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US bank deal discussions buzzing despite rate mark pain


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US bank deal discussions buzzing despite rate mark pain

High interest rates and long regulatory approval timelines are still making it hard to close deals, but bankers believe those same factors will soon lead to a wave of consolidation.

US bank deal activity has picked up in recent months, with 39 announcements since July 1 totaling $3.21 billion in announced deal value, or 84% of all announced deal value so far this year. However, the impact of high interest rates on deal math and prolonged closing timelines still make it hard to get things across the finish line, executives said on third-quarter earnings calls.

"You've got the larger marks up front so it's kind of a math question right now," United Community Banks Inc. Chairman and CEO Herbert Harton said on the company's third-quarter earnings call, adding that M&A will likely remain slow until mid-2024.

Still, deal conversations are heating up, bankers said. Multiple executives predicted that 2024 will see a boom in US bank M&A activity as banks are forced to pair up to better deal with intensifying headwinds.

Rates, regulators hinder banks' appetites

Lubbock, Texas-based South Plains Financial Inc. has fielded more inbound calls from sellers recently compared to the past couple of years, Chairman and CEO Curtis Griffith said. The bank is open to targets with a West Texas footprint, low loan-to-deposit ratio and core low-cost deposits, the executive said.

"But finding those right now in a situation where the seller would be willing to recognize how much the [accumulated other comprehensive income (AOCI)] hit is likely to be, that's a unicorn to go find right now," Griffith said.

As such, buybacks make more financial sense right now, the executive added.

Fellow Texas-based Prosperity Bancshares Inc. also believes buybacks make more financial sense than M&A right now, though the company is "constantly in talks with other banks," executives said Oct. 25.

"What's different this time in M&A than it's ever been before: When you're looking at acquiring or merging with a bank, banks have losses in their portfolio," Senior Chairman and CEO David Zalman said. "You got to mark-to-market. So you're going to mark their capital down, which would bring the overall capital down, although we will get that money back really quickly. So those are just the considerations."

When mulling a potential deal, Prosperity looks at potential tangible book value and earnback on the deal versus buybacks, and often, buybacks are "a safer bet," President and COO Kevin Hanigan added.

Nashville, Tenn.-based FB Financial Corp. is interested in strategic acquisitions that are below three years earnback, come with double-digit earnings per share accretion or boost tangible capital, but finding an attractive target is hard right now because of AOCI losses, President and CEO Christopher Holmes said on the company's third-quarter earnings call.

"That's a harder computation than it used to be because of AOCI and what that does. It can create more tangible book value dilution," Holmes said.

Home BancShares Inc. has engaged in several deal discussions recently, but those fell apart due to deal math not making sense.

"They get to a point where you can't do them," said Chairman, President, CEO and co-founder Johnny Allison. "I was excited about the opportunity in these markets, but they don't work."

In addition to interest rate marks, longer regulatory approval timelines are also deterring banks.

"Given where rates are today, given the time that the regulators take from a bank approval transaction kind of timeline perspective, the math on the M&A side is just harder. And we frankly can't wait for that in order to grow our company," Community Bank System Inc. COO Dimitar Karaivanov said on the company's third-quarter earnings call.

Impending wave

Still, executives agreed that the dynamics hindering M&A today will lead to an impending wave of consolidation.

As high interest rates continue to pressure banks' earnings power, they will need to merge to build their deposit bases and diversify asset generation, Ameris Bancorp CEO H. Palmer Proctor Jr. said.

If banks can secure regulatory approvals, which are creating uncertainty about timing, "you're going to see a wave of consolidation," Proctor said. "There should be a lot of activity taking place ... as we look out into next year and into the following year."

Valley National Bancorp executives agree that the high interest rate environment will likely push banks to sell.

With an inverted rate curve, "there's going to be definitely a lot more opportunities based on some of the challenges that many banks have," Chairman and CEO Ira Robbins said.

Aside from muted earnings power from high rates, "higher technology costs, salary increases, loan competition, funding costs, succession planning concerns and increased regulatory burden, all point to continued consolidation," Prosperity's Zalman said.

Multiple bank CEOs foresee M&A picking up in 2024.

"There's conversations that seem to be picking up," FB Financial's CEO said. "Folks are thinking. I think '24 is going to force a lot of that. ... Folks are having to think strategically. And the landscape continues to change and I think you have to think more and more strategically."