Bank Notes: October 2023

Activity in the bank M&A marketplace continued to prove fickle in September, echoing an up-and-down monthly pattern traced over the past year. After notching a relative high-water mark in August, September’s activity was weighed down by incumbent deal frictions including unrealized bond losses (AOCI), moribund stock valuations, and volatile interest rates. On AOCI, the bid-ask spread between sellers and buyers has somewhat narrowed over time as would-be dealmakers have gained a better understanding of the implications of AOCI (see Olsen Palmer’s recent webinar “AOCI in Bank M&A”, available for on-demand replay). On the pricing front, median multiples in 2023 year-to-date are down ~10-15% relative to 2022.

Paradoxically, branch M&A activity is also tracking toward a multi-year low (see p.2, top right) despite outsized acquirer demand driven by ballooning funding costs. A peeling back of the proverbial onion reveals the culprit is the lack of supply: few banks are inclined to pursue a sale of branches in light of the heightened importance of funding. As such, one notable strategic takeaway is that any bank contemplating the divestiture of branch(es) should consider taking advantage of current market conditions.

Back to AOCI, one musing often observed in the Board room of potential sellers is that a sale should be delayed until interest rates fall. Unfortunately, this conclusion may prove specious, for several reasons: the current federal funds target rate is not much above the long-term average; empirically, the duration in recent cycles from trough-to-trough rates has been as long as 8 years; and any sharp reduction in rates would likely be accompanied by a significant erosion in economic conditions and a corresponding decline in sale valuations. In other words, any improvement in franchise value derived from riding out AOCI could be partially or fully cancelled out by market conditions.

Finally, on September 20th Mississippi River Bank agreed to be acquired by Merchants & Marine Bank and on September 27th The Bank of Denver agreed to be acquired by MidWestOne Bank (party advised by Olsen Palmer indicated in bold).

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Bank Notes: September 2023

Bank M&A activity rebounded sharply in August 2023, fulfilling the leading indicators of a broader intensification of deal discussions discussed in this space last month and symbolically foreshadowed by two appreciably-sized transactions announced in late July. Specifically, 17 whole-bank M&A transactions were announced in August, almost double the monthly average deal count witnessed over the rest of 2023.

More broadly, this sharp uptick in announced deals lends greater conviction to the outlook that the stage is set for a period of elevated bank M&A activity over the coming quarters and years as the structural forces driving consolidation over the past decade or more remain stubbornly in place and, in fact, are being further fueled by the headwinds currently buffeting the banking industry. While deal count will likely evidence fits-and-starts on a monthly basis, over a longer arc, appreciable deal activity is anticipated especially if and as bank stock valuations (aka, acquisition currencies) stabilize over time.

On valuations, as previously discussed in this space, moderated growth trajectories and compressing margins having softened earnings projections and, by extension, tempered franchise values. This phenomenon is reflected in median transaction multiples which are off ~10-15% in 2023 relative to 2022. That said, the 2023 median is skewed by the disproportionate absence of pricing details from non-public deals and by the increasing prominence of low/no-premium merger-of-equals. In fact, in many already-announced private deals as well as in active, in-process transactions, we are seeing pricing that is more consistent with 2022 levels, especially in transactions involving sellers on the lower end of the asset size spectrum.

Finally, in unrelated transactions, on August 1st Wyoming Bank & Trust agreed to be acquired by Saville Capital Group; on August 28th OneSouth Bank agreed to be acquired by Five Star CU; and on August 31st Algonquin State Bank agreed to be acquired by Michigan State University FCU (party advised by Olsen Palmer indicated in bold).

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Bank Notes: August 2023

After a languid first half of the year, bank M&A re-started in July, at least symbolically, as reflected by twin deal headlines of two unrelated, sizeable transactions: 1) on July 25th, California-based Banc of California, Inc. and PacWest Bancorp announced an agreement to combine in an all-stock transaction valued at approximately $1.1 billion; and 2) also on July 25th, Virginia-based Atlantic Union Bankshares Corporation entered into a merger agreement to acquire American National Bankshares Inc. in an all-stock transaction valued at approximately $417 million.

While discussions have been gathering momentum “off camera” of late, several developments are clearing a path for a resumption in M&A: the dissipation of post-SVB fears of expansive failures; an ongoing rebound in bank stock valuations; a more-nuanced understanding of AOCI; and the mounting prospect of an economic soft landing. Balance sheet challenges, particularly tighter loan-to-deposit ratios and/or higher deposit costs, are also driving M&A interest from buyers and sellers alike. More broadly, due to mounting operating challenges, expanding regulatory obligations, and heightening competition, the banking   industry   has   landed   at   the   vanguard   of   an   era   of consolidation that may now have officially begun. While AOCI remains a friction point, buyers and sellers are better-understanding the issue, at least partially bridging the bid-ask spread. Ultimately, we anticipate elevated bank M&A activity over the coming quarters and years, especially if and as stock valuations continue to recover.

