity even lower in the coming months. But other factors resulting from the turmoil, including potential increased regulation, will lead to a surge of M&A in the future.
"In the near term, ongoing uncertainty about the financial markets, regulatory burden, and deposit insurance likely will cause banks to defer making strategic decisions until they have greater visibility," John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP, said in an email. "Once the dust settles, I suspect that plenty of pent-up matchmaking will occur in the industry."
Regulation, stress as deal drivers
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Increased regulation is one of the main factors that will drive the impending wave of bank M&A. Regulators are expected to ramp up their supervision of banks following the collapses, with a specific focus on regional banks with more than $50 billion in assets.
Increased regulation forces banks to devote more time, staff and money toward compliance, which will encourage them to merge to gain scale and offset those challenges.
"We do expect that regulatory requirements will be ratcheted up for banks below the $250 billion in assets threshold with bills already introduced to lower the threshold back to $50 billion," Michael Driscoll, managing director of global FIG at DBRS Morningstar, said in a statement. "As such, we expect some banks to merge to become systemically important."
For smaller banks, recent events will push some of them to sell faster than they otherwise would have, according to Christopher Marinac, director of research at Janney Montgomery Scott.
"This whole episode has stressed them out, and they will exit. They don't have general plans for succession and they were going to sell anyways, this is just going to accelerate the timeframe," he said on a March 22 webinar hosted by Clark Street Capital.
However, for now, the slow pace of bank M&A will continue as banks weather the storm. Through March 24, US banks have announced 16 deals in 2023, down drastically from at least 34 announcements in each quarter of 2022.
"There are always a few banks that are supremely confident in their position and want to capitalize, but they are often few and far between in the early innings of a crisis," Piper Sandler analysts Mark Fitzgibbon and Gregory Zingone wrote in a March 22 note. "We would expect M&A activity in the near term to be sluggish and idiosyncratic in nature."
At the negotiation table
For banks that do strike deals in the current environment, factors like deposit concentration and liquidity positions are front and center in negotiations.
Prospective buyers will increasingly look at percentages of uninsured deposits as well as deposit concentration by industry, Jason Kuwayama, shareholder in Godfrey & Kahn SC's banking and financial institutions practice group whose focus areas include M&A, said on the Clark Street Capital webinar.
In addition, banks have been using tangible common equity to price recent deals because this ratio captures losses in accumulated other comprehensive income, unlike regulatory ratios, Kuwayama added.
"You're going to start looking at all of that and get to that level of granularity to determine the true health of a bank," he said.
Increased disclosures
For deals that make it past negotiations and across the finish line, recent events will force buyers and sellers to disclose more information about their deposit and liquidity positions.
"In the past couple weeks, we're all of a sudden dealing with new metrics that are really interesting to people, and that's healthy — just the greater transparency, the greater understanding of how deals are put together and everything that was analyzed in the course of putting the deal together, is a good thing," said Jonathan Hightower, partner at Fenimore Kay Harrison LLP who represents banks on growth plans, regulation and other topics.
In a recent example, the news release announcing First Mid Bancshares Inc.'s acquisition of Blackhawk Bancorp Inc. on March 21 included details about the seller's uninsured deposits and securities portfolio. The companies also emphasized how the transaction will bolster First Mid Bancshares' funding position and liquidity sources.
Although the companies had been discussing the deal for "several months" prior to recent events, First Mid Bancshares Chairman, President and CEO Joe Dively said the disclosures were related to the current atmosphere in the industry.
"The additional disclosures were intended to provide greater transparency given the current environment and reiterates the strength of Blackhawk's core deposit base," Dively said in a statement to S&P Global Market Intelligence. "It also provides additional information supporting the stability of funding sources and further enhanced liquidity of the pro-forma balance sheet that will result from the combination."
Such disclosures in a merger press release are unusual but could become more common going forward.
"That is not something I would've expected to see in the press release before the events of the last two weeks," Scott Coleman, partner at Ballard Spahr LLP who represents banks on mergers and more, said in an interview. "I think they're looking at what everyone else is looking at, knowing there would be questions asked about this and wanting to address them head on from both perspectives ... what the impact is on the acquirer [and] that the target was not facing some of the same issues that, for example, SVB was facing. I think they wanted to make sure that the public got that message."
