In recent years, the traditional bank acquisition model has been fairly straightforward: Bank A acquires Bank B, typically through an all-stock transaction or a combination of cash and stock. However, this pattern has started to evolve.

In late March, a long-pending acquisition involving two New Jersey community banks received regulatory approval, contingent upon the buyer raising additional capital. By late April, two more bank mergers and acquisitions (M&A) deals were similarly accompanied by capital raises.

Notably, UMB Financial and Fulton Financial both conducted capital raises around the time they announced their respective acquisitions last month. UMB, based in Kansas City, Missouri, raised a net $201.6 million, while Fulton, located in Lancaster, Pennsylvania, generated a net $273.5 million.

This additional capital aims to strengthen key regulatory ratios amidst industry-wide concerns about potential credit deterioration and the impact of prolonged high-interest rates on banks’ securities portfolios.

According to Mary Eyre, managing director of the M&A advisory practice at Cornerstone Advisors, other banks preparing for M&A transactions may follow this precedent. “They’re setting a precedent,” Eyre stated. “Other banks are seeing that and saying, ‘They’re doing that successfully. Why shouldn’t we?'”

The M&A activity in the banking sector has been sluggish over the past two years, with only 100 deals announced in 2023 and 157 in the previous year, according to S&P Global Market Intelligence. So far this year, 44 deals have been announced, tracking toward a 15-year low, as noted by Laurie Hevener Hunsicker, an analyst at Seaport Research. However, there has been an uptick in activity this spring, with 12 deals announced in April alone, including UMB’s proposed acquisition of Heartland Financial USA and Fulton’s purchase of the failed Republic First Bank from the FDIC.

The trend of capital raises linked to M&A deals is significant, partly because the funds are not necessarily being used for the acquisitions themselves. Eyre explained, “They’re not raising cash because they need it for the transaction. They’re doing it for other reasons.”

Both UMB and Fulton have stated that their capital raises were not regulatory requirements. Instead, they plan to use the proceeds for general corporate purposes. UMB, for instance, may contribute Tier 1 capital to its banking subsidiary, UMB Bank, to support its pending Heartland acquisition. This move provides the company with “ample dry powder and capital to fully support” the acquisition, according to UMB CEO Mariner Kemper.

Fulton’s capital raise aims to support “continued growth” across its entire footprint. Without this additional capital, Fulton’s ratios would have declined post-acquisition, hindering its growth potential. Frank Schiraldi, a Piper Sandler analyst, noted, “It’s a reasonable thing to do because you want to be well-positioned for growth opportunities and it makes sense as long as there is demand from investors.”

Provident Financial Services, another bank raising capital in connection with an M&A deal, generated $219.3 million in net proceeds. This capital raise was mandated by regulators for Provident to gain approval for its acquisition of Lakeland Bancorp. Provident must maintain a Tier 1 capital-to-total-assets leverage ratio of at least 8.5% and limit its commercial real estate loan portfolio as per regulatory requirements.

The motivation behind other banks raising capital remains uncertain. Some banks might be responding to subtle regulatory encouragement or aiming to improve their chances of deal approval. As Terry McEvoy, an analyst at Stephens Research, pointed out, “How much of this is behind the scenes? That’s a difficult question to answer.”