Many regional banks are emerging from the pandemic with loads of cash. As Mohamed Dabo reports, interest in acquisitions from these banks has surged over the past few months.

Banks are turning to mergers as an effective way to navigate the headwinds they are facing as an industry.

Investment bankers report that more and more regional banks are expressing a desire to acquire other companies. The question is whether this really will translate to a step-change in M&A activity in America’s fragmented and often antiquated banking sector.

Regional banks have long sought to bulk up their digital offerings to compete with giants such as JPMorgan and Bank of America, which spend billions annually on technology and have been moving into new markets.

The conditions are ripe. With US interest rates near zero and weak demand for loans, acquisitions are currently one of the few viable paths to growth for many smaller banks.

Soaring valuations could hinder any acquisition frenzy

But the inflation in share prices that has emboldened wannabe buyers has, of course, made acquisition targets more expensive, too.

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The KBW Regional Banking index has climbed 37% year-to-date compared with a 13% increase on the S&P 500, after trailing the broader market for the previous two years.

Price-to-earnings ratios for banks have already zoomed above pre-pandemic levels and Wall Street analysts say they would be higher still if earnings were not currently inflated by the release of loan loss reserves.

In this week’s featured deal, a North Carolina bank with a local presence will be acquired later this year if the transaction meets with regulatory approval.

Deal of the Week: United Community Banks to Acquire Aquesta Financial Holdings

Aquesta Financial Holdings Inc., parent of Aquesta Bank, has entered into a definitive agreement to be purchased by United Community Banks Inc., United officials announced last week.

Aquesta, based in Cornelius, a fast-growing Charlotte suburb on Lake Norman, has reported total assets of $752m, with total loans of $576m.

It maintains one branch in Wilmington and ranks 15th in the local market, ranked by local deposits.

Greenville, South Carolina-based United Community Banks has $18.6bn in assets and 161 offices in Florida, Georgia, North Carolina, South Carolina and Tennessee, along with a national SBA lending franchise and a national equipment lending subsidiary.

The transaction value is estimated at approximately $131m, including approximately $12m in value for outstanding options and warrants to acquire Aquesta common stock.

In a press release the companies said: “The transaction structure includes an election for Aquesta stockholders to receive their consideration in cash, subject to a limitation that no more than 30% of the total consideration paid by United will be in cash.

“The stock portion of the merger consideration is based upon 0.6386 shares of United common stock being issued in exchange for each share of Aquesta common stock.”

Because the process is in its very early stages, Aquesta President and CEO Jim Engel said he did not have many details to share at present.

“I can say that we are excited about the opportunity to partner with a larger community bank. The Wilmington area is new to UCBI and they are excited to help us grow in the market,” Engel said.

Officials expect the transaction to be completed in the fourth quarter of 2021, subject to customary conditions, including regulatory approval as well as the approval of Aquesta’s stockholders, the release stated.

US banks announced 19 merger or acquisition deals in April, compared with just nine in the whole second quarter of last year.