How the changing M&A landscape will affect banks this year

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

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Bank M&A activity has been in the doldrums since the start of the pandemic — just 98 mergers were completed in 2023, in contrast to more than 200 in 2021. However, shoots of a recovery are emerging, and a number of CEOs are predicting an increase in bank consolidation this year. But optimism must be balanced against potential challenges, such as the DOJ's recent warning about redlining activity in M&A deals.

Read our roundup for more about the issues that will be shaping the M&A landscape this year.

Redlining activity poses risk to banks in M&A deals, cautions DOJ

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."

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Latest DOJ redlining settlement offers warning about M&A

Bank M&As drop dramatically in ‘meaningful slowdown’

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.

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

New rules could lead to rise in regional bank M&A

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.

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Regulatory pressures to merge intensify at larger banks

Arthur J. Gallagher continues buying spree of bank-owned insurance brokerages

Arthur J. Gallagher & Co. completed 12 acquisitions of bank-owned insurance agencies in the third quarter of 2023, and has billions of dollars to deploy on additional merger-and-acquisition activity in 2024.

In September last year, Gallagher announced plans to purchase Eastern Bankshares's insurance subsidiary for approximately $510 million in cash. A month later, the $48.5 billion-asset Cadence Bank agreed to sell its insurance business to Gallagher for $904 million in cash. In November, Evans Bancorp became the latest bank to strike a deal to sell its insurance business to Gallagher. The Williamsville, New York, institution expects to make $15 million in after-tax proceeds.

"It turns out owning insurance distribution is a great investment," said Franklin Manchester, principal global insurance advisor for analytics software developer SAS. "Well, what if you owned hundreds of them? Now we start getting into why the A.J. Gallaghers of the world want to own that distribution."

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This company wants to buy your insurance business

Optimism abounds for bank M&A revival

As 2023 came to a close, senior executives in the industry forecast a spike in bank M&A activity over the next two years, bringing an end to the period of low activity and failed mergers set in motion by the pandemic in 2020 and kick-starting a new era of bank consolidation.

Palmer Proctor Jr., CEO of Ameris Bancorp in Atlanta, said in an earnings call in October that high rates helped to curb M&A since the Federal Reserve began pushing up borrowing costs to tame inflation in early 2022. Buyers and sellers, uncertain about the impact on loan portfolios and deal pricing, moved to the sidelines. But elevated rates could soon have the opposite impact, he added.

"You're going to see a wave of consolidation," said Proctor, whose $25 billion-asset bank bought several banks over the past two decades but none since 2021. "There should be a lot of activity taking place ... as we look out into next year and into the following year."

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Banks eager to resume M&A predict 'wave of consolidation' in 2024