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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