Street Talk | Episode 141: Signs of stronger bank M&A emerge as serial acquirers, large transactions return

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Nathan Stovall

Welcome to Street Talk, S&P Global Market Intelligence podcast that offers listeners a deep dive into issues facing financial institutions and the investment community.

I'm Nathan Stovall. And on this episode, we're talking about bank M&A activity, the drivers of deals and whether we're seeing a sustained rebound from the recent lows in the spring and talking about if activity can come back to some of the hopes of what we thought we might see at the beginning of 2025 when it seemed like the market was shaping up for a really healthy M&A environment. Joining me on the show is Christopher Olsen. Christopher is the Managing Partner of Olsen Palmer, an independent investment banking firm focused exclusively on advising financial institutions on M&A. Christopher has been one of the most active advisers in the space during his career, and I believe has worked on more deals than any other adviser in the bank space over the last 5 years, at least according to our data. Christopher, thanks for joining us.

Christopher Olsen

My pleasure. Happy to be with you. Looking forward to the conversation.

Nathan Stovall

So let's start off talking a little bit about your firm. I had the benefit of getting to talk to lots of advisers in the space. And as I mentioned, you've been one of the more active ones out there. Tell us a little bit about Olsen Palmer, how it's different than other advisory firms and where your focus tends to be.

Christopher Olsen

Yes, for sure. So our model is pretty simple. As mentioned, we're an independent firm that specializes really solely in advising community banks on M&A. And so we like to say we're sort of an inch wide but miles deep in that space. And in approaching our practice, our model is sort of simple. We combine the expertise of a large traditional investment banking firm with that specialization, hopefully the right amount of humility, some creativity and if nothing else, the independence and ability to sort of give good client-first advice as opposed to kind of keeping in mind or potentially being conflicted by a number of different products or services or business lines that may or may not harness the ability to give sort of candid advice. In terms of where we play, we enjoy working with and really focus our efforts on working with banks below, I'd say, $10 billion all the way down to $10 million in assets. What we found is that was maybe an underserved space, believe it or not, while the industry is lousy with good quality community bank, M&A investment bankers, we found for folks kind of in that space between $0 billion to $10 billion, while there are a number of good quality firms, many of them are looking to go upstream and maybe for bigger paydays or just bigger revenue opportunities or more products and services. And so maybe not as good advice given the banks in those size. And then certainly, within that maybe at the low end of that spectrum, they're getting advice from smart folks, but maybe not M&A experts, maybe accountants or consultants or what have you that serves a niche to give really good high-quality target advice to the right-sized bank, and that's where we tend to spend our time.

Nathan Stovall

Well, it has served you well. It's 90% of the institutions are kind of in that ballpark you talked about, and that's about where 90% of the deals are. So it has served you well. And you've worked on both buy and sell side, but a number of sell-side engagements. And one of the questions we love to ask particularly of community banks when they do sell, what's the driver there? What actually pushed them over the hump to decide that they want to partner with another institution? What are you seeing at this point in the cycle from sellers in terms of what actually encourages them to take the plunge? And is it different than 5 years ago or a lot of the same things?

