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.

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.

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.

Not All MOEs Are Created Equal

In the December 2020 BankWatch, we provided our M&A outlook for 2021 and touched on themes that we believed would drive deal activity for the year.  Our view was that the need to reduce costs in the face of revenue … Continued

Mortgage Banking Lagniappe

2020 was a tough year for most of us. Schools and churches closed, sports were cancelled, and many lost their jobs. There were a select few, however, that thrived during 2020. Jeff Bezos and Elon Musk saw a meteoric rise in their personal net worth over the past 12 months. Mortgage bankers are another group showered with unexpected riches last year (and apparently this year).

Mortgage Banking Lagniappe (Part II)

The January Bank Watch provided an overview of the mortgage industry and its importance in boosting bank earnings in the current low-rate environment. As we discussed, mortgage volume is inversely correlated to interest rates and more volatile than net interest income. In this article, we discuss key considerations in valuing a mortgage company/subsidiary, including how the public markets price them.

Estate Planning When Bank Stocks Are Depressed

Maybe not for the best of reasons, the stars have aligned for bank investors who have significant interests in banks to undertake robust estate planning this year. Bank stock valuations are depressed as a result of the recession that developed from the COVID-19 policy responses, including a return to a zero interest rate policy that is now known as the effective lower bound. The result is severe compression in net interest margins

Four Reasons to Consider a Stock Repurchase Program

Amid many events brought on this year, many banks and their directors are evaluating strategic options and ways to create value for shareholders. While the Federal Reserve has prohibited the largest U.S. banks from share repurchases, the current environment has prompted many community banks to announce share buyback plans. In our view, there are four primary reasons that many community and regional banks are announcing or expanding share repurchase programs in the current environment. In this article, we expand on those four reasons.

Top Three Valuation Considerations for Credit Unions When Contemplating a Bank Acquisition

One emerging trend prior to the bank M&A slowdown in March 2020 was credit unions (“CUs”) acquiring small community banks. Based upon our experience of working on transactions where CUs acquire banks, we have compiled a list of three primary valuation considerations for CUs to consider when evaluating and hopefully ultimately closing successful acquisitions of bank targets.

Ernest Hemingway, Albert Camus, and Credit Risk Management

In the March 2020 Bank Watch, we provided our first impressions of the “reshaping landscape” created by the COVID-19 pandemic and its unfolding economic consequences.  This month, we expand upon the potential asset quality implications of the current environment. 

A Reshaping Landscape

March 2020 probably will prove to be among the most dramatic months for financial markets in US history.  Likewise, the fallout for banks may take a year or so to fully appreciate.  Nonetheless, in this issue of BankWatch, we offer our initial thoughts as it relates to the industry.