Dealmaking activity increased slightly in May relative to the prior month. While the underlying forces driving elevated consolidation remain, certain “known unknowns” are, to some extent, weighing on deal talks including: what impact inflation (and Ukraine) is having on the economic outlook; the pace, trajectory, and timing of rate changes; and the recent pullback in public bank stock valuations. Idiosyncrasies of bond accounting are also a factor, as discussed in this space last month.
Separately, we note that branch M&A activity is especially slow with the number of such transactions tracking toward a 15-year low (see p.2 top right), an unsurprising outcome given the post-covid glut of deposits. Forward-thinking bankers may appreciate that current conditions offer a once in a lifetime opportunity to attractively acquire deposits that will become more scarce (and more expensive) later.
Valuations held their ground in May: the median price-to-tangible book and median price-to-earnings (LTM) were 1.7x and 15.9x, respectively, both higher than their year-to-date medians of 1.48x and 15.4x.
Speaking of multiples, a reminder that price-to-book (tangible) multiples reported here and elsewhere are calculated simply as the total purchase price divided by seller’s actual book value (tangible). We occasionally see in transactions examples of a prospective buyer making an offer enunciated as a multiple applied to so-called “core” capital of 8% plus dollar-for-dollar on any capital above 8%. While simple to follow, such a construct is materially flawed as using 8% as the basis for “core” capital is an antiquated holdover from a period decades ago when banks actually had (or were regulatorily permitted to have) 8% capital. The all-but-written regulatory capital threshold is at least 9% (at least in terms of leverage ratio) and has been for some time. In fact, the median tangible equity ratio for all banks is 9.02% and, for banks with assets below $1Billion, 9.13%. Accordingly, if a buyer is endeavoring to make an offer that is consistent with ‘market’ pricing, any multiple proposed should be applied to the seller’s actual capital not just the first 8% of capital (provided seller is not materially ‘over capitalized’). To do otherwise decreases both the accuracy and competitiveness of any offer made.
Finally, on May 23rd, Olsen Palmer advised First Bank of Alabama in its agreement to acquire 2 branches from Southern States Bank.
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