Christopher Olsen

Yes and no, at the risk of giving rise to that Harry Truman quote about wanting a one-armed economist. And here's what I'm seeing. So in any decision to sell is -- I'm sure you can appreciate it, it's a very thoughtful decision in almost every case. In fact, I frequently say, other than the decision to start the bank, the decision to sell it is probably the most important decision a bank, a Board, management will make, right? It's literally the end of an era. So most, if not every client we work with will approach that very thoughtfully. And in some cases, they'll approach it reluctantly in some cases with some further. But what catalyzes sell certainly varies bank to bank, but there are some pretty consistent themes. I would say in the somewhat philosophical or strategic realm, there's a sense from many that scale is increasingly relevant, and I'm just not big enough. I hear that from banks as small as $10 million in assets to as large as $10 billion to $20 billion to $50 billion in assets. heck, I frequently cite the press release when BB&T and SunTrust merged. It's a 5- or 10-page release, but one of the bullets right on Page 1 of why they're doing the deal is they're too small to compete independently, and then we're talking about 2 of the 10 largest banks in the country at the time. So there's a sense of scale. Either folks will actually explicitly sort of pencil that out and say, gosh, in order to really earn our independence, we need to be X size and we just can't get there independently. So we're looking to exit or just an implicit gut sense that it's tough out there. It's getting harder and harder to compete, keep up with technology, keep up with what have you, and we're just not as profitable. So there's a sense of scale that manifests in a lot of different ways. There's also a catalyst that can be in the room around competition. This has always been the case. I mean the community banking environment has been competitive for 100 years now. I do think it hit the quality quantity of competitors, both bank and nonbank alike. While we have fewer banks, I think you have more formidable competition from banks and from nonbanks. That's a relatively new phenomenon in the last, call it, 5 to 10 years. And I'm having, frankly, just in the last week or so, a lot of conversations with the clients questioning what impact the Genius Act will have and maybe that will accelerate the nonbank competition and further challenge the community banking business model. So it's scale and how that manifests in a number of different ways, it's competition. And then 2 more practical reasons that frankly, probably drive most transactions, believe it or not. It's -- especially for banks at the $10 billion and below, it's 1 of 2 things will frequently be in the boardroom. It's either shareholder liquidity or management succession or both. I get frequently asked to help pursue a sale on behalf of a client, and they'll say, well, our shareholders really need liquidity. They've been in the stock for x period of time. We're not terribly liquid or we don't trade very much or what have you. We really owe it to our shareholders to get liquidity or definitely, in other cases, shareholders are asking or demanding for liquidity. We need out. And then the corollary is succession. And I said management succession, but in reality, when I advise folks, I'd say it's really -- you need to think about succession for management, which sort of starts with the CEO, but also other key folks. You think about succession for directors, for boards, a lot of them maybe not have as frequent turnover and what have you, but at some point, time does its thing and Board succession and then even shareholder succession, especially if it is small or relatively closely held. In fact, I do a lot of work, believe it or not, advising folks on how not to sell, and I start with those last 2 things, address shareholder liquidity and succession, which are not easy, but those can help launch sort of consolidation pressures if you don't want to be interested in a sale at some point.

Nathan Stovall

Those 2 are interesting. And we definitely hear all of those, right? But I do want to pick up on those last 2. On Board succession, just the idea there, you think of the CEO. But to your point, if you've got an aging Board and maybe you haven't recruited new directors, you're wondering, do I have people in my community who think like me, who would be a good fit for us culturally and be able to support our strategic plan, to support what we want to do here. And if -- it sounds like you're saying, in some cases, no, maybe we haven't done that. We haven't brought in new blood and you start to go, well, shoot. We're not in a place to operate where we have a Board that is going to kind of continue to serve it the same way they have. Is that kind of what that looks like?

Christopher Olsen

Yes, that frequently happens a lot. And I can understand it. And I don't know that I've been with a lot of community banks might have a relatively static board where they might not have staggered elections or what have you, and it's been the same group of folks for a period of time, at least a core group of folks. Well, unfortunately, time is undefeated and invariably, some folks will move on or retire or what have you. And what unfortunately, a lot of community bank boards aren't great at is managing for that. And maybe it's -- not to get to psychological, but maybe it's submitting your own fallibility or your own time line or just maybe heading the same, whatever it is. But a lot of times, when I start being engaged to more seriously help folks pursue a sales because folks didn't prepare ahead of time, they kind of look around the room and they say, gosh, we're all old. They might be in their 60s, their 70s, in some cases, 80s, and they haven't done a great job of succession and recruiting new folks. At the same time, Athan, I'd point out that there's a core -- I think you already touched on it. It's also probably harder and harder to recruit board members maybe there are fewer folks that want to serve on a board or capable to serve on a board of a bank. It's maybe higher risk than it used to be 10, 20, 30 years ago. Maybe it's less rewarding, more obligations, liability, regulation. And so I don't know there's as much demand from folks wanting to serve on boards. There are plenty for sure, but maybe fewer than there were. So between folks not reloading and maybe a limited pool, that ends up backing some folks into a corner and having to pursue a sale because they don't have folks that are going to be running the ship, not too far down the road.

