5 issues affecting bank M&A in 2024, from redlining to regulation

First National Bank of Pennsylvania agreed to a redlining settlement in order to resolve allegations about its mortgage operations in certain parts of North Carolina, after entering the market via an earlier acquisition. The settlement, announced by federal and North Carolina authorities, sends a warning to banks: dealmaking will bring scrutiny of lending practices, even within a seller's old footprint.

Between 2017 and 2021, First National avoided making mortgage loans in heavily Black and Hispanic parts of the Charlotte and Winston-Salem areas, in contrast with its practices in majority-white neighborhoods, according to the U.S. Department of Justice and North Carolina authorities.

"We are prepared to hold institutions accountable when they engage in discriminatory conduct," Assistant Attorney General Kristen Clarke, who heads the DOJ's civil rights division, said during a call with reporters. "Banks should also be on notice that they will be held accountable for redlining activity even when conducted by entities that they have acquired or merged with."

Read more: Latest DOJ redlining settlement offers warning about M&A 

Only 98 bank M&A deals were completed in 2023, according to updated data from S&P Global Market Intelligence, far below than the 161 in 2022 and less than half the 202 M&A transactions announced in 2021, when M&A activity revived after dipping to 112 in 2020 as a result of the pandemic. 

It "was a very weak year for M&A in the U.S. as rising rates, the threat of a recession, and mismatched valuation expectations put a brake on dealmaking," Carole Streicher, head of deal advisory and strategy at KPMG U.S. recently told Jim Dobbs, deputy editor, community banks for American Banker. "However, the data showed a pickup in M&A in the fourth quarter, and this aligns with the uptick in work we have been seeing with our clients."

Jacob Thompson, managing director of investment banking at Samco Capital Markets, said bank M&A would also likely rebound once it is clear rates are done rising and the economy is stable. He said would-be small bank sellers, struggling to keep up with the technology spending of larger banks and intense competition broadly, may look to join larger banks to create more efficient digital offerings.

Read more: Bank M&A nearly flatlined in 2023, reaches pandemic-era low

Recent regulatory changes increase the level of capital that banks with at least $100 billion of assets must sustain to guard against possible losses. These shifts come at a time when banks are already facing further elevated funding expenses, leading to the possibility of bank consolidation.

"Banks need to achieve significant scale to absorb more regulatory costs and to be competitive," Christopher McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, told American Banker's Jim Dobbs. "All of our work suggests more M&A is going to happen."

U.S. bank supervisors proposed rules last summer that would further tighten regulations for large banks in an effort to incorporate elements of the international governance framework known as Basel III that was agreed upon after the 2008 financial crisis. The failures of several regional banks in the U.S. in early 2023 jump-started the process. 

Read more: Regulatory pressures to merge intensify at larger banks