Rising interest rates and higher regulatory hurdles chilled bank merger and acquisition activity in the first quarter, quelling expectations for continued momentum into this year after a robust 2021.
Through the third week of March, banks had announced only 35 acquisitions in total and just eight with deal values north of $50 million, according to a Piper Sandler analysis. That puts the industry behind the pace set last year, when there were 211 deals announced for the full year (averaging at about 50 per quarter) and 79 valued at more than $50 million.
Bankers and analysts say the increased regulatory scrutiny of M&A under orders from the Biden administration delayed several deals in 2021. This, in turn, has made buyers this year more discriminating — they're focusing on targets that are least likely to raise even minor red flags with regulators.
"Going forward as an industry, we're going to be more selective because of the elongated approval process,” Jim Ryan III, CEO of Old National Bancorp in Evansville, Indiana, said during a webcasted panel discussion this month.
The $46 billion-asset Old National announced last June that it would acquire First Midwest Bancorp in Chicago for
Ryan said Old National and other acquisitive banks remain interested in M&A for all the reasons that fueled a deal surge in 2021 — pursuit of scale, geographic diversity and greater resources to invest in technology. But buyers are now taking more time to assess targets and this is having a dampening effect on total volume.
"We don't want to spend time on things we know aren't going to fit" easily into the evolving regulatory process, Ryan said.
Piper Sandler analyst Stephen Scouten said that “volume has been constrained further by the tantalizing nature of a
As expected since early this year, the Federal Reserve this month boosted its benchmark rate by 25 basis points in
With rising rates, most banks stand to earn more on their loans, Scouten said. As such, many would-be sellers have raised their price expectations and, at least temporarily, given buyers sticker shock.
“We do not expect to see any concessions from sellers in the near term,” Scouten said. “Any seller today would likely be asking for a valuation that incorporates the upside from rates.”
Some others that had considered selling are delaying those plans to see how much they might benefit from rising rates. If their interest income soars, they may decide to remain independent.
Some banks have held off their plans in March amid the global tumult caused by Russia’s invasion of Ukraine, Scouten said. The war, which started in late February, has grown increasingly bloody and chaotic, stoking concerns that it could escalate and further damage the global economy.
“In talking with many of our covered banks and industry observers as a whole,” buyers’ “
Scouten said the catalysts of M&A in 2021 nonetheless remain firmly intact this year.
“Scale matters now more than ever,” he said. “Partnering with a larger bank to drive” earnings “growth through greater efficiencies and investments into needed tech spend presents a differentiating opportunity.”
Robert Bolton, president of the bank investor Iron Bay Capital, agreed.
“The small banks are trying to find that way to keep up on tech — and selling to a bigger player that has the tech capabilities is going to continue to be an important route to get there," Bolton said. "And at the same time, the bigger guys want to get even bigger.”