Nathan Stovall

And on the shareholder liquidity part or even shareholder succession, the idea there being just the idea of -- you might have a state planning, you might have local investors and they're looking to diversify away or maybe even have new owners. Is that the kind of idea that if you don't have that next generation of owners that you could simply run into an issue there where they say, okay, well, we need to do something, we need to have a true liquidity event.

Christopher Olsen

That's right. This -- I mean I just zoom out and speak to, again, given our business model, we work with hundreds of community banks and solely focus on M&A. And I will tell you, shareholder succession is a big catalyst of M&A, especially on the seller side. And what can happen in a bank below $10 billion or below $5 billion or $1 billion, especially if they're privately held, they might have some -- they might be some sizable shareholders and/or quite a few legacy shareholders, maybe founding shareholders in some cases, depending on the age of the bank. And generationally, those shareholders will change hands. And this is maybe a testimony unfortunate negative, though it may be, that subsequent generations don't have as much interest in being an investor in community bank. especially if they're no longer attached to that community, they might be out of state. And they'll look to sell the shares for whatever they can get for. In many cases, it's viewed as found money and they'll market them for half of book value or a fire sale price because for them, it's 0. Now they're going to get something for it. That depresses values for the residual shareholders. And in many cases, if folks can't sell their shares, that puts pressure on the Board to create a liquidity event like a sale. And so again, a lot of folks need to sort of plan ahead for how do you create liquidity for small or large blocks of shareholders, especially if it's relatively closely held and not very liquid day-to-day. And there's no great answer. It might be a repurchase. It might be an uplisting, whether it's OTCQX or eventually a path or a glide path to a major exchange. That's a pretty tough hall for a number of community banks, whether it's the regulatory obligations, the cost, -- and up until a certain market cap, you're not going to get a whole lot of liquidity. So there's not a great answer there. It might be a repurchase or a buyback, which is certainly feasible, but doesn't solve the full problem. there's some issues there. And then a sale as clear as it is, might be full liquidity at a maximized price. And so I'm not necessarily advocating for that. But again, thinking more thoughtfully ahead of time, how to create liquidity for shareholders is a key to do for banks, whether they want to sell or not.

Nathan Stovall

Sure. Well, certainly, from an execution standpoint that the sale probably seems like it could be a cleaner path. It doesn't mean it has to be the path, but I can definitely understand why you would find folks there, -- which gets me to where are we kind of -- where are we in terms of pace of activity? And what are you seeing in the M&A markets? And I want to frame that a little bit coming in. I remember seeing you at acquire we acquired in January, and it was about as hopeful as we were in terms of pace of activity, not just you and I, but everybody there that I've seen in a long time for lots of good reasons, friendly regulatory environment, valuations coming back, still feel pretty good about the fundamental environment. Then we had the tariff change that put pressure on valuations sort of put a damper on activity. But it feels like we're getting some green shoots back. You talk about that a lot around here. Are you seeing that in your day-to-day work? Do you feel like discussions are picking up right now?

