Strong undercurrents in the banking industry are driving a decided buildup in M&A discussions. On the one hand, many of the otherwise-intended transactions that went dormant or were otherwise unpursued over the past two years due to volatile market conditions remain in the queue. On the other hand, stubbornly challenging operating conditions – particularly swelling regulatory oversight, flattening earnings, and persistent funding challenges – are increasingly nudging other bankers to the M&A marketplace, whether as a prospective acquirer, seller, or merger counter-party.
That said, the pace of M&A activity remains relatively tempered as evidenced by the total deal count in March after a somewhat busier first two months of the year. The disconnect between the growing tide of deal discussions and the moderated pace of deal announcements is explained, in large part, by the view held by many would-be sellers with appreciable levels of bond losses that a sale should be pursued at a later date only after interest rates decline and, in turn, at least a portion of bond losses are erased. While a valid thesis, a number of counterfactual questions merit consideration: What if interest rates do not actually decline much in the coming years? What if rates do decline but any incremental value from potential rate cuts (and recoveries in bond losses) is partially or wholly offset by a decline in M&A pricing due to weakened economic conditions that drove rate cuts? And what if the buyer list is thinner – or potentially even non-existent – by the time rates do decline appreciably and a sale is pursued?
On the branch deal front, such transactions remain few and far between, entirely due to a lack of seller supply not due to lack of acquirer demand. In fact, pricing for branch deals is at robust levels, an unsurprising finding given that deposit premia generally track the interest rate cycle. The takeaway: if you have one or more branch location(s) that you have considered divesting for strategic reasons, now would be a particularly good time to consider doing so.
Finally, Olsen Palmer advised Lafayette Bancorp, Inc. in its sale to Guaranty Capital Corp. which was completed on March 1st.
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