US bank M&A discussions are gaining traction after skidding to a near halt in the first half of the year.
A recent spurt of US bank deal announcements and increasing comfort with the interest rate environment and current valuations have buyers and sellers feeling more confident about jumping back into M&A. As such, buyers and sellers began flocking back to the negotiating table in the past month, deal advisers told S&P Global Market Intelligence.
"We're seeing a lot of activity where people are talking about deals that maybe they talked about before, and they're reenergizing conversations or new parties are coming together," James Stevens, a partner at Troutman Pepper Hamilton Sanders LLP, said in an interview.
Domino effect
US bank M&A activity woke up in the third quarter with a number of sizable announcements. Atlantic Union Bankshares Corp. kicked off the spurt with its acquisition of American National Bankshares Inc., and PacWest Bancorp and Banc of California Inc. shortly followed with their merger announced on the same day, marking the second-largest and largest US bank deals announced so far this year, respectively. The PacWest-Banc of California deal was also the first bank deal with a value above $1 billion announced since last year.
Two weeks later, Glacier Bancorp Inc. announced its acquisition of Community Financial Group Inc., bringing the total announced deal value to $1.65 billion so far in the third quarter — more than 3x the announced deal value in the first quarter and more than 9x second-quarter announced deal value.
For banks on the M&A sidelines, the Atlantic Union and Glacier deals are "illustrative that it's safe to go back in the water," Christopher Olsen, managing partner at Olsen Palmer LLC, said in an interview.
The Atlantic Union deal in particular was a "watershed moment," said Frank Sorrentino, managing director at Stephens. Though the deal carried about 10% tangible book value (TBV) dilution, Atlantic Union's stock only fell about 4% on the day of the announcement. Typically, a buyer's stock falls about 70% of the announced TBV dilution, Sorrentino said.
"That made a lot of people more confident that investors are getting more comfortable with doing M&A in this environment," he said in an interview.
Separately, while the Banc of California-PacWest deal is unlikely to spur conversations on its own given the unique nature and structure of the deal, the resolution of a bank caught in the crosshairs of the turmoil in March and private equity's involvement are making banks more comfortable to get back into M&A, said Kirk Hovde, head of investment banking for Hovde Group LLC.
"With 'the problem' resolved there ... that got people more comfortable because they said, 'OK, here was one of the biggest concerns of if there was another bank failure. This was in the top few out there of which ones it could be. And, oh, there was also investors willing to inject $400 million into the space,'" Hovde said.
That deal was "a confidence boost for the industry," he added.
Less interest rate worries
Though banks are coming back to the negotiating table, headwinds that make it hard to get a deal across the finish line still remain. However, banks are slowly but surely overcoming some of those hurdles, deal advisers said.
The rapidly rising interest rate environment put the brakes on M&A in 2022 as buyers and sellers grappled to understand how it would impact deals. But now, banks have a better understanding of unrealized losses in their bond portfolios and how they play into M&A.
"There's now a healthier understanding by many — not all, but by many — of what is [accumulated other comprehensive income (AOCI)]? What is its role in a transaction? What is its impact on valuation?" Olsen said.
Moreover, as interest rates steady, it is easier to estimate marks when penciling deal math. The rapid increase in rates in 2022 and early 2023 made it hard for buyers to know where interest rates would be at close.
"Buyers are starting to look at it with a little more certainty in their modeling and saying, 'It's easier to project out what our mark will be at close,'" Hovde said. "That just gives people more comfort."
Sorrentino agreed that the slowdown in rate increases removes a major hurdle because "people at least have a good handle around [the] worst-case" scenario, he said.
Banks are also coming up with unique ways to offset the pressures that come with mark-to-market hurdles, such as an uptick in using closing equity provisions. Other strategies banks can use include branch divestitures for locations that can be sold at a premium or selling other noncore business lines, advisers said.
"These are all kinds of tools in the toolbox that can be used in an M&A deal with the ultimate goal of bolstering both capital and lowering the amount of tangible book value dilution," Sorrentino said.
Banks could also use a more unique structure, as Banc of California and PacWest did. To reduce the impairment, the deal was structured so that Banc of California is the legal acquirer while PacWest is the accounting acquirer.
"If one party has very little AOCI, try to structure the transaction so that's the party whose balance sheet is getting marked to avoid realizing the AOCI entirely. That's a novel structure we've seen occasionally," Olsen said.
Realistic pricing
In addition to becoming more comfortable with the interest rate environment, both buyers and sellers are being more realistic about pricing, advisers said.
"There may be a little bit more realism in price expectations. That helps on both sides of the table," Olsen said.
On the sellers' side, they are being more realistic about how their valuations have changed recently.
"Most people are accepting the reality that something that was worth whatever it was worth 18 months ago is now worth a different, lower amount than it was," Stevens said.
Sellers are also coming to terms with current pricing trends. The median deal value to tangible common equity was 132.3% year to date through July 31, compared to 154.3% last year, according to S&P Global Market Intelligence data.
"Sellers, from our conversations, are just starting to realize that, 'I got to pick and choose my battles and waiting for multiples to return to summer of 2018 when they were last at their peak, that might not be in the next 12, 24, 36 months. Do I have the ability to sit around and wait that long?'" Hovde said.
On the flip side, buyers are more willing to pay more for an attractive target.
"Buyers are saying, 'I need funding, good cheap funding or just funding ... I'm probably willing to pay a little bit more,'" Olsen said.
H2 outlook
As headwinds abate, buyers and sellers come back to the table, and operating environment pressures intensify, deal advisers expect M&A activity to soon return to more normal levels.
"I do expect over the next few months and quarters and years to have a pretty elevated level of activity as a result of market conditions" such as margin pressure, deposit competition and rising funding costs, Olsen said.
Hovde expects announcement activity to pick up in the fourth quarter since conversations just started gaining steam and it takes time to get deals done.
Sorrentino expects a "trickling of announcements" for the rest of the year, but then 2024 will be very active because "there's a lot of pent-up demand," he said.
One of those deals could be from Glacier Bancorp, if it finds the right partner. Like investment bankers, Glacier is also seeing an uptick in bank deal conversations recently. Though the company just announced a deal Aug. 8, the target was less than 3% of Glacier's size, giving the company capacity for another deal if it finds the right partner, President and CEO Randy Chesler said in an interview.
Glacier has been an active acquirer, announcing five bank deals since 2019. Those transactions helped to catapult the company's growth, which is now more than double the asset size it was in 2018.
"From our standpoint, we have a lot of optionality because we cover eight states," Chesler said. "If we can find a good bank that gives us incremental presence in a market and builds our presence in that market with great credit, great deposit franchise and great people, that's going to be really interesting to us."