Christopher Olsen

Yes. What strikes me is investment bankers or hope springs eternal and speak it into an existence. So I recognize some potential bias here. But I'll say we have practice across the country, 6 different offices, talk with lots of community banks have pretty good level of visibility at the risk of bragging. I think we're the #2 sell-side firm for a number of transactions last year. So we see a lot and we hear a lot. And what we're seeing and hearing from across the footprint what have you, I would tell you, absolutely, deal discussions have increased considerably in the last few months. And you have a couple of things going on. First, yes, absolutely, I remember back in January, you and I were crossing pass at AOBA. And there was optimism. I don't know if it was necessarily ground on anything other than maybe the change in the administration. But a lot of noise has happened since, primarily tariffs and questions about what the rate of Fed loosening may or may not be. But any event, as we stand today, I'm absolutely seeing a lot of discussions, and I could attribute that to a few things. First, tariffs created a lot of noise, but maybe there's some resolution and maybe the impact is not as bad as many had hoped and maybe less of an impact -- so maybe get more stability in the wake of liberation Day. Then two, you have a lot of pent-up and sort of what I call bottleneck. There are a lot of folks that have been thinking about or trying to do something over the last 3 to 5 years. I mean this could be maybe all the way back to COVID when we've had a couple of black swan events that stalled M&A. Those -- a lot of the folks, especially on the seller side, are 2, 3, 4, 5 years older now. They're that much longer than their contracts. They're much further behind in their planned exit. A lot of those are coming back off the bench. And so you're seeing sort of a pickup of folks that have been attempting to do something. Then you have what I call incremental. These are folks that are increasingly thinking about M&A because of market conditions certainly challenges, competition, scale. There's definitely a cohort of folks that are increasingly thinking about M&A because of Trump 2.0, at least the regulatory environment, which is clearly more pro- M&A. We've seen a resumption of serial acquirers, whether it's Seacoast or Cadence or Glacier or others announcing subsequent deals in just the last 6 to 9 months alone, which we haven't seen that in years, sort of serial acquirers. That's telling you about acquisition demand, and they're not the only ones. There are others. In fact, we're working on a couple of different transactions right now where 2 of the buyers that I'm talking to on behalf of my client had just closed large acquisitions for them. And I said, well, is it too soon for you all to be thinking about deals, and this is the mindset from a couple of years ago. The answer was quickly no. In this environment, no. we're ready willing and able to look at our next one. And in another case, I'm looking -- I have a client who has a buyer looking at them, and they're also looking at something else large, and I asked about, can you do both? And they said, yes, we could do both at the same time. Those are anecdotal, but that's not -- those aren't necessarily one-offs. That's really directly a function of a much more pro-M&A regulatory environment. That is increasing deal activity. I'm sure you're following your reporting, and you're seeing it not only with some larger transactions that have been announced in Huntington by Veritex, the rumor of Northern Trust being approached by BNY Mellon, 2 of the largest banks in the country. That wouldn't be happening unless they view it as more greenlight environment to be talking about M&A activity. I think it was either Bloomberg or Wall Street Journal reported that Synovus may be exploring strategic options. All of these are emblematic of a lot of the factors that, in short, reflect an absolute increase in deal discussions. I think that's early. I think that's going to be a years-long phenomenon for various reasons.

Nathan Stovall

Well, you said anecdotal, but we didn't have those anecdotes over the last 3, 4 years, right? So it kind of sticks out to me. And the bigger side of it is an interesting one because we really didn't see that. Not only did we see less activity, but those players were not active in the market. So one of the things that I've heard for years is the idea that you could have serial acquirers now being able to see an exit. So maybe they even look to get bigger to look attractive to somebody like that. And that wasn't really an opportunity there before. And the last thing, too, that I want to pick up on that on the serial acquirers bit. Sure, all 3 of those are great markers and the idea that you can do true deals, that's sort of obvious, that's more deals. But I feel like I heard pretty often from the advisory community that the fact that you were worried that you could only do one in a year or maybe even 18 months meant you were more selective on that one. So it made you more reticent to kind of take the plunge and buy anybody. Do you think that's fair?