On valuations, while deal pricing has remained relatively resilient, moderated growth trajectories and compressed margins have softened earnings projections and, by extension, tempered intrinsic values. Based on publicly-available data, median deal multiples are off 10-15% in 2023 relative to 2022. However, the 2023 median is particularly skewed by the absence of pricing details from non-public deals. In many live-fire, in-process transactions, we are seeing pricing more consistent with 2022 levels.

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Bank Notes: July 2023

In this expanded 2023 Mid-Year Review edition of The M&A Monitor, we examine the full spectrum of bank M&A activity through the first half of 2023 (“1H 2023”) including deal volume; pricing and valuation trends; deal drivers; geographic differences; and the outlook for the remainder of the year. Additionally, we will be hosting a webinar on July 26th at 2:30pm ET to discuss current conditions in the bank M&A marketplace.

Without question, M&A in the banking industry was sluggish in 1H 2023. While the languid pace of dealmaking can be attributed to a variety of factors, there is one primary culprit: the fastest increase in the federal funds rate in more than 40 years and the ripple effects thereof.

Indeed, rate increases resulted in significant unrealized securities losses for many banks, creating a bid/ask spread between buyers and sellers. Separately, deposit costs accelerated sharply, if belatedly. The ensuing funding and margin challenges hindered dealmaking and swung the pendulum of optimal acquisition targets away from loan generators toward deposit-rich franchises. Meanwhile, the failures of Silicon Valley Bank et al. – which were fueled, in part, by the circumstances above – triggered a sharp selloff in bank stocks that hampered the dealmaking efforts of those would-be acquirors that use stock as deal currency.

Deal pricing proved somewhat resilient, if lower than in prior periods. Albeit derived from a limited sample and skewed by the absence of non-public deal terms, the median price-to-tangible book and price-to-earnings (LTM) multiples in 1H 2023 were 1.36x and 11.3x, respectively, 12% and 22% lower than in 1H 2022.

Looking ahead and with history as a guide, the banking industry now appears poised for a period of outsized consolidation as the underlying forces driving bank M&A in recent years – if not decades – all largely still hold and have, in fact, been exacerbated. Deal discussions will especially gain momentum as the endgame for the FOMC’s tightening cycle comes into focus, as clarity on the economic outlook emerges, and if and as bank stocks rebound to more-customary valuation levels.

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Bank Notes: June 2023

Dealmaking in the banking industry remained languid through May. M&A was already tempered before the failures of Silicon Valley Bank et al. (“SVB”), largely due to the advent of a bid-ask spread created by AOCI. SVB and the resulting fallout further slowed activity as bankers prioritized firming up liquidity plans and assuaging depositor, investor, and regulator concerns. The SVB-induced decline in bank stocks - initially down ~30-40% with ~20% since re-gained - threw a further wrench in the works.

However, more recently, discussions have been gathering momentum. As of press time, June’s month-to-date deal count has already surpassed May’s while our proprietary pipeline confirms M&A discussions have started to tick up meaningfully, especially as heightened funding and margin challenges are increasingly highlighting the relevance of operating scale. Notably, on most active sell-side engagements, we are seeing a critical mass of ready-and-willing would-be acquirers. Buyer interest on active sell-side engagements is generally as high as it was pre-SVB. In fact, unsurprisingly, those potential sellers with attractive deposit bases are seeing heightened interest from prospective buyers.

In terms of pricing, data from both actual multiples reported in May transactions (albeit from a limited sample size) and proprietary in-process transactions indicate that current market pricing is little changed relative to pre-SVB valuations.

Also of note, First Horizon and TD Bank announced on May 4th the mutual termination of their $13.4 billion pending merger, first entered into on February 28, 2022. The termination, attributed to the lack of regulatory approval of the merger and insufficient visibility on the timeline for securing such approval, is not reflective of the state of regulatory approvals for community bank M&A. Rather, for recent community bank M&A transactions, the regulatory approval process remains relatively straightforward as the average duration between the date of the merger agreement and the date of closing remains largely unchanged at approximately 5 months.

