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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