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Regional Banks Ramp Up M&A Deals to Strengthen Balance Sheet
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The merger and acquisitions (M&A) activity among the U.S. regional banks is showing signs of a rebound this year following subdued 2023. More regional banks are resorting to M&As to strengthen their balance sheets amid enhanced competitiveness for low-cost deposits.
Per Dealogic data, regional banks with assets between $10 billion and $100 billion have completed 38 deals year to date. This exceeds the 29 deals recorded during the same period last year.
Since last year, the regional banking sector has been under tremendous strain as elevated interest rates reduced borrowing, raised competition for deposits and led to bigger losses on commercial real estate loans.
The banks are now expanding inorganically despite regulatory hurdles.
Per S&P Global Market Intelligence data, year to date through Jul 31, 2024, 67 U.S. bank deals for $9.25 billion were disclosed, exceeding the total deal value of $8.95 billion and $4.15 billion announced in 2022 and 2023, respectively.
3 Largest Banks Deals (in terms of value) Announced in 2024
In May, SouthState Corporation (SSB - Free Report) agreed to buy McKinney, TX-based Independent Bank Group in an all-stock transaction valued at nearly $2.02 billion. This became the biggest M&A deal announced by deal value year to date. Following the acquisition, the combined company will have total assets of nearly $65 billion. With this deal (expected to close by the end of first-quarter 2025), SSB expects earnings accretion of 27.3% by 2025.
In April, UMB Financial Corp. (UMBF - Free Report) announced it would acquire Heartland Financial, USA Inc. in an all-stock deal valued at around $2 billion. The deal will mark UMBF’s largest acquisition in its 111-year history, increasing total assets by more than 40% to $64.5 billion. It is likely to close in first-quarter 2025.
Renasant Corp. (RNST - Free Report) and The First Bancshares Inc jointly entered into a merger agreement in July. Per the agreement, The First Bancshares will merge into RNST for an all-stock consideration of $1.2 billion The merger, expected to wrap up by first-half 2025, will result in a six-state Southeastern banking franchise with nearly $25 billion in total assets.
Reasons Behind Increased Regional Bank M&As
The rise in the M&As is being driven by strong market activity, thanks to a stabilizing macroeconomic environment, the expectation of interest rate cuts, and a large surplus available to both corporate and financial sponsor investors after subduing last year's M&As.
Regional banks are resorting to M&As as these help them gain access to low-cost deposits, a key source of funding. In April, at the time of announcing the transaction to acquire Heartland, UMBF CEO Mariner Kemper stated former’s low-cost deposit base was attractive and that such deals would allow lenders to expand into new states and access more depositors.
Many U.S. banks have high exposure to commercial real estate (CRE) loans, making their loan portfolio risky. Thus, banks are resorting to diversifying their loan portfolio through M&As. This enables banks to optimize their portfolio by reducing risks of dependency on one loan category.
Regulatory Headwinds
While M&As could support struggling smaller lenders, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have proposed new regulations that will give greater scrutiny to large transactions.
Bank regulators assess how transactions may impact systemic risk, competitiveness, and the needs of impacted communities. Occasionally, the Justice Department provides antitrust advice.
This year, regulators have suggested stricter merger regulations, particularly for consolidations that result in banks with assets of more than $50 billion, to guarantee that mergers do not raise systemic concerns.
This came after New York Community Bancorp, Inc.’s (NYCB - Free Report) buyout of parts of failed Signature Bank in early 2023 (immediately after acquiring Flagstar Bancorp in December 2022). The acquisition pushed NYCB above the $100-billion threshold in assets, which by law puts it under increased regulatory scrutiny. This contributed to its troubles as it faced higher reserve build because of an increase in its CRE loan portfolio.
Parting Thoughts
With an improving macroeconomic backdrop, an indication of a rate cut beginning in September paints a favorable picture for more M&As in the coming period. As interest rates and the macroeconomic scenario improve, balance sheets will be better able to support inorganic expansion, leading to more such activity.
With Treasury yields declining, regional banks that postponed transactions to avoid realizing losses on their securities holdings when yields were high are expected to consider M&As to expand and diversify revenues and footprint.