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Bank Notes: May 2023

The passage of time continues to bear out the thesis held by many bank industry observers that the recent bank failures are isolated events catalyzed by a host of variables idiosyncratic to each institution and largely absent, at least in lethal combination, in other institutions. However, the corresponding damage to bank valuations caused by the bank failures and related headlines remains afoot, though bank stocks appear to have bounced off their cyclical troughs. Accordingly, and unsurprisingly, activity in the bank M&A marketplace remains tempered though, notably, the number of such transactions announced in April marked an increase – not a decrease – relative to March.

On a longer-term basis, the banking industry is seemingly now positioned at the vanguard of an elevated period of M&A over the coming quarters and years especially as the factors driving banking consolidation over at least the past decade all largely still hold and, likely, have now been amplified.

On the pricing front, deal valuations were soft in April though this onion requires particularly-informed peeling: only 3 of April’s 8 transactions publicly revealed pricing and, in each case, the consideration form was primarily or entirely stock. As the counterparties in each transaction almost certainly had agreed to pricing terms before SVB and the ensuing nosedive in equity valuations, the softness in April’s median deal multiples reflects a limited dataset; the absence of pricing information from cash deals; and the decline in buyer currency valuations post-SVB. Put differently, April’s valuations are deceptively low and not reflective of current, arms-length M&A market pricing, a finding empirically confirmed by in-process transactions.

Despite certain headlines prognosticating a hard landing for the economy and/or storm clouds on the credit front, bank credit remains extremely benign with levels of non-performing assets (“NPAs”) at cyclical lows, if not all-time lows.

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Bank Notes: April 2023

The banking industry continues to stabilize in the wake of recent headline-grabbing bank failures as the so-called banking crisis increasingly appears to be largely an isolated event concerning an extremely limited pool of banking institutions. Nevertheless, underlying funding challenges – one ingredient among the medley of variables that contributed to recent failures – remain a challenge for many traditional community banks: balance sheet liquidity continues to tighten while, simultaneously, funding costs are rising steeply.

Amidst this backdrop, it should come as no surprise that bank merger activity has been particularly tempered of late. To wit, the aggregate count of bank M&A transactions in Q1 of 2023 was not dissimilar to that of Q2 of 2020, the quarter immediately following the mass onset of COVID. That said, we can report that, in recent weeks, bank merger discussions have become increasingly active. On the one hand, many deal discussions that were already underway pre-Silicon Valley Bank have continued ahead while, on the other hand, recent developments and emergent challenges are catalyzing a new crop of both buyers and sellers seeking to utilize M&A to solve for or otherwise mitigate stiffening operating challenges. As discussed in this space of late, on a longer-term basis, the banking industry is now almost certainly on a clearer path toward an elevated period of consolidation over the quarters and years ahead. Over the shorter-term, however, while overall deal discussions are continuing to rebound, a subset of transaction activity will remain tempered – namely, deals involving publicly-traded stock as acquisition currency – until bank stock valuations rebound off recent failure-induced troughs.

One area of the bank M&A market is seeing especially heightened interest, branch M&A transactions. Unsurprisingly, pricing for such transactions is up sharply given heightened demand for deposit funding. Accordingly, if your bank has one or more branch locations that are less strategically-relevant, current conditions are particularly opportunistic for considering divesting branch(es).

Finally, on March 31st, in separate, unrelated transactions, Catlin Bank was acquired by The Fisher National Bank; Pioneer State Bank was acquired by NuMark Credit Union; and Savanna-Thomson State Bank merged with Fidelity Bank (parties advised by Olsen Palmer indicated in bold).

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Bank Notes: March 2023

Recent material developments in the banking industry – namely 2 receiverships and 1 voluntary liquidation of not insignificantly-sized banking institutions – have infused a round of unwanted, knuckle-whitening volatility into the community banking industry. In the immediate aftermath of these events, as many were quick to draw fallacious parallels to the great financial crisis, bank stocks declined sharply while many / most / all bank executives have been hard at work assuaging depositor (and shareholder) concerns. For those who assiduously remember their Greek philosophy – as readers of this space surely do – such events are a blunt reminder of Heraclitus’ take on matters: the only true constant in the universe is change. Olsen Palmer’s interpretation is that these recent events, while headline-grabbing, appear to be otherwise largely benign from a broader perspective at least insofar as they are isolated events that were the result of a unique combination of variables that idiosyncratically manifested at a very limited number of specific banks.

