KBRA Financial Intelligence

Slow First Half for Bank M&A Following Lender Failures

The number of bank deals slowed dramatically in first-half (1H) 2023 with about 40 transactions announced, well below the five-year average of about 100 deals over the same time, according to data compiled by KBRA Financial Intelligence (KFI).

Bank M&A has stalled amid higher interest rates, a tougher regulatory environment, and increased uncertainty following the regional bank failures this spring. Higher rates have curbed lenders’ profitability, saddling them with unrealized losses in their bond and loan portfolios, which become recognized in a sale. This dynamic has left many banks on the sidelines until the Federal Reserve starts lowering interest rates or bond losses roll off banks’ books.

"The market will flip the other way when bond losses get back closer to zero," said Bob Wray, managing director at CC Capital Advisors, who expects a slow second-half of the year. "We think 2024 is going to be busy. We have a pipeline of at least 10 deals once these unrealized losses go down."

Those losses shrunk by $102.2 billion (16.5%) in Q1, but remain elevated at $515.5 billion, according to FDIC data. Lower interest rates would help reverse those losses.

The Fed is closer to the end of its hiking cycle. The central bank has signaled two more rate hikes in 2023, after pausing in June for the first time in 16 months to gauge the impact of its aggressive monetary policy. The market is pricing that in with more than 90% of investors currently anticipating an increase of 25 bps at the Fed’s July 25 meeting, according to the CME FedWatch Tool, which forecasts rate moves based on trading data.

Largest publicly traded bank deals tracked by KFI in 1H 2023. Source: KBRA Financial Intelligence (KFI)

Of the nine public deals announced in 2023, the biggest tie-up was LINKBANCORP’s $167.8 million buyout of Partners Bancorp in an all-stock deal. Billed as a merger of equals, the combined bank holding company will have about $3 billion in assets and an expected market value of $300 million.

The deal, which is expected to close in Q3, expands LINKBANK’s footprint to Maryland and Washington, D.C. area, by adding 21 branches from Partners’ subsidiaries Bank of Delmarva and Virginia Partners Bank. Partners had previously agreed to sell itself to OceanFirst Financial Corp. in 2021, but that deal was terminated last November.

Fed’s Barr Calls for Higher Bank Capital, Tougher Stress Tests

Michael S. Barr, the Federal Reserve’s vice chair for supervision, called for tougher bank regulation in a July 10 speech that could require the largest banks to hold an additional 2% in capital as well as face tougher stress tests. Barr outlined the potential changes, which are expected to be proposed in the coming months, after a nine-month review of the Fed’s capital rules—during which three regional banks failed. The potential reforms would:

• Require banks with assets of $100 billion or more to account for unrealized losses and gains in their available-for-sale (AFS) securities when calculating their regulatory capital.

• Require standardized credit risk assessments so banks apply the same requirements to each bank rather than letting lenders develop their own requirements.

• Require banks to model risk at the level of individual trading desks for particular asset classes, instead of at the firm level.

Barr plans to pursue additional changes in response to this year’s bank failures, including how the Fed regulates and supervises liquidity, interest rate risk, and incentive compensation. "I expect to have more to say on these topics in the coming months," he said.

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3 THINGS IN CREDIT

Follow Van Hesser’s 3 Things in Credit podcast. From the July 14 episode:

"Inflation is trending decidedly lower as you would’ve expected. That’s what happens when you hike rates by 500 bps (soon to be 525 bps) while running down the Fed’s balance sheet, and you allow supply chains to repair. But here’s the thing. We have incurred only part of the cost of bringing down inflation."