Bank Notes: March 2022

Bank merger activity moderated in February, at least in terms of deal count. Seasonality was a factor as a nearly identical pattern was seen in the past 3 years likely due to the knock-on effect of the holidays slowing deal discussions. In terms of total deal value, February’s was substantial at more than $14 billion, driven particularly by the First Horizon/TD transaction.

M&A discussions remain elevated driven by headwinds that are beginning to stack up. Excess deposits remain abundant, loan growth is sluggish, rate-driven competition is elevated, and margins are under pressure, though recent Fed actions may – or may not – offer some near-term relief. While 2020 and 2021 evidenced record or near-record earnings for many community banks, the “going is getting tougher” in 2022, particularly as the twin one-time earnings catalysts of PPP fees and elevated mortgage activity are largely in the rearview mirror. Indeed, PPP loans all but processed.

As in January, pricing multiples evidenced a bifurcated trajectory in February: the median price-to-tangible book (“P/B”) multiple increased while the median price to earnings (last twelve months, “P/E”) declined. On a year-to-date basis, the median P/B of 1.53x is exactly the same as the full-year 2021 median while the median P/E of 17.7x is an increase over the 2021 median of 15.3x. We attribute this increase in P/E more to lower “E” – i.e., lesser earnings – than to higher valuations.

Finally, on February 14th, Western States Bank and its parent company were acquired by First National Bank of Omaha; on February 15th, The Farmers Bank of Mt. Pulaski agreed to be acquired by Longview Capital Corporation; and on February 28th, Security Federal Bank was acquired by Alabama Credit Union (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains one of the top 3 bank M&A advisory firms nationwide according to S&P Global, based on the total number of whole-bank transactions advised upon over the last three years.

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Bank Notes: February 2022

Dealmaking picked up in January as eighteen whole-bank M&A transactions, continuing the elevated pace of deal activity the industry has seen for more than a year.

Pricing multiples evidenced a bifurcated trajectory in January relative to the prior month: the median price-to-tangible book multiple decreased somewhat while the median price to earnings (last twelve months) increased. Over a broader, multi-month timeline the glide path of valuations is smoother and largely unchanged relative to full-year 2021 medians. Our near-term outlook for deal pricing is flat: while we do not necessarily see valuations declining we see few catalysts for deal pricing to appreciate, especially not unless and until excess liquidity on most balance sheets is absorbed and downward pressure on margins eases.

On that note, a number of clients are increasingly questioning whether initial fed rate increases will have more blunt of a benefit to margins than initially hoped. The glut of liquidity has exacerbated loan competition such that a market-version of a game of chicken could break out as banks may hesitate to increase loan rates lest quality borrower prospects be lost to those willing to hold the line at pre-increase yields.

On the topic of excess liquidity, the pace of bank branch closures accelerated sharply in 2021. While not a surprising finding in light of both excess liquidity and the industry’s longer-term pivot away from brick-and-mortar, the scope of closures in 2021 is nonetheless a profound reminder of ongoing tectonic changes in the banking industry.

Finally, on January 3rd, BankFirst Capital Corporation acquired The Citizens Bank of Fayette and on January 31st, the parent of Lusk State Bank agreed to be acquired by Banner Capital Corporation (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains one of the top 3 bank M&A advisory firms nationwide according to S&P Global, based on the total number of whole-bank transactions advised upon over the last three years.

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Bank Notes: 2021 Year-in-Review

Without question, bank M&A activity is back: the number of deals announced in 2021 was nearly twice that of 2020 while the aggregate value of deals in 2021 – nearly $80 billion – marked a 15-year high. Deal pricing similarly rebounded off the COVID-induced trough as valuations are now largely back to pre-COVID levels: the median price-to-tangible book multiple in 2021 was 1.54x, just below the pre-COVID median of 1.58x seen in full-year 2019.

Looking ahead, it appears that an extended period of consolidation is upon us. Stiff headwinds – including NIM compression, slowing economic growth, excess balance sheet liquidity, increased competition from banks and non-banks alike, looming inflation, etc. – are driving elevated acquirer appetites. This acquisition demand is benefitting from conditions in the capital markets that are particularly cooperative for funding potential acquisitions. Conversely, on the seller side, insufficient scale, political and regulatory changes, increased compliance and technology costs, a desire for greater shareholder liquidity, general operating fatigue, and other idiosyncratic factors are individually and collectively driving more banks to pursue a sale, essentially ‘taking chips off the table’.

Finally, Olsen Palmer is pleased to report that we ended 2021 as one of the top 3 bank M&A advisors across the entire U.S. according to S&P Global, as ranked by the total number of whole-bank M&A transactions advised upon over the last three years.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

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Bank Notes: December 2021

Merger activity in the banking industry remained vibrant in November. Twenty whole-bank M&A transactions, representing approximately $2.5 billion in aggregate value, were announced over course of the month, keeping 2021 on-pace to see twice as many transactions as 2020.

