A Cautiously Optimistic Outlook for Bank M&A: AOBA 2025 Recap

We recently attended Bank Director’s 2025 Acquire or Be Acquired Conference (“AOBA”) in Phoenix, Arizona.  AOBA is a two-and-a-half-day conference that covers a wide range of topics, including the nuts and bolts of bank M&A, an overview of bank valuation trends and drivers, growth strategies (both organic and inorganic), and FinTech strategies.

Phoenix’s warm and sunny weather reflected the generally optimistic and upbeat mood of the 2025 conference.  We discuss three primary themes below that stuck out to us.

Banks Turned a Corner in 2024

This theme was noted in several sessions, and the data observed for publicly traded banks was often cited as evidence of the turnaround.  Small-cap publicly traded banks experienced negative returns in 2022, 2023, and the first half of 2024.  On average, publicly traded bank’s earnings per share declined in 2023 and 2024.  This reflected a combination of headwinds, including NIM compression, higher operating expenses, slower growth, and increased provision expense (although credit quality and the macro economy generally remained strong from 2022-2024, pockets like CRE in certain markets/niches began to impact provisions for some banks).

However, a shift in sentiment appeared to occur in mid-2024, and small-cap banks increased 23% in the second half of the year.  This reflected that sentiment began to shift towards a no (or perhaps extremely soft) landing for the economy, the uninverted yield curve, and bank net interest margins and cost of funds bottoming out in mid-2024.  This provided a foundation for banks from which NIM expansion could occur and a tailwind for EPS growth in 2025.  For 2025, EPS growth was forecast to be driven by a combination of NIM expansion from lower funding costs, higher yields as legacy assets continue to mature and/or reprice higher, and higher loan growth.

In addition to the more optimistic earnings outlook, it was noted that capital market availability for banks (opportunities to raise capital through debt and equity issuances) was on the rise.  Several presenters noted evidence of this trend, with a few common equity raises by banks in the second half of 2024 that helped fund M&A, inorganic growth, and/or balance sheet repositioning.  Earnings and capital growth were expected to fuel banks to position themselves for organic or inorganic growth (through M&A) in 2025.

Optimism That Bank M&A Will Accelerate

Consistent with the theme of turning the corner and greater capital market availability for M&A, there was noted optimism that bank M&A will accelerate in 2025.  The reasons cited beyond banks generally turning the corner include the following:

• Pent-Up M&A Demand. The number of announced transactions and % contraction in the industry was below the long-term averages for the last few years.  This has created a backlog of would-be sellers and buyers that could lead to enhanced discussions and merger activity as conditions improve.
• Buyer Needs. Elements that exist for buyers that could enhance M&A include capital market availability, a continued focus on improving efficiency and returns by achieving greater scale, the need to diversify and/or enhance loan/deposit mix, expanding geographically, and having improved valuations (relative to year-end 2023) to facilitate using their stock as acquisition currencies in deals.
• Seller Needs. For sellers, a number of the trends that could be drivers for M&A are an aging management/ownership/board and a need for liquidity for shareholders; a need for additional scale to enhance efficiency, technological, and/or profitability; and relatively low tax rates (present vs. historical).
• Continued Need for Scale/Size in Light of Competitive Environment.  The growing number of attendees and presenters at AOBA illustrated a talking point that came up in several sessions.  Banking remains a highly competitive marketplace with competition from traditional players (banks, CUs), non-traditional players (non-bank and alternative lenders), and emerging players (FinTechs).  A few sessions discussed at what level of scale a bank needs to be for peak efficiency.  While these discussions often led to further debate than a definitive answer, added size/scale was often cited as necessary to achieve better operating leverage and to have the earnings to fuel necessary investments in staff, facilities, and technology over time.
• Potential for Less Regulation. Although many sessions noted the significant uncertainty around the regulatory outlook, the potential for a less stringent regulatory environment in light of the changeover in administration is a factor that could lend itself to more M&A.  This potential for a less stringent and more efficient regulatory approval process could shorten timelines to closing and be a tailwind for M&A.

Potential Headwinds to Bank M&A Still Persist

Despite improving conditions and the optimism around bank M&A in 2025 noted above, some of the headwinds that have kept deal and consolidation levels below historical norms in the last ~2 years were also frequent discussion topics in sessions.  A few of the persistent headwinds include the following:

• Fair Value Marks and Pressure on Pro Forma Capital Ratios. Discounts on acquired assets, particularly long-term fixed rate loans and securities, pressure pro forma tangible capital ratios and may limit the number of viable and interested buyers and reduce buyers’ valuation of the seller for those that remain interested.
• Scarcity of Buyers. We talked about pent-up demand for M&A, but another aspect that came up in a few sessions is how consolidation over the years has reduced the number of potential buyers willing, able, and interested in acquiring a particular bank.  CUs and private equity have expanded the pool of potential buyers and helped offset this headwind to some extent, but some community banks still have a scarcity of buyers.
• Bid-Ask Spread Between Buyers and Sellers. The current environment is often conducive to a disconnect between buyers’ valuations and sellers’ expectations.  The improved earnings outlook for 2025 could widen this disconnect between buyers and sellers.
• Economic Uncertainty and Interest Rate Volatility.  Although we noted some favorable economic and interest rate trends for banks in recent months/quarters, a significant amount of economic uncertainty and interest rate volatility remains.  This could lead some would-be buyers and sellers to sit on the sidelines until greater certainty and less volatility emerge.
• Regulatory Uncertainty.  While hope exists for lighter regulations and a shorter timeline to closing, hope in and of itself is not a strategy and regulatory uncertainty still persists.  It will be interesting to see if that trend starts to surface in 2025.

Conclusion

In conclusion, the discussions and talking points across different sessions led me to think that “cautious optimism” for bank M&A is the best description of the overall theme and mood of AOBA 2025.  We look forward to discussing these issues further with clients in 2025 and monitoring how they evolve within the banking industry over the next year.

As always, Mercer Capital is available to discuss these trends as they relate to your financial institution, so feel free to call or email.  Mercer Capital can assist financial institution clients with various valuation needs as well as transaction advisory services.

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