Bank M&A activity thawed somewhat in June as six whole-bank M&A transactions were announced. While appreciably below historical levels, this was a notable uptick vs. April and May.
Dealmaking remains slow as buyers and sellers alike await greater visibility particularly on credit and economic conditions. For better or worse, greater clarity should arrive in the coming months as initial loan deferral periods expire. Early readings indicate a significant portion of deferred loans are migrating back to paying-as-agreed status. Nevertheless, not until well into – or after – Q3 will the dust settle on visibility on loan deferrals. That said, at an industry-level, banks are well-positioned to bear the impact of any credit issues that may be looming: as mentioned in this space in recent months, the banking industry’s loss absorption capacity is 30% higher than it was before the financial crisis. Since this crisis began, reserves have been further-enhanced by many banks in Q1 and Q2, especially by CECL-adopters. Many of our clients have indicated they are allocating most or all PPP fee proceeds into reserves.
June also witnessed an apparent unicorn of sorts in the canon of bank M&A: a 3-bank merger-of-equals (“MOE”) in Texas. While they are commonly compelling on paper as a means of realizing significantly-greater operating scale, in reality a 2-way MOE is difficult enough to mutually-reconcile social issues to say nothing of reconciling such issues across 3 banks. In actuality, this deal is not quite a unicorn: the prior familiarity, overlapping managements, and shared investor bases of each of these institutions renders this transaction much less “arms-length” than it appears at first glance.
June also saw the first deal in three months that publicly- released pricing, though this sole transaction arguably offers little in the way of price discovery as transaction terms were seemingly negotiated and agreed to pre-COVID.
Finally, we note the acceleration of a trend profoundly impacting the banking industry: the declining number of branches. Banks are increasingly announcing once-temporary COVID-driven branch shutdowns becoming permanent in order to trim expenses in the face of shrinking margins, a trend accelerated by the increased adoption of digital banking. Indeed, Bank of America recently reported that almost 1/4th of its first-time digital users in April were seniors or boomers, one of the last segments to adopt digital banking en masse. Furthering this trend is the industry’s heightened cash liquidity over the last few months, lessening the need for branch-driven deposit gathering. In fact, as we noted in the Chart of the Month of the July edition of The M&A Monitor (Olsen Palmer’s monthly summary of M&A in the banking industry) the industry-wide loan-to-deposit ratio, which declined materially year-over-year in Q1, now stands at an almost 30-year low. [To subscribe to The M&A Monitor, please click here.]
The implications of these trends should certainly be factored into revised strategic plans. As one specific strategic option that merits heightened consideration of late, selling branch(es) may present an opportunity to reduce expenses, enhance the balance sheet, and/or realize a premium that augments capital.
Finally, on June 24th, we hosted a Webinar discussion of the impact of COVID on bank M&A and best practices across strategic options. For either the presentation and/or the audio replay accessed here.
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