A host of variables and market forces - some transient, some seemingly permanent – have converged to drive consolidation in 2021 and, likely, the years ahead. That said, while our outlook for the coming years entails elevated M&A activity, we note that industry-wide credit conditions are currently near-pristine and, somewhat counterintuitively, even improved in the aftermath of the onset of COVID. While we, like most, hope credit quality remains this sterling, we are reminded of the stubbornly cyclical nature of banking. Thus, an observation emerges that is especially applicable to potential sellers: current conditions are particularly favorable… but they may not remain so forever.

Transaction pricing was decidedly stable in November at least relative to the month prior: the median price-to-tangible book multiple of 1.57x was exactly identical to the median in October 2021. Over a broader period, the median price in full-year 2021 through November was 1.53x, just below the pre-COVID median notched in full-year 2019.

Finally, on November 22nd, Western States BanCorporation, Inc. agreed to be acquired by the parent of First National Bank of Omaha and on November 30th, Legacy Bank agreed to be acquired by InBankshares, Corp for total consideration of approximately $77.2 (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains one of the top 3 bank M&A advisory firms nationwide according to S&P Global, as ranked by the total number of whole-bank M&A transactions advised upon since 2019.

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Bank Notes: November 2021

While the fall season has brought change to clocks and leaves, the bank M&A marketplace remains unchanged. Almost 200 whole-bank M&A transactions have been entered into over the last twelve months, effectively twice as many as in calendar year 2020. Indeed, the aggregate bank M&A deal value in 2021 through just October has already reached the highest annual level in at least 15 years. 

The recovery in dealmaking that took root in the fall of 2020 sprouted in full through 2021 and, barring a cessation of the confluence of factors driving deal activity, appears to be accelerating into 2022. Indeed, anecdotal indications and formal earnings guidance alike suggest that net income in 2022 will be flat – or lower – relative to 2021, though ’21 numbers enjoyed the benefit of one-time earnings boosters (e.g., PPP, mortgage volume, reserve releases, etc.). Nonetheless, if past cycles are a guide, flat earnings trajectory may hasten the pace of M&A for would-be buyers and potential sellers alike.

Deal pricing proved stable in October as the median price-to-tangible book multiple of 1.55x was in-line with the prior month’s median and, indeed, almost identical to the full year-to-date median of 1.53x. As referenced in this space previously, for a variety of reasons, we see little catalyst for a material increase in deal pricing in the coming quarters (see above re: flattening earnings), especially as current pricing is largely identical to M&A valuations over the long-term: the median price-to-tangible book value for all transactions announced over the past 20 years is approximately 1.56x.

Finally, on October 1st, Mackinaw Valley Financial Services, Inc. was acquired by First Bancorp of Taylorville, Inc.; on October 8th, Landmark Community Bank was acquired by Simmons First National Corporation while on the same date  Tri-State Bank merged with Liberty Bank and Trust Company; and on October 13th, BankFirst Capital Corporation agreed to acquire The Citizens Bank of Fayette (party advised by Olsen Palmer indicated in bold). Olsen Palmer remains a top 3 bank M&A advisory firm nationwide according to S&P Global, as ranked by the total number of whole-bank M&A transactions advised upon   since 2019.

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Bank Notes: October 2021

The rebound in bank M&A activity on display through the first three quarters of 2021 relative to the COVID-induced trough in 2020 has been nothing short of substantial. Back in July the cumulative count of annual transactions in 2021 surpassed that of the entire year of 2020. If the current run rate of monthly announcements continues through the rest of the year, 2021 will see more than twice the number of deals of 2020.

A number of challenges continue to drive robust M&A activity. In addition to the “deposit glut” discussed in this space last month, elevated loan competition is also driving consolidation. Both anecdotal and empirical evidence points to excessive competition for quality credits, from banks and non-banks alike. Indeed, non-banks have been increasing their market share of C&I loans over time and now have all but the same share of the market as do banks.

Deal pricing in September was essentially stable month-over-month. The median price-to-tangible book multiple came in at 1.56x in September, slightly above the August median but virtually equal to the year-to-date median. The median price-to-earnings (last-twelve-months) multiple ticked up to 12.1x in the month of September, below the year-to-date median of 15.4x. That said, to refresh an illustrative note, median P/E multiples are temporarily low in optics only, a function of temporarily elevated earnings over the last twelve months (e.g., PPP fees, mortgage revenue, reserve releases, etc.).

