As in recent months, bank merger activity remained tempered in October though the bank M&A marketplace is by no means ‘closed for business’: 2022 is still on pace to notch as many as 175 transactions. That said, as market conditions clarify over time, we anticipate significant consolidation in the banking industry as the backlog of pent-up transactions combines with incremental transactions spurred by intensifying competitive challenges.
Deal valuations, on the other hand, remained steady in October as they have for most of 2022. The median price-to-tangible book and median price-to-earnings (LTM) multiples for 2022 year-to-date through October were 1.58x and 14.7x, respectively, little changed versus both the prior month and the prior year. Of note, however, October’s median price-to-tangible book multiple ticked up to 1.79x, suggesting valuations have increased. While this suggestion contains elements of veracity – bank stock valuations have rebounded off mid-summer lows allowing for improved M&A valuations – something of a mirage is also at play: the price-to-tangible book multiple increased in October partly because tangible book values decreased in October, due to the impact of bond valuations (i.e., AOCI). In other words, the uptick in October’s multiple may be more a case of the denominator declining than the numerator increasing.
Speaking of competitive challenges, we are particularly monitoring an emerging development – competition for deposit funding – as a triple-whammy seemingly looms: after bottoming out in Q1 2022, industrywide loan-to-deposit ratios have begun to increase spurring accelerating deposit competition. Meantime, deposit costs are rising as the delayed impact of FOMC rate increases has started to kick in. Unrealized losses in bond portfolios are further exacerbating funding challenges as selling bonds as a means of generating liquidity has been rendered increasingly infeasible. Savvy bank managers and directors would be well-advised to factor increasingly stout funding costs and competition into their strategic and M&A planning.
Finally, on October 1st, in separate unrelated transactions, Freedom Bancshares, Inc. was acquired by Landmark Bancorp, Inc.; BankFirst Capital Corporation acquired Sycamore Bank and its parent company; and First Bank of Alabama acquired 2 branches from Southern States Bank; while, on October 7th, Catlin Bank and its parent company agreed to be acquired by Fisher Bancorp, Inc. (party advised by Olsen Palmer indicated in bold).
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