Bank Notes: December 2022

Bank merger activity in November continued the up-and-down monthly pattern that has played out for most of 2022. As before, the bank M&A marketplace is by no means ‘closed for business’ as 2022 has seen more than 160 transactions announced to-date.

By contrast, transaction pricing continued its steady course through November. The median price-to-tangible book and median price-to-earnings (LTM) multiples for 2022 year-to-date through October were 1.57x and 15.1x, respectively, virtually unchanged relative to 2021. Monthly pricing in November was varied as only 3 of the transactions announced in the month publicly disclosed pricing with the price-to-tangible book value (“P/TBV”) on those transactions ranging from as high as 2.03x for a seller in North Carolina to as low as 0.97x for a California-based thrift with a mortgage-focused business model.

In fact, on a monthly median basis, pricing has generally traced an upward trajectory over the course of 2022, at least in terms of P/TBV. This is due, in large part, to the appreciation in the market multiples of publicly-traded banks particularly in Q4 2022.

From here, as market and economic conditions clarify over time, we anticipate significant consolidation in the banking industry in the coming quarters…and years. A backlog of pent-up already-contemplated transactions will play out. Additionally, we anticipate difficult competitive conditions will spur an elevation of both supply and demand: acquirer appetites will increase as a means of offsetting declining margins, tightening loan-to-deposit ratios, and flat-to-flagging loan growth. On the other hand, we suspect seller supply will swell for similar reasons along with the traditional catalysts of liquidity needs and CEO succession.

Finally, on November 9th, Savanna-Thomson State Bank agreed to merge with Fidelity Bank (party advised by Olsen Palmer indicated in bold).

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Bank Notes: November 2022

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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Bank Notes: October 2022

Merger activity in the banking industry tempered in September, continuing the arc of the up-and-down monthly patten that has played out for most of 2022. Based on the transaction count year-to-date through September 2022, the year is on pace to witness approximately 175 whole-bank M&A transactions, about 15% fewer than the total annual count seen in 2021.

While a host of factors are moderating deal activity – including changes in the interest rate environment, inflation, economic and geopolitical uncertainty, etc. – one otherwise-benign factor is by far the biggest culprit in cooling the bank M&A marketplace: fair value accounting as it relates to “Accumulated Other Comprehensive Income” (AOCI for short) or unrealized losses in seller bond portfolios. While such losses remain unrealized in a going concern scenario, in a sale scenario unrealized losses become realized. Notably, these losses are not necessarily equivalent to a dollar-for-dollar impact on deal price, however, as an acquirer can either hold the acquired bonds to maturity and recapture the AOCI losses over time or an acquirer can rebalance seller bond portfolios post-deal, picking up as much as 200 to 300 basis points (or more) in incremental yield in the process. Similarly, the impact of AOCI on regulatory capital, by definition, is effectively non-existent. However, the complexity of AOCI and the resulting accounting implications have indeed slowed dealmaking as buyers and sellers alike gain a better understanding of the accounting implications of AOCI in an M&A context.

Deal pricing, on the other hand, remains steady. The median price-to-tangible book and median price-to-earnings (LTM) multiples came in at 1.58x and 15.1x, respectively, in September, all but identical to the medians in both 2022 year-to-date and full-year 2021.

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Bank Notes: September 2022

Thirteen whole-bank M&A transactions were announced across the U.S. in August putting the total deal count for full-year 2022 on track to fall in the neighborhood of 175. This tally would be lower than the prior year’s, an unsurprising outcome given the economic and geopolitical variables that emerged in early 2022 and tempered dealmaking. That said, deal discussions appear to be freshening, especially as a bit of clarity materializes…or at least a decline in volatility.

Deal pricing, on the other hand, has been anything but volatile. The median price-to-tangible book and median price-to-earnings (LTM) multiples came in at 1.56x and 13.5x, respectively, in August and 1.53x and 15.2x, respectively, on a year-to-date basis, all but identical to the medians in 2021. However, as expressed in this space often, caution is warranted if using median multiples to evaluate about a particular bank’s value. Indeed, price-to-tangible book value multiples in August spanned from as low as 1.3x to as high as 2.3x while price-to-earnings multiples similarly spanned a chasm as low as 8x to as high as 24x.