While the policy implications of recent events are beyond the scope of this space, there will be reverberations in the banking industry over both the short- and long-run. For now, we can report bank M&A activity ticked up slightly in February – ahead of recent  events – based on transaction count, though the overall number of deal announcements in 2023 remains tempered. Though, anecdotally, underlying M&A discussions remain relatively active as prospective sellers and would-be buyers alike remain interested in potential transactions. On the valuation front, pricing seemingly largely held up in February as multiples on reported transactions were in-line with recent medians.

Going forward, the ripple effect of recent events will almost certainly keep M&A somewhat tempered over the immediate term. However, on a longer-term basis, in the wake of recent events, the banking industry is likely on an even clearer path toward an elevated period of consolidation in the quarters and years ahead due to a host of variables, not the least of which is the continuing tightening of balance sheet liquidity positions.

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Bank Notes: February 2023

Dealmaking in the banking industry continued to trace a capricious path in January 2023 on the heels of a hearty level of transaction announcements in December 2022.  While the count of whole-bank M&A transactions in January was relatively muted, our observations from the trenches – in other words, discussions with bank CEOs and Boards of Directors – indicate that M&A discussions are escalating, likely heralding a material surge of consolidation in the coming quarters and years.

Prospective sellers are reporting that their NIMs may be peaking, deposit funding is tightening, and loan growth may be moderating, all while quality talent remains difficult to hire and regulatory compliance and technology costs swell unflinchingly. As a result, interest in a sale in order to better-position shareholders for value creation and/or taking chips off the table is freshening. Conversely, would-be acquirers are reporting similar challenges and are seemingly increasingly interested in acquisitions as a means of realizing enhanced scale for both offensive and defensive purposes and, ultimately, as a means of driving balance sheet and earnings growth. While further clarity on several variables would benefit the bank M&A marketplace, the drumbeat of consolidation appears to be getting louder.

One idiosyncratic factor that is especially driving the buildup in both buyer appetites and seller interest is the sharp increase in funding costs over a very short time period. As the cost of interest-bearing deposits among community banks has increased substantially in recent months, with the median cost in Q4 2022 coming in at a level more than double that of Q1 2022, the nadir of the low-rate environment that is now squarely in the rearview mirror. Unfortunately, this sharp uptick in funding costs is coming at precisely the same time that liquidity is contracting and industrywide loan-to-deposit ratios are tightening. In other words, a double whammy of sorts.

We also note an interesting corollary in the marketplace for branch-level M&A. Whereas such activity was particularly low – if not all-but non-existent – two years ago due to lack of buyer demand (i.e., few institutions were interested in buying branches due to the COVID-era deposit surge), such activity currently is also particularly low but now due to lack of seller supply. In this era of escalating funding costs and tightening liquidity few, if any, institutions are interested in cleaving off much-needed, lower-cost deposits and their corresponding branches.

Finally, on December 9th, First Bank agreed to be acquired by Alabama One Credit Union; on December 19th, LincolnWay Community Bank was acquired by CoVantage Credit Union; on December 31st, Mechanics Bank was acquired by BankFirst Financial Services; on January 10th, Bank of Burlington was acquired by Farmers & Merchants Bank of Colby; and on January 20th, First Savanna Savings Bank was acquired by Citizens State Bank (party advised by Olsen Palmer indicated in bold).

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Bank Notes: 2022 Year-in-Review

Dealmaking in the banking industry tempered in 2022 relative to the prior year. The year began with a flurry of activity as January saw nearly 20 whole-bank M&A deals announced, continuing the brisk pace seen in 2021. However, deal activity began to moderate as a number of unknowns emerged including a war in Ukraine, hastening inflation, a meaningful shift in interest rates, macroeconomic uncertainty, and a pullback in equity valuations, bank and non-bank alike. Dealmaking was further complicated by the emergence of unrealized bond losses and the need by dealmakers to adapt accordingly. That said, while deal activity moderated in 2022 relative to 2021, the bank M&A marketplace otherwise remained alive and well as 165 whole-bank M&A transactions were announced over the course of the year. Now with the benefit of hindsight, the moderation in 2022 looks much less like an extinguishment of consolidation and much more like a deferral of deal activity into future quarters, as the underlying forces driving bank consolidation in recent years (if not decades) all largely still hold and, in fact, may now be even more stout.

Indeed, looking ahead, the banking industry appears to be poised for an extended period of consolidation. Stiff headwinds – NIM compression, slowing economic growth, tightening balance sheet liquidity, increased competition from both banks and non-banks alike, resilient inflation, regulatory obligations, etc. – are driving both elevated interest in selling (i.e., to avoid these challenges) and elevated acquirer appetites (i.e., to at least partially offset these challenges by achieving greater operating scale).

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