Mergers of equals continue to be attractive to US community banks as M&A headwinds linger.

Southern California Bancorp. and California BanCorp kicked off the new year by announcing their more than $200 million tie-up in the first merger-of-equals (MOE) of 2024. The combination continues the uptick of MOE announcements seen in 2023 after activity scuttled to a 5-year low in 2022. The California community bank MOE's announced deal value of $229.9 million is a strong start to the new year, with the one deal making up more than a quarter of the total announced MOE deal value in 2023.

MOEs have grown in popularity amid the ongoing US bank deal doldrums. As stock prices sunk in 2023, more community banks focused less on obtaining attractive premiums and instead looked to low- to no-premium MOEs as a way to gain scale.

"Given the lower stock prices in the banking sector this past year, mergers of equals are gaining attractiveness, as banks are shifting their focus away from deal premiums and towards recognizing the advantages that mergers can offer," a report from advisory firm Wolf & Co. read.

Concentrated among community banks

MOEs can be particularly attractive for community banks, which sometimes view them as an attractive pathway to raise their value for a sale to a larger lender in the future. In the 20 most recent US bank MOEs, most of the parties involved were community banks. The buyers in those transactions had an average asset size of $8.01 billion, while the targets had an average asset size of $7.79 billion.

These deals also allow community banks to come together and spread ever-climbing costs for technology, talent and regulation over a larger asset base.

"One of the main issues community banks must grapple with is the technological capabilities large financial institutions maintain due to their capital resources," the Wolf report said. "However, the recent merger of equals activity suggests that community banks are seeking to close the gap."

Now, "with the increasing popularity of a merger of equals amongst community and local banks, it is becoming more plausible for the technological gap between them and national banks to diminish," the firm added.

Golden State deal

The tie-up between Southern California Bancorp and California BanCorp is the largest US bank MOE based on announced deal value since Burke & Herbert Financial Services Corp. and Summit Financial Group Inc. announced their $371.5 million combination in August 2023.

The combined entity, which will be based in San Diego and have a new name, will have pro forma assets of about $5 billion.

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Analysts applauded the deal. The combination should bolster the scarcity value of the combined entity, according to Piper Sandler analyst Nathan Race.

"We believe the similar [balance sheet] mixes (including >35% [noninterest-bearing] deposits and >70% commercial loans at both CALB and BCAL) and client focus should bode well for greater franchise scarcity over time," Race wrote. "This scarcity value is furthered by these two banks operating localized and high-touch lower-to-middle market commercial operations in the two largest markets in California."

D.A. Davidson analyst Gary Tenner was surprised by the deal announcement, as he didn't tab California BanCorp as a merger candidate, but believes the combination is attractive both financially and strategically.

"The combination brings together two like-minded, high-performing CA small-cap banks that, together, will carry a significant presence in both Northern and Southern CA markets while providing improved management depth and diversification within lending verticals/geography," Stephens analyst Andrew Terrell wrote in a note.