From here, a question is begged: what is the outlook for bank M&A valuation multiples going forward? Crystal balls are especially opaque, particularly as questions linger as to the depth and breadth of potential Fed actions and the resulting cooperation (or lack thereof) by the economy. That said, we suspect the recent mini-recovery in bank net interest margins may be short-lived. Funding costs appear to have bottomed out in Q1 2022 and started to tick up in Q2. If accurate, there may be little catalyst for M&A valuations to increase in the coming quarters especially given broader unknowns.

Finally, on August 8th, The Farmers Bank of Mt. Pulaski was acquired by Longview Capital Corporation; on August 22nd, Boundary Waters Bank agreed to be acquired by Highland Bank; on August 23rd, Bank of Burlington agreed to be acquired by Farmers & Merchants Bank of Colby; and on August 31st, Mechanics Bank agreed to be acquired by BankFirst Financial Services (party advised by Olsen Palmer indicated in bold).

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Bank Notes: August 2022

The bank M&A marketplace evaded the summer doldrums in July as 17 whole-bank transactions were announced over the course of the month, continuing an arc of freshening dealmaking in recent months. Indeed, while bank merger activity tempered earlier in the year in the wake of budding macroeconomic and geopolitical volatility, an uptick in announcements over the last two months suggests the M&A market may be thawing. If July’s deal pace holds through the rest of the year, the total deal count tally in 2022 would land just behind that of 2021.

Similarly, deal pricing freshened somewhat in July relative to the prior month. The median price-to-tangible book and median price-to-earnings (LTM) multiples both ticked up in July, to 1.7x and 14.7x, respectively. That said, caution is necessarily warranted if extrapolating July’s medians as a true measure of market levels as only 4 of the month’s 17 transactions publicly disclosed pricing with the P/TBV ranging from 1.3x to 2.1x (i.e., a measure of skew is likely at play). Of particular note, the median deal multiples in 2022 year-to-date through July are almost exactly identical to the full-year 2021 medians.

Dealmaking continues to largely be the province of community-sized banks. The median seller in July had assets of just over $200 million and no seller was larger than $1.8 billion. On the other side of the equation, the median buyer in July had assets of $1.1 billion and no buyer in July had assets greater than $18 billion

Finally, on July 14th, Olsen Palmer advised First Savanna Savings Bank in its agreement to be acquired by Citizens State Bank. This is the 40th announced or completed community bank M&A transaction Olsen Palmer has advised upon since 2020.

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Bank Notes: 2022 Mid-Year Review

Dealmaking in the banking industry tempered somewhat in 1H 2022. The year began with a flurry of activity as January saw 20 whole-bank M&A deals announced, continuing the brisk pace seen in 2021. Since, however, deal activity moderated as a number of potential storm clouds appeared on the horizon including a war in Ukraine, hastening inflation, a meaningful shift in the interest rate outlook, and a pullback in equity valuations, bank and non-bank alike. That said, we view this moderation as less of an extinguishment of consolidation and more of 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 may even have been exacerbated by ongoing developments. If and as market conditions become less volatile and as the outlook becomes more visible in the coming quarters, we anticipate a significant uptick in deal announcements.

Deal pricing, on the other hand, has remained substantially more stable. In fact, the median price-to-tangible book and price-to-earnings (LTM) multiples for all transactions in 1H 2022 was 1.52x and 15.4x, respectively, all-but-identical to the medians of 1.54x and 15.3x seen in full-year 2021.

Over the course of 1H 2022, Olsen Palmer advised on a total of 13 announced or completed bank M&A transactions. Olsen Palmer remains one of the top 3-ranked community bank M&A advisors nationwide based on the number of whole-bank M&A transactions advised upon over the past 3 years, according to S&P Global. Individually, the firm’s Managing Partner Christopher Olsen has been the #1 ranked advisor nationwide since 2020.

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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Bank Notes: June 2022

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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Bank Notes: May 2022

The urge to merge among community banks tempered somewhat in April as measured by the number of whole-bank M&A transactions. Ten such deals were inked in April, a decline relative to both the prior month (16) and the trailing 12-month average (18).

The moderation in April’s deal count is unsurprising given the recent emergence of several confounding variables: the war in Ukraine, inflation, recession probabilities, rate increases, and the decline in bank stock valuations have infused additional uncertainties into the dealmaking calculus.

An additional, accounting-driven variable has been hampering deal discussions of late: the decline in bond portfolio valuations due to the increase in rates, commonly reflected on the balance sheet as Accumulated Other Comprehensive Income (or Loss), or “AOCI”. Buyers contend that fair value accounting requires incorporating AOCI into deal pricing while sellers contend the impact on book value is ephemeral if and as bonds are eventually held to maturity. Both arguments are sound. Indeed, because buyer’s accrete AOCI back as acquired bonds mature post-deal, a buyer’s earnback period is conceivably no different whether a seller has negative AOCI or not, depending on the remaining duration of the seller’s bond portfolio.

