Bank Notes: October 2023

Activity in the bank M&A marketplace continued to prove fickle in September, echoing an up-and-down monthly pattern traced over the past year. After notching a relative high-water mark in August, September’s activity was weighed down by incumbent deal frictions including unrealized bond losses (AOCI), moribund stock valuations, and volatile interest rates. On AOCI, the bid-ask spread between sellers and buyers has somewhat narrowed over time as would-be dealmakers have gained a better understanding of the implications of AOCI (see Olsen Palmer’s recent webinar “AOCI in Bank M&A”, available for on-demand replay). On the pricing front, median multiples in 2023 year-to-date are down ~10-15% relative to 2022.

Paradoxically, branch M&A activity is also tracking toward a multi-year low (see p.2, top right) despite outsized acquirer demand driven by ballooning funding costs. A peeling back of the proverbial onion reveals the culprit is the lack of supply: few banks are inclined to pursue a sale of branches in light of the heightened importance of funding. As such, one notable strategic takeaway is that any bank contemplating the divestiture of branch(es) should consider taking advantage of current market conditions.

Back to AOCI, one musing often observed in the Board room of potential sellers is that a sale should be delayed until interest rates fall. Unfortunately, this conclusion may prove specious, for several reasons: the current federal funds target rate is not much above the long-term average; empirically, the duration in recent cycles from trough-to-trough rates has been as long as 8 years; and any sharp reduction in rates would likely be accompanied by a significant erosion in economic conditions and a corresponding decline in sale valuations. In other words, any improvement in franchise value derived from riding out AOCI could be partially or fully cancelled out by market conditions.

Finally, on September 20th Mississippi River Bank agreed to be acquired by Merchants & Marine Bank and on September 27th The Bank of Denver agreed to be acquired by MidWestOne Bank (party advised by Olsen Palmer indicated in bold).

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