Recent M&A Deals Show Priorities of Buyers and Sellers

While bank consolidation is still moving at a slow pace, a recent spurt of deals may indicate what future deals could look like.

About 95 banks have agreed to be sold this year, with aggregate deal value of $11.5 billion, according to S&P Global Market Intelligence. Although that is set to exceed the lackluster pace of 2023, the activity will likely fall short of historical norms.

However, several mergers announced between July and September are viewed as potential models for larger, more significant deals that may arise later this year and into early 2025.

These include Tupelo, Mississippi-based Renasant Corp.’s acquisition of The First Bancshares in Hattiesburg, Mississippi; Wheeling, West Virginia-based WesBanco’s upcoming purchase of Premier Financial Corp. in Defiance, Ohio; Jasper, Indiana’s German American Bancorp’s planned acquisition of Heartland BancCorp in Whitehall, Ohio; and ConnectOne Bancorp’s agreement to buy The First of Long Island Corp. in Melville, New York.

“There are more, bolder deals to come from the banking sector,” said Frank Sorrentino IV, managing director of investment banking strategies at Stephens, at a recent conference. “You have a lot of institutional guys coming off the sidelines to put money to work with M&A.”

Here are some trends to watch in the coming months.

Selective Buyers
Prospective acquirers are becoming increasingly choosy, realizing that the days of being a habitual acquirer that quickly completes multiple deals are over. Heightened regulatory scrutiny surrounding mergers is a significant challenge.

“A lot of these transactions are one-off deals because it takes a while to apply, then you have to get the approvals and go through the integration,” says Bill Burgess, co-head of financial services investment banking at Piper Sandler Cos. “You know you’re going to be out of commission for at least a year.”

As a result, many buyers are targeting larger banks. The average seller this year has about $1.5 billion of assets – that compares with $548 million in 2023 and roughly $1 billion in 2022, according to S&P Global.

Premier has $8.8 billion in assets, while The First Bancshares holds $8 billion. Though smaller, The First of Long Island ($4.2 billion) and Heartland ($2 billion) still represent substantial asset sizes.

“Buyers certainly have to be more selective,” Jeff Cardone, a partner at law firm Luse Gorman, said at the recent conference. “Once you find your dance partner, you’re going to be with them for some time. It is also more efficient to buy a larger institution.”

Strategic narratives behind these acquisitions are equally important. For example, ConnectOne has a limited presence on Long Island, while $6.2 billion German American aims to enter the attractive Cincinnati and Columbus markets. The $17.5 billion Renasant would expand its presence in and around New Orleans and Baton Rouge by acquiring First.

While the average premium this year is down from previous years – 110% of tangible book value compared to 121% in 2023 and 145% in 2022, according to S&P Global – larger sellers with compelling stories have outperformed those results.

Premier’s sale is valued at 142% of tangible book value; First is expected to fetch a 184% premium. Heartland’s sale features an impressive 202% premium.

Because buyers have become more selective, many investors have shied away from investing in smaller community banks in hopes of getting high returns through future sales.

“Betting on potential sellers isn’t a viable standalone investment strategy anymore,” Joe Fenech, founder and chief investment officer at GenOpp Capital Management, said at the recent conference.

Proactive Capital Raising
In contrast, institutional investors are eager to inject capital into the right acquirers and transactions. Renasant, $18.1 billion WesBanco, and $9.7 billion ConnectOne all announced significant capital raises alongside their deals, with several other bank mergers this year also including investor support. “This is a rare time when hedge funds and mutual funds are very interested in putting capital to work for M&A deals,” Stephen’s Sorrentino said. “That’s not usually the case – this is a rare window. If you want to do a deal, raise capital now.”

A primary reason for the capital raises is to cover the initial interest rate marks associated with the transactions. Extra capital also helps reassure regulators during the approval process. “There’s an expectation from regulators that you have enough of a cushion,” Cardone said. “Sellers want to increase the likelihood of getting a deal approved so they’re more receptive to the contingency of a capital raise.”

It can also make sense for investors. Englewood Cliffs, New Jersey-based ConnectOne issued subordinated debt rather than diluting shareholders by selling stock.

“It makes all the sense in the world, certainly when you have an upside-down interest rate environment; having that extra capital helps keep all the ratios at levels that we’re comfortable with,” says Frank Sorrentino III, ConnectOne’s chairman and CEO, the father of Sorrentino IV at Stephens.

German American and Renasant also generated capital by selling their insurance units. The insurance sales make financial sense, especially given that agencies can sell for up to 30 times their earnings, bringing in capital without diluting existing investors. “It’s a smart use of capital when paired with a strong M&A deal,” Sorrentino at Stephens said.

Avoiding Regulatory Hurdles
Premier and First plan to sell before surpassing the $10 billion-asset threshold that triggers stricter regulations, including caps on debit card interchange fees and scrutiny from the Consumer Financial Protection Bureau. Premier’s board specifically considered the “expected regulatory and operational challenges associated with growth above that size,” according to a registration statement tied to its pending sale.

This is a trend to watch among other banks with $5 billion to $10 billion of assets, with Burgess estimating that exceeding the threshold could cut a bank’s net income by $7 million to $10 million annually. “This threshold has simplified the decision to sell,” he says. “It adds additional pressure on management teams.”

ConnectOne stands out as an exception; its acquisition of The First of Long Island will raise its assets from $9.7 billion to nearly $14 billion.

“We were going to surpass $10 billion one way or another,” Sorrentino says. “We were fully prepared to grow organically, but this deal accelerates our business plan and gives us an immediate earnings boost.”