Merger activity in the banking sector was vigorous in August as 22 whole-bank M&A transactions were announced during the month, well ahead of the 12-month trailing average of 16 such transactions. In fact, the deal count in August 2021 was almost 3 times that of August 2020. A number of variables and challenges are individually and collectively driving elevated deal activity not the least of which is a glut of deposit funding. Indeed, the industry-wide loan-to-deposit ratio is under 60%, the lowest industry level in almost two decades. This imbalance is squeezing margins while also spurring stiffer competition for good credits which in turn drives down loan yields, further compressing margins in a not-so-virtuous cycle.
Deal pricing was, on its face, bifurcated in August: the median price-to-tangible book multiple came in at 1.48x slightly lower than the prior month but largely in-line with the year-to-date median. Conversely, August posted a median price-to-earnings (last-twelve-months) multiple of 10.4x, a material decline relative to the month prior and quite a bit lower than the year-to-date median of 16.4x. Solace can be taken in the fact that this decline is largely optical only, as it is a function of significantly elevated earnings over the last twelve months due to one-time phenomenon including PPP fees, mortgage revenue, and/or reserve releases. Put differently, what appears to be a decline in P/E multiples month-over-month is a mirage, more a function of artificially elevated earnings (i.e., a swollen “E” in the denominator) than it is indicative of any true broader pricing trends. (See also: “The flaws in and limitations of using multiples” as discussed in this space frequently over time).
Finally, on August 25th, the parent company of First Capital Bank agreed to be acquired by Planters Holding Company while on August 4th, Security Federal Bank agreed to be acquired by Alabama Credit Union (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains one of the top 3 bank M&A advisors nationwide according to S&P Global, based on the number of transactions advised upon over the last twelve months.
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