Themes From the 2024 Acquire or Be Acquired Conference

The 2024 Acquire or Be Acquired conference saw discussions on traditional bank M&A, managing balance sheets, growing deposits, and leveraging technology. There was cautious optimism for an uptick in deal activity in the second half of the year. In this article we recap a few themes from this year’s conference.

The Tangled Path to Banking’s Garden of Earthly Delights

One of BankWatch’s favorite artists is the Dutch painter Hieronymus Bosch (1450-1516).   One triptych, The Garden of Earthly Delights, depicts a utopian scene in the middle panel adjacent to a hellscape in the right panel.  It serves as an apt metaphor for the banking industry’s stomach churning volatility in 2023. 

Bank M&A 2023

Bank and thrift M&A activity was subdued in 2023, with deal values reaching multi-decade lows. The challenging M&A environment was exemplified by the failed merger between Toronto-Dominion Bank and First Horizon in May, and continuation of the bear market that developed in 2022 for bank stocks and fixed income securities. Despite the overall slump, or perhaps because of it, M&A activity eventually will rebound, potentially explosively if the Fed follows through with rate cuts and the economy avoids a meaningful recession.

It’s Getting Real(ized)

In the third and fourth quarters of 2023, securities portfolio restructuring is a strategy that appears to be gaining momentum as more banks are opting to realize losses on underwater securities. In this month’s Bank Watch, we look at some of the recently announced transactions and discuss potential advantages and disadvantages of balance sheet repositioning.

Specialty Finance M&A

In this article we provide a summary of recent specialty finance transactions by bank acquirors. The article dives into the benefits, risks, and key considerations that bank buyers should examine when evaluating a specialty finance acquisition.

This Interest Rate Environment Done Got Old

During the third quarter of 2023, market expectations solidified that interest rates would remain elevated for some time, contrary to forecasts earlier in 2023 that the Federal Reserve would begin cutting its target Fed Funds rate later in 2023. In this article, we evaluate the effect of a higher-for-longer rate environment on net interest margins, growth strategies, securities portfolio management, credit quality, and M&A.

2023 Core Deposit Intangibles Update

Int his article we analyze the trend of higher core deposit intangible (CDI) asset valuations spurred by rising interest rates. We also explore mitigating factors to higher CDI values including an increase in average cost of funds, industry deposit attrition, and shifting deposit mix.

Bank Impairment Testing

Bank stocks have underperformed in the broad market since the beginning of the year and many currently trade below book value, which begs the question, is goodwill impaired? In this article, we discuss two common questions that arise for banks considering an impairment test: do I need an impairment test and how does it work?

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.

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.