Biden order seen as minimal threat to bank M&A

As the pace of bank mergers and acquisitions picks up, the Biden administration may have added another motivator to pursue and complete deals in 2021.

An executive order issued Friday by the president calls for greater scrutiny of bank mergers, as part of a broader effort to promote competition in financial services, technology and other sectors. But just as the specter of gun control is known to encourage near-term firearm sales, Biden's order could spur banks to rush into deals out of concern that stricter regulation will follow.

Small banks may speed up deal talks this year to get acquisitions completed before new regulatory pressure reaches them, said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates. “There will be some bankers that say, 'Hey, we’re not letting this go beyond 2021,' " he said.

Analysts said the order is not directed at small companies, but rather is meant to curb activities such as the merger of BB&T and SunTrust in 2019 — the largest bank deal since the financial crisis, analysts say. That acquisition created the $518 billion-asset Truist Financial in Charlotte, North Carolina.

Community bank M&A drives the bulk of deal activity, and "most community and regional bank mergers should be unaffected” by the executive order, Cowen analyst Jaret Seiberg said Friday.

The need for scale is likely to drive more consolidation even if deals slow down in the immediate future, according to Mike Mayo, analyst for Wells Fargo. “Economics should win out over politics and bank mergers should increase,” Mayo said.

There were 60 bank acquisitions announced during the second quarter, according to Raymond James. That was nearly double the 35 announced in the first quarter and six times greater than the total in the second quarter of 2020. Bankers and analysts say M&A is likely to gather more momentum in the second half of the year, sending this figure even higher.

Acquisitive banks are likely to get asked an abundance of questions about M&A during upcoming earnings calls this month, according to analysts. Earnings season gets underway this week.

The banking industry is increasingly focused on pulling out costs from the brick-and-mortar system and investing those savings into digital transformation. The pandemic hastened the trend by reducing branch use and ramping up online traffic.

Community banks “can’t afford not to” continually improve their tech offerings, said George Boyan, chief financial officer of Unity Bancorp in Clinton, New Jersey. It’s a matter of whether they have the resources on their own or need to merge with a larger bank to get there, he said.

“That’s a question that has to be answered by each and every management team,” Boyan said in an interview, though he would not comment on the $2 billion-asset Unity’s own view on M&A.

Deals provide an avenue for both buyers and sellers to jump ahead on the tech front. After an acquisition, buyers can close targets’ branches that overlap with their own and pump savings into their burgeoning digital programs. Sellers, meanwhile, merge into larger banks and their customers gain access to more sophisticated digital banking services.

“No question, the need to invest in tech and get better and better with digital is a big driver,” Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets, said in an interview.

At the same time, Thompson said, buyers are eager to expand in growth markets via deals to offset lingering revenue headwinds from the pandemic — light loan demand, a result of customers having saved enough during the pandemic to make big purchases without loans, and pressure on net interest margins from historically low interest rates. Federal Reserve policymakers drove rates to near zero to bolster the economy in the wake of coronavirus outbreaks in 2020. Rates are expected to remain low into 2022.

“There’s plenty of reason for both buyers and sellers to continue pursuing scale,” Thompson said.

A case in point: Simmons First National in Pine Bluff, Arkansas, announced in June two deals that will enable it to bulk up in Nashville and Memphis, which are Tennessee’s largest markets. The $23.3 billion-asset Simmons agreed to buy Triumph Bancshares in Memphis for $131.6 million and Landmark Community Bank in Collierville, Tennessee, for $146.3 million.

The proposed acquisitions would lift Simmons from the 13th-largest bank in Tennessee by deposit market share to the ninth. Simmons Chairman and CEO George Makris Jr. said in an interview that the deals will bolster the bank’s position in coveted growth markets, positioning it for stronger loan growth, while also enabling it to consolidate several branches and reinvest savings. “We’ve got a lot of branch consolidation we’re going to do,” he said.

Both sellers, meanwhile, said they were looking to join a larger bank to access more cost-efficient digital offerings and loans for customers at a time when tech investments are becoming increasingly expensive for small companies with limited budgets.

Buyers also say they are moving with haste because available sellers of size in some prized markets are increasingly scarce following years of consolidation prior to the pandemic.

Glacier Bancorp in Kalispell, Montana, for example, said in May it paid up to acquire Altabancorp in an effort to strengthen its presence in coveted Utah when other states in the West are recovering more slowly from the pandemic. Glacier said Utah is home to the fastest-growing economy in its eight-state western footprint. At the same time, Alta is the only bank headquartered in Utah — as well as neighboring Idaho, Wyoming, Arizona and Nevada — with total assets between $3 billion and $10 billion. That gave it scarcity value.

The $19.8 billion-asset Glacier agreed to pay $933.5 million in stock to clinch the deal with the $3.5 billion-asset Alta of American Fork, Utah. The deal valued each Altabancorp share at about $49 at announcement, or 270% of tangible book value. In the first quarter of this year, sellers received about 150% of tangible book value on average, according to S&P Global data.

Sale prices overall are steadily rising following a recovery in bank stocks this year. Shares of banks are up more than 50% in 2021. Higher prices provide buyers stronger currencies with which to pursue stock deals.

Deal activity “looks poised to continue as sellers are receiving higher multiples and the larger buyers are armed with historically stronger relative currencies to put to work,” said Stephen Scouten, an analyst with Piper Sandler. “We expect 2021 to be a year of rampant M&A activity.”

The pace of deals in the second quarter put the industry back on track for M&A levels seen in 2017-19, before the lull caused by the pandemic last year, Scouten said.

Analysts at Raymond James noted another likely driver unique to 2021: The anticipation of higher corporate tax rates in 2022 — a top priority for President Biden — is likely motivating some buyers and sellers to pull up chairs to M&A negotiations tables sooner than they might otherwise have to get deals done this year before any change in taxes in 2022.

“The thinking here is that a deal that closes by year-end would be subject to the current tax rate versus a potentially higher rate in 2022, thus netting the seller a larger net payout,” the Raymond James team said.