How Will Bank M&A Shake Out in 2024?

The pendulum of a clock wasn’t always a perfect rhythm. It was only when Dutch mathematician and physicist Christiaan Huygens devised a pivot point that forced the bob of the pendulum to swing in an arc rather than a circle that the period of a pendulum was truly constant. With this crucial change in construction, a clock pendulum always takes the same amount of time to go back and forth once. While banking M&A deals aren’t quite as predictable as pendulum swings, there is a back-and-forth pattern developing over the past few years. While 2021 saw a surge in M&A activity, M&A fell to a record low in 2023, with 98 deals announced. Early indicators have shown that M&A could be back on the upswing in 2024. So far, S&P Global data reveals that $1.59B worth of M&A deals have been announced in 2024, as of April 15. The 28 pending deals include one of the largest M&A deals in over a year — Wintrust Financial Corporation’s acquisition of Macatawa Bank Corporation for $512.4MM. While that’s an encouraging sign that deals could be picking up — whether in value or in quantity — we’re still only in Q2. The key ingredients for M&A deals definitely exist — continued pressure on both margins and earnings, while operating expenses continue to increase with inflation. In a recent webinar hosted by Bank Director, three bankers gave their take on what this year holds for bank M&A activity. We summarize their perspectives on how the M&A market is shaping up and what factors to consider if you are interested in pursuing an M&A deal.Strategic ConsiderationsIf your community financial institution (CFI) is willing to entertain an M&A deal, there’s a laundry list of factors to mull over before talks become more serious. Along with the impact on your customers, your staff, and any investors you might have, you’ll need to think about the overall impact on your CFI’s financials, including your accounting.According to Steve Fusco, CFO of Spencer Savings Bank in Elmwood Park, New Jersey, financial institutions considering an M&A transaction need to make sure that the accounting marks don’t bring their capital level down so low that it challenges the overall pro forma and the deal itself.“It comes down to accounting versus economic factors,” Fusco says. “The accounting, which creates more capital dilution upfront, makes it harder to justify in a regulatory application, going into uncertain times. But if you look at deals with access to additional capital and a lower residual risk profile for the pro forma bank — those deals will happen.”The Importance of Credit Assessment in M&A DealsWhen analyzing a seller’s loan portfolio, modeling is sufficient for homogeneous loan pools and smaller credits — but deeper dives into the seller’s larger exposures and larger concentrations are critical, says Jeff Welch, Chief Credit Officer at Burke and Herbert Bank in Alexandria, Virginia. Moreover, deeper dives will likely shed a fair amount of insight into the seller’s credit culture and underwriting standards.It’s also prudent to obtain an independent review of the seller’s portfolio, to gain additional insight into their credit culture and credit administration — and potentially dispel any preconceived notions that the buyer might have, Welch says. An outside party can also establish a road map for the buyer’s own due diligence — what to look for and where to look for it.Aligning Credit CulturesIt’s also critical to make sure there’s a culture match between the credit cultures of both institutions. This is important particularly if the seller tends to be more aggressive while the buyer prefers to be more conservative. “The differences in credit culture are probably one of the biggest factors that cause mergers to stutter a bit,” Welch says.Where your CFI might be more generous with rates or loan amounts when lending to small businesses and those with lower credit scores, a larger institution, for example, may have stricter standards that they expect your staff to adopt once the deal is complete. While there might be limited time to assess the credit culture of the other institution involved, it’s important to get access to leadership at the bank and get a sense of their values. This can help you interpret whether they’re on the same page as your CFI. Even just observing how the other brand presents itself to customers through its mission can help provide insights into the institution’s philosophy and what is most important to them in conducting business.Cultivating Relationships with RegulatorsFor the foreseeable future, the regulatory environment will be more restrictive, Fusco says. While it's anticipated that the larger banks are to receive the brunt of the regulatory pain, the reality is that tends to trickle down quickly to CFIs that have fewer resources to deal with the additional burden.
 
Before considering deals, it’s extremely important for institutions to communicate often with their regulators in local offices, as decision-makers higher up will likely ask for their opinions of the institution, according to Brian Jones, President and CEO of the First National Bank of Elmer in Elmer, New Jersey.“Developing a relationship is the first key — you're going to get the support to help you through,” Jones says. Being proactive and roping in regulators to get a sense of how the deal could be received prior to making any formal moves could prove helpful in highlighting any early concerns so that you have time to address them before proceeding.If your institution is looking to gain deposits and capital, now may be an opportune time to consider a deal. Make sure you do your due diligence to learn more about the institution looking to acquire your CFI or merge with you. Aligning credit cultures is paramount. Plus, don’t forget to forge positive relationships with regulators in your local office, as well as those making the actual decision to approve your deal.