The gap between bank buyers and sellers' expectations has widened again, prompting a slowdown in the M&A market that is expected to continue in the coming months.

Rising rates and prospects for regulatory relief have made smaller banks slightly more optimistic about the future, so it is taking more money to get them to sell than it might have last year.

Meanwhile, stock valuations have shot up at bigger institutions, making it harder for them to offer tempting exchange ratios. Investors in community banks do not want to receive a small number of shares that would have limited value when prices ultimately come back to earth.

“Quite frankly, the economics around [bank acquisitions] today are particularly challenging given how regional bank stocks trade in relationship to the smaller institutions,” Grayson Hall, the chairman and CEO of Regions Financial in Birmingham, Ala., said during a conference call to discuss quarterly results.

“At this point in time, we’ve not seen that as a particularly productive thing for us to be heavily focused on,” Hall said.

Bank M&A was relatively sluggish in the first quarter. Banks announced 57 mergers through March 31, a slight decline from a year earlier, according to data from S&P Global Market Intelligence.

Deal values rose 75% to $15.6 billion, but the increase largely reflected a handful of big acquisitions, including Sterling Bancorp’s $2.2 billion deal for Astoria Financial, Pinnacle Financial Partners’ pending $1.8 billion purchase of BNC Bancorp and Iberiabank’s $1 billion agreement to buy Sabadell United Bank.

Premiums improved modestly, averaging 187% of a seller’s tangible book value during the first quarter, according to PricewaterhouseCoopers. That compared with about 180% in the fourth quarter and 145% a year earlier.

Other bankers beside Hall downplayed the potential for acquisitions.

“I was a little more optimistic about a month ago,” C.K. Kum, the CEO of Hanmi Financial in Los Angeles, told analysts when asked about M&A during his company’s quarterly call. “There are still potential sellers out there … but the volatility of the stock market as it relates to financial institutions has caught all of us somewhat off guard.”

“Not a lot of activity out there,” Robert Kaminsky, the CEO of Mercantile Bank in Grand Rapids, Mich., said when pressed on his call about M&A. “We remain obviously open to conversations as things cross our desk … but we’re not seeing a whole lot right now.”

However, a number of small and midsize banks may just be pausing to prepare for future acquisitions, industry observers said.

“Regional and community banks should be strategically positioning themselves for consolidation by focusing on core capabilities to capture synergies, execute value-creating deals and attract the capital base to allow [for] investment in digital transformation,” said Scott Carmelitano, a principal in PricewaterhouseCoopers’ deals practice.

Sellers’ lofty expectations are even encouraging serial acquirers such as Bank of the Ozarks to focus more on organic growth.

“There have been a couple of transactions that would have been very nice … for us to do at the right price,” George Gleason, the Bank of the Ozarks’ CEO, said during the Pine Bluff, Ark., company’s quarterly call.

“But the sellers' expectations ... were high, and we didn’t think it was prudent for us to pursue them,” Gleason said. “Every transaction we do takes manpower, and it distracts me and dozens of other people's attention from other things that we could do.”

To be sure, deals are still getting done.

In addition to the quarter’s three biggest announcements, other notable deals in the first quarter included Home BancShares’ agreement to buy Stonegate Bank, Columbia Banking Systems’ pending purchase of Pacific Continental and PacWest Bancorp’s deal for CU Bancorp.

Deals involving 15 branches were reached during the first quarter, along with transactions involving 24 nonbank operations, according to S&P Global Market Intelligence. Only three banks failed over that time.

Two prevalent trends are playing out in whole-bank deals so far this year, Carmelitano said. Banks are looking to expand into new markets or acquire specific capabilities.

That could certainly be said for Union Bankshares in Richmond, Va.

“Our future could carry us out of state,” John Asbury, Union’s new CEO, told analysts, adding that North Carolina was the “most logical” option. Maryland would also be under consideration. “I cannot imagine we’d do something that’s not contiguous.”

Union is also looking at targets in its home state as it looks to bolster commercial lending operations in places such as northern Virginia and the Hampton Roads area, Asbury said.

Other bankers made it clear that conversations between institutions are still taking place and that they believe the pace of consolidation will accelerate, though it may depend on forecasts for regulatory reform and less ambitious pricing demands from sellers.

“There’s still a lot of talking going on in my space,” Kum said. “So I remain hopeful that there could be transactions done in 2017 and beyond.”

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