That said, April’s tempered dealmaking is likely short-lived as the underlying forces driving the sustained arc of consolidation in the banking industry in recent years remain intact. Indeed, as the transitory factors noted above either self-resolve or as the marketplace adapts, as marketplaces do, bank merger activity will likely press on apace.

In terms of valuations, deal pricing actually appreciated in April: the median price-to-tangible book and price-to-earnings (LTM) in April – 1.7x and 16.9x, respectively – were higher than both the prior month and year-to-date medians (1.47x and 15.4x).

Finally, on April 22nd, LincolnWay Community Bank agreed to be acquired by CoVantage Credit Union while on April 29th, Legacy Bank was acquired by InBankshares, Corp (OTCQX: INBC), (party advised by Olsen Palmer indicated in bold).

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Bank Notes: April 2022

Merger activity in the banking industry freshened in March while, more broadly, dealmaking is up substantially on a quarterly basis: the number of whole-bank mergers in Q1 2022 was almost 50% higher than the count in Q1 2021. As narrated often in this space, the quest for – or absence of – operating scale as a means of offsetting stiff headwinds remains a key driver of bank M&A activity.

In terms of pricing, median deal valuations were relatively stable in March: both the median price-to-tangible book and price-to-earnings (LTM) – 1.47x and 15.4x, respectively – mirrored year-to-date medians which, themselves, are largely similar to the full-year medians seen in 2021. In other words, pricing levels have been relatively stable.

Geographically, the long-term arc of bank consolidation continues to be a nationwide phenomenon. To be sure, a map of those banks agreeing to sell in March 2022 spans from Massachusetts to Arizona. The Midwest featured prominently in March as half of sellers hailed from this region. While this is reflective of several trends, the primary culprit is simple math: almost half of U.S. banks are chartered in the broader Midwest.

Recent chatter out of DC from the legislative and regulatory/executive branches is casting a brighter spotlight on the regulatory review process for bank mergers. Headlines addressing the same have prompted clients to inquire about the impact this has had – or might have – on the timing of the regulatory approval process for a potential M&A transaction. We do not anticipate much, if any, impact on community bank M&A transactions as the political chatter is focused on those institutions with assets above $100 billion. To wit, the median duration between transaction execution to transaction closing for all transactions closed thus far in 2022 is approximately 5 months, not materially different from prior years.

Finally, Olsen Palmer remains one of the top 3 community bank M&A advisors nationwide based on the number of whole-bank M&A transactions we have advised upon across the U.S. over the past three years, according to S&P Global.

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Bank Notes: March 2022

Bank merger activity moderated in February, at least in terms of deal count. Seasonality was a factor as a nearly identical pattern was seen in the past 3 years likely due to the knock-on effect of the holidays slowing deal discussions. In terms of total deal value, February’s was substantial at more than $14 billion, driven particularly by the First Horizon/TD transaction.

M&A discussions remain elevated driven by headwinds that are beginning to stack up. Excess deposits remain abundant, loan growth is sluggish, rate-driven competition is elevated, and margins are under pressure, though recent Fed actions may – or may not – offer some near-term relief. While 2020 and 2021 evidenced record or near-record earnings for many community banks, the “going is getting tougher” in 2022, particularly as the twin one-time earnings catalysts of PPP fees and elevated mortgage activity are largely in the rearview mirror. Indeed, PPP loans all but processed.

As in January, pricing multiples evidenced a bifurcated trajectory in February: the median price-to-tangible book (“P/B”) multiple increased while the median price to earnings (last twelve months, “P/E”) declined. On a year-to-date basis, the median P/B of 1.53x is exactly the same as the full-year 2021 median while the median P/E of 17.7x is an increase over the 2021 median of 15.3x. We attribute this increase in P/E more to lower “E” – i.e., lesser earnings – than to higher valuations.

Finally, on February 14th, Western States Bank and its parent company were acquired by First National Bank of Omaha; on February 15th, The Farmers Bank of Mt. Pulaski agreed to be acquired by Longview Capital Corporation; and on February 28th, Security Federal Bank was acquired by Alabama Credit Union (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains one of the top 3 bank M&A advisory firms nationwide according to S&P Global, based on the total number of whole-bank transactions advised upon over the last three years.

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