Merger Arbitrage and Valuation

In this article, we step away from the daily drumbeat of questions about bank liquidity, PacWest and CRE loans to review valuation in the context of merger arbitrage. The TD-First Horizon terminated deal highlights why until a deal closes, there is uncertainty for a reason.

First Republic Bank & The Asymmetry of Banking

At September 30, 2018, First Republic Bank (FRC) reported total deposits of $75 billion, which expanded to about $175 billion at December 31, 2022. A deposit run reversed four years of deposit growth over several days in March, with deposits at March 31, 2023 regressing to the September 2018 level excluding $30 billion of funds deposited by large banks in March 2023. The shareholder value destruction also was crystallized. FRC’s market capitalization declined from $16 billion at September 30, 2018 to $1 billion at April 26, 2023. This month, we look at this stunning reversal in fortune.

What Are Bank Stocks Telling Investors?

In this article we look at the performance of publicly traded banks in what was the worst performance since the GFC other than the first quarter of 2020 with the NASDAQ Bank Index declining 21% for the quarter and 28% YTD through April 26. Analyst estimate revisions have been declining for nine months due to now declining NIMs from rising COFs. The market implies that further reductions are likely to occur. While we do not want to be accused of piling on, we also offer a flyover of beleaguered First Republic Bank (NYSE: FRC).

“I’m Not Broke. I’m Just Not Liquid.”

The Federal Reserve’s aggressive monetary policy tightening claimed its first banking industry casualties in March with the failures of Silicon Valley Bank and Signature Bank. In this month’s issue of Bank Watch, we explore the turmoil that enveloped some regional banks in March and its implications.

Themes from Bank Director’s 2023 Acquire or Be Acquired Conference

In this month’s article we discuss a few themes from the Bank Director’s 2023 Acquire or Be Acquired Conference along with some highlights of the sessions we attended. Over the years the conference has broadened its M&A offerings to focus on a combination of M&A, growth, and FinTech strategies.

2022 Bank Stock Performance Recap

In 2022, market performance for publicly-traded banks was more dispersed than in 2020 or 2021, when most every bank reported share price declines (2020) or increases (2021). In 2022, approximately 35% of public banks with assets under $10 billion reported share price gains. We examine some reasons for this diverging bank stock performance during 2022 in this article.

Bank M&A 2022 — Turbulence

The outlook for deal making in 2023 is challenged by significant interest rate marks, uncertain credit marks given a potential recession and soft real estate values, and the bear market for bank stocks that has depressed public market multiples. However, core deposits and excess liquidity of potential sellers is highly prized today given tight balance sheet liquidity and an inability to sell bonds to generate liquidity given sizable unrealized losses. A rebound in bank stocks and even a modest rally in the bond market that lessens interest rate marks could be the catalysts for an acceleration of activity in 2022 provided any recession is shallow.

Bond Portfolio Update

The U.S. bond market is undergoing its worst bear market in decades. In this article we provide commentary on bank bond portfolios after the third quarter 2022 earnings calls.

Community Bank Loan Portfolios Have Unrealized Losses Too

There has been a lot of discussion surrounding the impact of rising rates on bank bond portfolios and bank stocks as rising rates have resulted in large unrealized losses in bank bond portfolios. If subjected to mark-to-market accounting like the AFS securities portfolio, most bank loan portfolios would have sizable losses too given higher interest rates and wider credit spreads. In this article, we examine data from a survey of periodic loan portfolio valuations by Mercer Capital to observe recent trends in loan portfolio fair values.

How Are Tech-Forward Banks Performing?

Fintech partner banks have underperformed the broader banking sector in 2022 in a reversal of the trend in 2021. For some banks, fintech partnerships have accelerated growth and created new income streams. However, bank partners also face unique risks. We examine considerations for community banks pursuing a fintech partnership strategy in this month’s BankWatch.

2022 Core Deposit Intangibles Update

Mercer Capital previously published articles on core deposit trends in August 2020 during the early stages of the pandemic and again in August 2021. In those articles, we described a decreasing trend in core deposit intangible asset values. In response to the pandemic, the Fed cut rates effectively to zero, and the yield on the benchmark 10-year Treasury reached a record low. While many factors are pertinent to analyzing a deposit base, a significant driver of value is market interest rates. As shown below, we find ourselves in a very different interest rate environment today.

NIB Deposits Anesthetize Bond Pain

Bond portfolios saw a significant increase in unrealized losses during 2Q22; however, investors seem to be looking past the issue, focusing instead on expanding NIMs for banks with significant non-interest-bearing deposit funding.

Strategic Benefits of Stress Testing in an Uncertain Economic Environment

With both inflationary pressures and interest rate risk causing volatility in the current and forecasted economic environment, both banks and credit unions may find themselves contending with uncertainty surrounding their capital positions. Stress testing can be an important tool to utilize in order to better understand how your bank or credit union is positioned to withstand a severely adverse economic scenario. In this article, we give an overview of the stress testing process, as well as what strategic benefits it may provide to your financial institution.

Bond Pain and Perspective on Bank Valuations

For fixed income investors who were around, 1994 is known as the Great Bond Massacre when rates rose globally, including by about 300bps in the US. The bear market caused mayhem in part because of increased leverage used to finance the “carry trade.” Among the casualties were Orange County, California and Mexico. Banks managed through that bear market with some scrapes but no major casualties. So far the same can be said about banks and the fixed income bear market of 2022 even though the magnitude of price reductions is greater than 1994.

Specialty Finance Acquisitions

Bank acquisitions of specialty lenders picked up notably last year amid efforts to deploy excess liquidity and grow loans. The rationale for a bank acquiring a specialty lender is intuitive: higher yielding loans funded with cheap deposits. While these deals are not without risk, for the right buyer they can provide a new growth channel and help diversify revenue and earnings.

First Quarter 2022 Review: Volatility Resurfaces

In this month’s article we summarize key metrics we track regarding equities, fixed income, and commodity markets leading up to the Ukrainian invasion on February 23, 2022 and thereafter.

Net Interest Margin Trends and Expectations

As 2022 gets underway, the banking industry is hopeful that rate increases and loan growth stemming from continued economic recovery will deliver a boost to margins. This potential inflection point provides a good opportunity to review recent margin trends and examine how banks may be impacted by rising rates this year. Read more in this month’s issue of Bank Watch.

Bank M&A 2022 | Gaining Altitude

At this time last year, bank M&A could be described as “on the runway” as economic activity accelerated following the short, but deep recession in the spring. Next year, activity should gain altitude. Should and will are two different verbs, however.

Value Drivers in Flux

No one knows for sure; the future is always uncertain. For banks, two key variables have an outsized influence on earnings other than credit costs: loan demand and rates. In other industries the variables are called volume and price.

Fairness Opinions – Evaluating a Buyer’s Shares from the Seller’s Perspective

Fairness opinions are more than a 3 or 4 page letter that opines as to the fairness from a financial point of view of a contemplated transaction. A fairness opinion should be backed by a robust analysis of all the relevant factors considered in rendering the opinion, including an evaluation of the shares to be issued to the selling company’s shareholders. In this article, we present key questions that should be asked about the buyer’s shares.