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.
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.
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.
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.
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.
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.
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.
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.
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.
While the terms “fair market value” and “fair value” appear to be similar, they are very different concepts. When seeking a business valuation, it is critical to ensure that the appraisal is performed according to the relevant and proper standards. In this article we discuss these two analogous terms.
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.
In this month’s issue of Bank Watch we discuss four themes from the 2022 Acquire or Be Acquired Conference sponsored by Bank Director.
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.
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.
Against this backdrop of the potential for an active bank M&A environment in 2022, we consider the top three factors that, in our view, should be considered by bank acquirers to help make a successful bank acquisition.
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 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.
In the latest issue of Mercer Capital’s Bank Watch, we update our analysis of trends in CDI assets recorded in bank acquisitions completed through the second quarter of 2021.
Summary In December 2020, the Securities and Exchange Commission (“SEC”) adopted a new rule 2a-5 to update the regulatory framework around valuations of investments held by a registered investment company or business development company (“fund”). Boards of directors of funds … Continued
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
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).
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.
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
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.
