Bank merger activity remained relatively tepid in October as five whole-bank transactions were announced bringing the annual tally to just under 90. Dealmaking remains hampered by the residual impacts of the rapid pace of the FOMC’s rate tightening and the knock-on impacts thereof as well as by diminished bank stock valuations. Deal pricing has been equally tempered as the median price-to-tangible book value multiple is approximately 1.27x year-to-date through October.
Branch transactions have been languid as well despite particularly elevated pricing (see chart at top right of page 2), a phenomenon attributed to few sellers wiling to divest of highly-coveted deposits. Indeed, deposits will likely remain in focus given the upward momentum of funding costs. As illustrated in this month’s Chart of the Month (lower right), the long-term, historical spread between the federal funds target rate when at similar levels previously and the median bank cost of funds is approximately 200bp, implying funding costs may appreciate another 200bp based on a target rate of 5.5%.
Behind the scenes, we have been observing for several months now a proliferating interest in M&A from both prospective sellers and would-be buyers alike, notwithstanding extant deal frictions. Looking ahead, elevated consolidation is likely in the coming periods fueled by the heightened import of operating scale. Activity will be furthered by a catch-up of sorts related to transactions that were otherwise intended but were tabled until dealmaking conditions improved.
Accordingly, now is an appropriate window to be updating and re-calibrating your bank’s strategic direction whether as a potential seller, a would-be acquirer, a prospective merger counterparty, or in remaining independent. To facilitate such efforts, we have a host of resources available to help ask and answer key strategic questions including a broader update on the M&A market, a customized review of various M&A alternatives, and a framework for determining appropriate transaction valuations.
Finally, on October 18th Oxford University Bank agreed to be acquired by Guaranty Bank and in a separate, unrelated transaction, on October 20th SENB Bank was acquired by CBI Bank & Trust (party advised by Olsen Palmer indicated in bold).
For assistance with answering questions or if we can provide additional information, please feel free to contact us.
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