U.S. banks are increasingly looking to M&A to solve funding pressures, making targets with low-cost core deposit bases more valuable than ever, according to industry experts.
The median tangible book premium to core deposits fell sharply in 2020 after the M&A market cooled during the pandemic. While premiums have risen since then, they still remain well below pre-pandemic levels, according to S&P Global Market Intelligence data. But that metric may rise to historic levels again in 2023 as banks increasingly turn to M&A for low-cost, core deposits, according to industry experts.
"The arms race is officially afoot relative to funding," said Matt Resch, managing director and co-head of M&A and capital markets with PNC Financial Institutions Advisory Group. "Banks with really strong deposit franchises are much more valuable on a relative basis as buyers are looking for liquidity and funding."
High value for banks with low-cost deposits
As the record level of deposits from the pandemic increasingly abate and the cost of deposits continues to climb due to rising interest rates, sellers with low-cost deposits bases are more valuable than ever, investment bankers and analysts told S&P Global Market Intelligence in interviews.
"Strong deposit franchises are worth as much as they've been in over a decade," said Will Brackett, a managing director of investment banking at Performance Trust Capital Partners. "The value increase is really, really there if you got a company that has strong core funding that has been able to hold deposit rates with discipline."
The premium to core deposits metric is becoming more important in deal discussions, according to Resch.
"For banks with great deposit franchises, sticky low cost deposits and lower deposit betas, they can capture handsome relative premiums from banks with higher loan-to-deposit ratios that need funding," he said. "We are starting to see the premium to core deposits metric come back en-vogue when looking at deals."
As such, now may be a good time for banks interested in eventually selling to gauge interest, said Bill Jones, senior vice president of Community Capital Advisors.
But while higher valuations are good news for potential sellers, the bad news for buyers is that they will face increased competition for those banks, he said.
"There's going to be higher competition for the seasoned existing assets owned by banks," Jones said. "That means the price for M&A and for acquiring high-quality banks is going to increase."
One alternative for buyers looking for attractive core deposit bases at a reasonable price could be small, rural or family-owned banks, according to Hovde analyst Ben Gerlinger. Many of those banks have attractive, low-cost deposit bases, but face limited growth prospects, so a buyer could pay a lower premium, Gerlinger said.
Byline acquires Inland
One recent deposit-driven deal is Byline Bancorp Inc.'s acquisition of
"We are a very deposit-focused and deposit-oriented institution, so having the opportunity to acquire deposits at what we think here is a very, very reasonable price was attractive," Paracchini said in an interview.
Though the deal was motivated by Inland's deposit base, it held a tangible book premium to core deposits of just 3.4%, or less than half of the industry median of 6.9%, according to S&P Global Market Intelligence data. The deal also ranked 12th among the top 20 U.S. bank deals with the lowest tangible book premium to core deposits announced this year.
For Inland Bancorp, however, price to tangible book value and price to last-12-month earnings was more important than the deposit premium and made the deal with Byline attractive from their perspective, Inland Bank and Trust CEO Peter Stickler said.
"It's about 24x [LTM earnings], which is pretty much the highest that we've seen in the Chicago market," Stickler said.
With the addition of Inland deposits, Byline will improve its loan-to-deposit ratio and continue its outsized loan growth, said Stephens analyst Terry McEvoy in an interview.
Further, competition surrounding deposit costs is expected to only rise from here, and "Byline's actually getting in front of it as best they can in a selective manner" with the deal, Hovde's Gerlinger said.