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Deposits and liquidity remain at the forefront for most bankers and the intense competition for core funding will eventually lead to a resurgence in M&A activity.

That was the message delivered by a variety of presenters at S&P Global Market Intelligence's annual community bankers conference on May 20 and 21 and was highlighted in the latest "Street Talk" podcast. While presenters expect bank M&A activity to rebound eventually, they acknowledged that transactions face some challenges in the near term, including lower valuations, fewer would-be buyers and regulatory pressures that tend to require more capital in deals.

Numerous presenters focused on ways banks can thrive through a challenging operating environment, where higher rates have challenged banks' deposits, margins, liquidity and have raised concerns about their credit quality. The outlook for deposits and liquidity came up numerous times during panel discussions at the event and presenters agreed that competition for core funding remains fierce. Kelly Brown, chairman and CEO at Ampersand Inc. and a senior adviser to Patriot Financial Partners noted that competition is unlikely to ease soon.

"We have our finger on the pulse of deposits here in the country. And I don't see anything abating," Brown said. "It's getting tougher and tougher to find those deposits."

Greg Muenzen, director and head of treasury and balance sheet management at Curinos Inc., noted that the environment has shifted from worrying about liquidity to worrying about profitability.

"The balance runoff has abated a bit, but we've essentially paid for that," Muenzen said.

Liquidity has remained top of mind for regulators who want banks to show they have diverse contingent liquidity options and provide lots of detail on their deposit base, such as geography, customer type and duration, said Josh Siegel, managing partner, chairman and CEO of StoneCastle Partners LLC.

The focus on liquidity has put pressure on margins, raising concerns about profitability. Umrai Gill, partner at Performance Trust Capital Partners LLC, said the ability to raise deposits 100 basis points under the fed funds rate would be a miracle for most banks today. He expects the funding pressure to lead to more M&A eventually.

"If you have simply the passage of time where assets burn down and you're fighting this knife fight on the liability side. And once you get through all of that, you may look at your earnings power and say, 'Geez, I just went through a buzzsaw for the last two or three years, the hardest competitive environment we've been through, what are my options,'" Gill said.

Other advisers at the event agreed that bank M&A will eventually pick up as institutions face earnings walls and seek scale. They think plenty of sellers exist in the marketplace but noted there are many challenges to deals, including the required rate marks buyers must take when acquiring a target, reduced bank valuations and simply fewer buyers existing in the marketplace because of the regulatory scrutiny over deals.

Jonathan Hightower, partner at Fenimore Kay Harrison LLP, said recent policy statements from bank regulators made clear that they are less likely to approve multiple acquisitions from the same buyer at once. That means buyers are looking for targets that really move the needle.

Scott Studwell, head of US depositories and co-head of equity capital markets at Stephens Inc., echoed that sentiment and argued that sellers need to appreciate how much the buyers have changed over the last 15 years.

"Not all of them want to do the $0.5 billion banks, the $2 billion banks anymore. In fact, most of them are thinking bigger," Studwell said.

Caspar Bentinck, managing director in the financial services group at Piper Sandler Cos., agreed and noted that the pool of buyers has simply shrunk.

"I think if you go out to sell a bank, the dirty truth of it is, if we have three legitimate buyers put in a bid, we're pretty damn happy about the outcome," he said.

A number of recently announced transactions — particularly larger deals — have included capital raises in conjunction with the deal. That was the case with the FirstSun Capital Bancorp and HomeStreet Inc. tie-up and the UMB Financial Corp. and Heartland Financial USA Inc. merger.

Mariner Kemper, chairman and CEO of UMB Financial, wrote in an email to S&P Global Market Intelligence that UMB was not asked by regulators to raise capital to support its recent acquisition and had informed regulators of its acquisition plan, including a capital raise from the beginning.

"This is a significant and important transaction, and the capital raise provides us with ample dry powder and capital to fully support it," Kemper wrote. "As is typical for the acquirer in merger transactions, our risk based regulatory capital ratios will decline at transaction closing, driven by goodwill and other intangibles generated when we mark the assets and liabilities to their fair value. While our pro forma capital ratios at close are projected to be well above regulatory minimums, the offensive capital raise further bolsters such ratios and provides downside protection should the fair value of acquired assets decline due to interest rate movements."

At the community bankers conference, Kevin Stein, a managing director at Klaros Capital, said he expects more consolidation but noted that regulators want to see that capital is not diluted by a transaction. Stein said regulators want to see that the combined institution has the same common equity Tier 1 capital ratio at closing that the buyer had when announcing the deal.

"You need to have that same level of capital on day 1, which means that many transactions today are going to need additional capital. Not that it can't be raised," Stein said. "But it's required now."

Capital, commercial real estate at center of bank regulators' scrutiny

Regulators are upping the ante in exams and acting much faster to downgrade banks' regulatory ratings and hand out confidential and public orders, advisers said during S&P Global Market Intelligence's Community Bankers Conference.

For US banks, creative deposit-gathering trumps rate-dependency

Community banks must think outside the box if they want to win deposits in the current higher-for-longer environment, panelists said at S&P Global Market Intelligence's Community Bankers Conference.

Sellers outnumber buyers as US bank M&A picks up

Higher-for-longer rates, lower-than-usual tangible book values and regulatory hurdles are making buyers pickier but pushing more banks to seek a sale.

^{Article amended at 6:20 p.m. on June 6 to remove a reference to UMB's capital raise coming at the behest of regulators. The article was updated at 8:10 a.m. ET on June 7, 2024, to add commentary from Mariner Kemper, chairman and CEO of UMB Financial.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}