Is North Carolina Bank Combo Sign of Returning Confidence?

A move by North Carolina’s Piedmont Financial to buy local rival Wake Forest could signal a thawing in the relative merger and acquisition freeze that has hit the US banking sector since March’s liquidity crisis.

Piedmont Financial Holding Company announced last week that it had agreed to acquire Wake Forest Bancshares, the parent company of Wake Forest Federal Savings and Loan Association, in a bid to create a “stronger franchise”.

The move comes after quarterly banking sector merger and acquisition activity heads for a three-year low.

With just four deals announced in May, data from S&P Global Market Intelligence showed that the second quarter total was likely to hit just 12 — the lowest since the same period in 2020 when coronavirus lockdowns were in place.

The Piedmont-Wake Forest deal is expected to close during the fourth quarter of this year, and is subject to regulatory and Wake Forest shareholder approval. The deal has been valued at $36.75 million.

Deal activity has been muted in the US banking sector since liquidity-driven banking collapses in March, most visibly characterized by the likes of Silicon Valley Bank.

In a bid to stabilize markets, federal regulators introduced more stringent M&A reviews in the wake of the failures, while both buyers and sellers have been more cautious amid the rising interest rate environment and its potential impact on balance sheet robustness.

While economies of scale can be beneficial in banking, even if mainly to overcome the increasing complexity and cost of regulatory compliance, inherent risks are involved.

One of the main factors dampening enthusiasm for deals could be rising credit risk in various areas, notably commercial real estate.

Worsening credit quality is a “significant disincentive” to bank mergers, as it makes both buyers and sellers more skittish about prospective partners, according to Factset.

Piedmont, founded in 1903, operates in North Carolina markets ranging from the Northwest Piedmont to the Triad and Lake Norman. The merger with Wake Forest, founded in 1922, will extend its deposit client base to include Wake Forest’s office located in the heart of the North Carolina town.