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Regional Banks Ramp Up M&A Deals to Strengthen Balance Sheet
The merger and acquisitions (M&A) activity among the U.S. regional banks is showing signs of a rebound this year following subdued 2023. More regional banks are resorting to M&As to strengthen their balance sheets amid enhanced competitiveness for low-cost deposits.
Per Dealogic data, regional banks with assets between $10 billion and $100 billion have completed 38 deals year to date. This exceeds the 29 deals recorded during the same period last year.
Since last year, the regional banking sector has been under tremendous strain as elevated interest rates reduced borrowing, raised competition for deposits and led to bigger losses on commercial real estate loans.
The banks are now expanding inorganically despite regulatory hurdles.
Per S&P Global Market Intelligence data, year to date through Jul 31, 2024, 67 U.S. bank deals for $9.25 billion were disclosed, exceeding the total deal value of $8.95 billion and $4.15 billion announced in 2022 and 2023, respectively.
3 Largest Banks Deals (in terms of value) Announced in 2024
In May, SouthState Corporation (SSB - Free Report) agreed to buy McKinney, TX-based Independent Bank Group in an all-stock transaction valued at nearly $2.02 billion. This became the biggest M&A deal announced by deal value year to date. Following the acquisition, the combined company will have total assets of nearly $65 billion. With this deal (expected to close by the end of first-quarter 2025), SSB expects earnings accretion of 27.3% by 2025.
In April, UMB Financial Corp. (UMBF - Free Report) announced it would acquire Heartland Financial, USA Inc. in an all-stock deal valued at around $2 billion. The deal will mark UMBF’s largest acquisition in its 111-year history, increasing total assets by more than 40% to $64.5 billion. It is likely to close in first-quarter 2025.
Renasant Corp. (RNST - Free Report) and The First Bancshares Inc jointly entered into a merger agreement in July. Per the agreement, The First Bancshares will merge into RNST for an all-stock consideration of $1.2 billion The merger, expected to wrap up by first-half 2025, will result in a six-state Southeastern banking franchise with nearly $25 billion in total assets.
Reasons Behind Increased Regional Bank M&As
The rise in the M&As is being driven by strong market activity, thanks to a stabilizing macroeconomic environment, the expectation of interest rate cuts, and a large surplus available to both corporate and financial sponsor investors after subduing last year's M&As.
Regional banks are resorting to M&As as these help them gain access to low-cost deposits, a key source of funding. In April, at the time of announcing the transaction to acquire Heartland, UMBF CEO Mariner Kemper stated former’s low-cost deposit base was attractive and that such deals would allow lenders to expand into new states and access more depositors.
Many U.S. banks have high exposure to commercial real estate (CRE) loans, making their loan portfolio risky. Thus, banks are resorting to diversifying their loan portfolio through M&As. This enables banks to optimize their portfolio by reducing risks of dependency on one loan category.
Regulatory Headwinds
While M&As could support struggling smaller lenders, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have proposed new regulations that will give greater scrutiny to large transactions.
Bank regulators assess how transactions may impact systemic risk, competitiveness, and the needs of impacted communities. Occasionally, the Justice Department provides antitrust advice.
This year, regulators have suggested stricter merger regulations, particularly for consolidations that result in banks with assets of more than $50 billion, to guarantee that mergers do not raise systemic concerns.
This came after New York Community Bancorp, Inc.’s (NYCB - Free Report) buyout of parts of failed Signature Bank in early 2023 (immediately after acquiring Flagstar Bancorp in December 2022). The acquisition pushed NYCB above the $100-billion threshold in assets, which by law puts it under increased regulatory scrutiny. This contributed to its troubles as it faced higher reserve build because of an increase in its CRE loan portfolio.
Parting Thoughts
With an improving macroeconomic backdrop, an indication of a rate cut beginning in September paints a favorable picture for more M&As in the coming period. As interest rates and the macroeconomic scenario improve, balance sheets will be better able to support inorganic expansion, leading to more such activity.
With Treasury yields declining, regional banks that postponed transactions to avoid realizing losses on their securities holdings when yields were high are expected to consider M&As to expand and diversify revenues and footprint.