Christopher Olsen

Yes, absolutely, it's fair. Again, in our line of work, we frequently talking to buyers and ask them their opinion, where do you want to buy? What should we keep you in mind for? What doesn't make sense? And I could earmark a distinct change in the mentality of most of those conversations where wind the tape a year ago, and they would say something along the lines of many actually use the metaphor of I've got fewer bullets in my gun, I'm going to shoot them much more sparingly and only at the right opportunities. In other words, the bar is pretty high. There's a buyer I know that literally has a short list of 5 targets, and they said, we would do a deal for 1 of these 5 for anybody else. I'm not so sure. Fast forward to today, many of those folks that use some version of that bullet metaphor, just more of a practical description thereof. They're saying, I actually might -- I would be interested in more deals. I might go lower on my asset side threshold. I might go further out in geography. I might buy something that maybe is a little bit scratched and invented that one anecdote I just mentioned that we're calling a conversation with a buyer using that bullet metaphor. I've talked to them in the last few weeks and said, yes, no, I'd be open to taking meetings with smaller banks or such and such. And there's a clear more openness and frankly, it just boils down to broader acquisition demand from a subset of buyers. I might just elaborate sort of a tangent, but the biggest risk though, it's going to increase demand. But all else equal, I've seen in the last 20, 25 years of my career is that the buyer list overall is shrinking. You mentioned some of these acquires might be themselves improving their franchise value to open up an exit. I do think, and I'm advising my clients that less regulation is good, but not all good. Think about it this way, what if -- if I'm talking to $1 billion asset client, the typical buyer is about 5 to 7x as big as the seller. So what if the $5 billion to $10 billion to $20 billion banks are now more able to sell themselves because the $10 billion to $50 billion cohort or $10 billion to $100 billion have now a green light to buy. A lot of my community bank clients, I'm saying you should be very aware of your buyer list, and it's likely going to shrink at an accelerated pace over the next 2, 3 years. And just keep that in mind doesn't mean you have to do anything one way or the other, just be aware of that change because it is affecting the buyer landscape.

Nathan Stovall

Right, right. And if you're thinking about your strategic plan and one of the possibilities is that we might have an exit at some point in the next 3 years. So we'd like to entertain offers there or even maybe even more active than that, I've always heard the analogy of dating and you talk with your partners, potential partners and date with them. What if they're not on that potential list because, again, as you said, they're not independent. How does that change what you're looking to do? I mean, what do you think that does? And that's really hard to ballpark, I know, but what does that do to the $1 billion bank if suddenly they have fewer buyers? Do they have a buyer? Is it a different buyer? Is it -- we haven't seen credit unions necessarily at that size. We've seen some. But is it the credit union landscape? Do those institutions have to think about ways to gain scale themselves to make themselves more attractive if an exit is eventually what it looks like? I know there's a lot in there, but if that $5 billion to $10 billion acquirer might not be there that you're hoping for, what do you counsel that bank to do and start thinking about?

Christopher Olsen

Yes. That's a thoughtful question, and we do have those thoughtful discussions with our clients. I think the good news is we're not there now where the typical $1 billion bank doesn't have a buyer. I would say where I think we are for most, there are not many buyers. Most banks like that. There's not -- 20 years ago, it used to be you'd put a bank -- you'd be hired to sell a bank and you put a book out. It literally was a hard copy book and you send out to 20 parties, you might get 10 to 15 offers. Now for a typical $1 billion bank, depending on where it is and how good it is and the business model, what have you, you might have 2 or 3 possible buyers, you might just have. And so for now, for most, there's options. There are just fewer of them. which may or may not translate to valuation, right? It depends on if the right buyers willing to pay the right price, you only need one. But I could see a scenario in 3 to 5 years that, that list goes from 2 to 3 down to 1, potentially down to 0. And there in lies some tough decisions. Are there other types of entities you could sell to? Are there different things you could do to maybe graduate to a larger class, whether it's a merger of equals or some acquisitions yourself, so that you graduate into a different cohort of potential buyers. We're not there yet. And for some, you are, but I am trying to give my folks candid advice that depending on where you want to go and when you want to do it, keep all this in mind because things are changing relatively fast now.

Nathan Stovall

What about below that level? I think that's a really interesting point you made at that $1 billion because it's not something we necessarily thought about. But I feel like we've talked about if you're the $200 million or $500 million bank, that, that is challenging if you're looking to raise your hand and say, I want to partner. And maybe I'm overstating it, it's as challenging as I think. But what does that look like? I'm sure it matters about the market, sure it matters about the deposit franchise, particularly if you're in a good rural market and have a great deposit franchise, like maybe a fast-growing bank in a metro market likes that. One, are you seeing things like that? Or what broadly do you see as options for institution like that?