Finally, on September 8th, Two Rivers Bank agreed to be acquired by First State Fremont, Inc.; on September 14th, University National Bank agreed to be acquired by Great American Bank; and on September 30th, Dupaco agreed to acquire Home Savings Bank (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 total number of transactions advised upon since 2019.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

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Bank Notes: September 2021

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.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

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Bank Notes: August 2021

Elevated M&A activity in the banking industry continued in July as 19 whole-bank M&A transactions were announced, the third-highest monthly total seen over the last 18 months.

While a host of factors are driving dealmaking on both sides of the table, one such variable is increasingly prominent – loan growth – especially as many buyers and sellers alike are either struggling to achieve appreciable loan growth; are beset with a glut of deposit liquidity; are feeling the pinch of compressing margins; or all of the above. Indeed,  with the exclusion of Paycheck Protection Program (“PPP”) loans, total loans across the industry grew just 0.2% year-over-year as of Q2 2021 though, notably, the 15 largest U.S. banks fared far better, posting year-over-year loan growth of 2.2%.

In terms of deal pricing, valuations held relatively steady in July as the median price-to-tangible book and price-to-earnings (LTM) multiples came in largely in-line with year-to-date medians.

That said, we reiterate an oft mentioned word of caution if and when using multiples to value a bank. While medians and averages are commonly quoted, we note that – by definition – there is a wide range of pricing on either side of the median. Indeed, in July’s deals, the price-to-tangible book paid ranged from as low as 1.15x to as high as 1.95x. While averages and medians can be helpful when reviewing broad trends, actual M&A pricing varies greatly and is dependent on a number of factors including, but not limited to, seller size and location, buyer availability (or scarcity), core post-deal earnings, pro forma cost savings, loan growth, etc.

Finally, on July 26th, Town-Country National Bank was acquired by United Bank while on July 30th Durand Bancorp, Inc. was acquired by High Point Financial Services, Inc. (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.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

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Bank Notes: 2021 Mid-Year Review

Without question, bank M&A activity is back: the number of deals announced in the first half of 2021 was nearly twice that of the first half of 2020. The acceleration in deal activity that began in the fall of 2020 is hastening: June of 2021 saw 26 whole-bank M&A deal announcements, the highest monthly deal count the industry has seen in almost 2 years. If the pace of deal announcements seen in June continues for the remainder of the year, 2021 would post a deal count that squarely rivals the frothy annual activity seen in the pre-COVID years.

Deal pricing has similarly rebounded off the COVID-induced trough recorded in 2020. Indeed, valuations are now largely back to pre-COVID levels: the median price-to-tangible book multiple through 1H 2021 was 1.53x, just below the pre-COVID median of 1.58x seen in full-year 2019.

Additionally in June, on June 3rd, Tri-State Bank of Memphis agreed to be acquired by Liberty Financial Services, Inc. while on June 7th, Landmark Community Bank agreed to be acquired by Simmons First National Corporation in a stock-and-cash deal valued at $146.3 million as of the date of the agreement (party advised by Olsen Palmer indicated in bold).

Olsen Palmer is pleased to report that we are ranked as one of the top 3 bank M&A advisors across the entire U.S. according to S&P Global, based on the number of whole-bank M&A transactions advised upon over the last twelve months, including both sell-side and buy-side engagements.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

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Bank Notes: June 2021

Bank M&A activity remained active in May. The average monthly deal count over the past 3 months suggests the total deal count in 2021 may be double that of 2020.

As discussed in this space frequently, the increasing pace of bank M&A is being driven by a wide variety of factors on both sides of the negotiating table, the most prominent of which is scale. While the quest for (or lack of) scale has been key a driver of dealmaking for at least a decade now, incremental scale is arguably that much more important in light of the current margin environment. As illustrated in this month’s Chart of the Month (lower right), loan yields across all categories have declined precipitously over the last two years, compressing margins for banks of all sizes.

Deal pricing freshened in May, at least nominally. The median price-to-tangible book multiple increased sharply in May, coming in at 1.73x relative to 1.56x in April.

That said, when it comes to using monthly median multiples as a proxy for valuation, the onion – as it were – requires further peeling: May’s transaction list includes one deal in which a seller with $3.5B in assets agreed to be acquired for 2.9x tangible book by a buyer whose stock was trading for above 3.0x tangible book value (i.e., the buyer uniquely had an ‘ability to pay’ such a multiple). But for this outlier transaction, the monthly median price-to-tangible book value in May would have been 1.32x.

On a year-to-date basis, the median price-to-tangible book value and median price-to-earnings multiple in 2021 was 1.46x and 17.6x, respectively, through May.

Finally, on May 4th, Cumberland Bancshares, Inc. agreed to be acquired by First Paragould Bankshares, Inc. while on May 14th DeWitt First Bankshares Corporation was acquired by Southern Bancorp, Inc., and on May 28th First Bank of Linden was acquired by Alabama ONE (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.

For assistance with answering questions or if we can provide additional information, please feel free to contact us.

Contact: info@olsenpalmer.com