US bank M&A resurgence continues, undeterred by stock price punishment

The US bank M&A rebound is showing no signs of slowing down even as the Street punishes deals with outsized dilution as a result of rate marks.

US bank M&A activity surged back to life in the third quarter with 34 deal announcements, up from 20 and 25 in the first and second quarters, respectively. The total value of deals announced in the third quarter also surged to $2.76 billion from just $432.8 million in the first quarter and from $197.1 million in the second quarter.

Third-quarter deal value was boosted by a handful of large deals during the period. Banc of California Inc. and PacWest Bancorp's pending $1.04 billion tie-up marked the biggest US bank deal so far in 2023, and Eastern Bankshares Inc.'s proposed $527.1 million acquisition of Cambridge Bancorp is on track to be the second-largest transaction of the year.

With the increase in large deal announcements since July 1, four of the year's five largest US bank deals have been announced in the third quarter. The deals announced in the third quarter accounted for 81% of the $3.39 billion in transaction value for 2023 so far.

However, yearly activity still lags behind historic numbers because of the slow start to the year. Only 79 US bank deals have been announced in the year to Sept. 30, less than half of the 165 deals announced for full year 2022. The total deal value of $3.39 billion for the first three quarters of 2023 is just over one-third of the $9.02 billion in all of 2022.

Less than stellar stock reactions

While banks are feeling more comfortable with dealmaking, several hurdles still remain, including interest rates' impact on deal math. Several recently announced deals saw increased dilution and prolonged earnback periods as a result of interest rate marks, which drove negative stock reactions.

Eastern Bankshares' stock price closed 5.9% lower after announcing its planned purchase of Cambridge. That reaction was partly driven by the impact of interest rate marks, which caused the deal to be 7.5% dilutive to tangible book value (TBV) with an earnback period of 2.75 years, instead of 11% accretive without rate marks.

"This illustrates the pinch point to 'deal math' from high rates in the current environment," Jefferies analysts Ken Usdin and Casey Haire wrote in a note on the deal. The analysts called the deal a "real-time example of market reaction to elevated rate marks in bank 'deal math.'"

Peoples Financial Services Corp. also experienced a similar reaction after it announced its planned acquisition of FNCB Bancorp Inc., which is the sixth-largest US bank deal for the year. Peoples' stock price went down 4.5% after the deal, which carried TBV dilution of 11.3% with an earnback period of 2.4 years, was announced.

Atlantic Union Bankshares Corp. got a negative reaction to its proposed acquisition of American National Bankshares Inc., which was announced in July. The Richmond, Va.-based bank's stock price declined 4.0% after the deal was announced, owing to expectations that the transaction would be 9.7% dilutive to TBV with a three-year earnback period. Without interest rate marks, the deal would be 4.5% dilutive to TBV with a 2.75-year earnback period.

Negative reactions to outsized dilution and prolonged earnback periods are not new. In the note on Eastern's deal, the Jefferies analysts also pointed to Provident Financial Services Inc.'s 12.5% sell off after its planned acquisition of Lakeland Bancorp Inc. was announced on Sept. 27, 2022. That deal carried TBV dilution of 17.3% with an earnback period of 3.6 years, compared to 3.6% dilution with an earnback of 1.65 years without interest rate marks.

"Meaningful rate marks [are] still not digested well initially by the market," the Jefferies analysts wrote.

Conversely, Glacier Bancorp Inc.'s stock price fell just 0.6% after announcing its pending acquisition of Community Financial Group Inc., which is expected to be immediately accretive.