Christopher Olsen

It's interesting. It's similar but different. At a bank, let's say, 0 to $500 million. And I get as an aside, I get asked this question a lot, what's the best size or what size do I need to be at either to stay independent or to buy or to sell. And I don't know folks like me that might think that way in terms of other business lines, whether they go public or whatever. But my answer is there's no perfect number. Relatively speaking, if you're looking for scale, for greater profitability, it's linear. -- the large you are, hopefully, the more efficient you are, the more profitable you are. So there's not hard cutoffs that if you need to get to $100 million or to $500 million. But for, let's just say, roughly banks below $1 billion or below $500 million, they have the similar challenges with the shrinking buyer list. I might say they tend to have a few more buyer options, if nothing else, because to your point earlier, Nathan, that's where the majority of banks are, right? I think 60%, 78% of banks are below a couple of billion. But the buyer list does depend on where it is, right, urban versus rural, what state it's in, and there's an asterisk on credit union transactions, which is a thing, right? So there's maybe more optionality -- but at the same time, while folks are -- buyers are willing to go down a little bit of asset, a lot of buyers will say, gosh, you might be too small to fool with. Is it worth my time to do a deal this small where if it's going to be time and effort to do a deal, I want larger. I want a $500 million or $1 billion or $2 billion. So similar but maybe slightly different challenges in buyer sets.

Nathan Stovall

Well, in closing, I'm hearing at least green shoots, if not more, in terms of what we're seeing in pace, seeing the stars kind of aligning. What do you think takes us even further than where we are today? Is it just simply time and not having a black swan event as you talked about and these things in the pipeline starting to hit? And what is the biggest stumbling block that remains in the front of transactions?

Christopher Olsen

Yes. I would say, I think time will help. In particular, time will help further catalyze deals only for additional stability, right? Everybody is looking for stability, particularly in the wake of the tariff announcements and hopefully a little bit of visibility, but at least stability, better understanding there, hopefully, a better understanding and visibility on what the Fed might do and not do. I don't know that's a significant catalyst or inhibitor of deal activity, but clarity will help. What will likely -- you're already -- we're already seeing it. I don't know if I mentioned this upfront, but deal activity in the first half of the year, we do a midyear review newsletter, we sort of analyze the marketplace. First half of the year saw 20% more deals than last first half of the year, 70% greater deal value in the first half of '25 versus first half of last year. So it's definitely already picking up. You've seen even more activity in July. You're going to see it there's an axiom that's time, worn and worn out, but it's apt that deals beget deals. So a little bit more time, some stability. And as you see more and more of these transaction announcements, that will foster others to be thinking about buying, selling, merging or staying independent and how to position to do that. So I think all those will help. The inhibitor right now is -- it's funny. I'm doing this a couple of decades and almost 30 years now. There's always a bid-ask spread. For as long as I've been doing this, in the early 2000s whereolks were selling for 3x or 4x book, I would hear sellers say, I'm not going to sell for $0.01 less than 4x book. I'm not going to give the bank away. And buyers sort of squalk is I'm not paying more than 3x. There's always been a bid-ask spread. I saw the same in the opposite during the financial crisis, around half a book are booked. So there's still a bid-ask spread. A client yesterday tell me I'm not going to sell anything less than $1.75 a book. So there's still a bit of a bid-ask spread. So what might help is continued recovery in bank stock prices. right? Maybe a little bit more price discovery where we're at on public stocks and on deals and some larger announcements. That's probably the biggest inhibitor is maybe just the bid-ask spread. But that's always been a thing, right, as sure as mom, apple pie and Texas.

Nathan Stovall

Well, in stability or instability, better said, is something that could only drive that wider and put valuations in flux. And to your point on the catalyst side, stability and continuing to chug along has to be get more deals. There's a higher price for certainty and there's a lower price for uncertainty. And with that certainty not only comes valuations, but we're starting to see some capital raising coming back and starting to see some war chest get built. So it does feel like we're lining up for a much busier second half of the year and probably carrying into '26. And imagine we'll see you on plenty of those transactions. So I appreciate you taking the time to talk with us.

Christopher Olsen

No, I enjoyed the conversation. Thanks.

Nathan Stovall

Thank you.