The urge to merge among community banks tempered somewhat in April as measured by the number of whole-bank M&A transactions. Ten such deals were inked in April, a decline relative to both the prior month (16) and the trailing 12-month average (18).
The moderation in April’s deal count is unsurprising given the recent emergence of several confounding variables: the war in Ukraine, inflation, recession probabilities, rate increases, and the decline in bank stock valuations have infused additional uncertainties into the dealmaking calculus.
An additional, accounting-driven variable has been hampering deal discussions of late: the decline in bond portfolio valuations due to the increase in rates, commonly reflected on the balance sheet as Accumulated Other Comprehensive Income (or Loss), or “AOCI”. Buyers contend that fair value accounting requires incorporating AOCI into deal pricing while sellers contend the impact on book value is ephemeral if and as bonds are eventually held to maturity. Both arguments are sound. Indeed, because buyer’s accrete AOCI back as acquired bonds mature post-deal, a buyer’s earnback period is conceivably no different whether a seller has negative AOCI or not, depending on the remaining duration of the seller’s bond portfolio.
That said, April’s tempered dealmaking is likely short-lived as the underlying forces driving the sustained arc of consolidation in the banking industry in recent years remain intact. Indeed, as the transitory factors noted above either self-resolve or as the marketplace adapts, as marketplaces do, bank merger activity will likely press on apace.
In terms of valuations, deal pricing actually appreciated in April: the median price-to-tangible book and price-to-earnings (LTM) in April – 1.7x and 16.9x, respectively – were higher than both the prior month and year-to-date medians (1.47x and 15.4x).
Finally, on April 22nd, LincolnWay Community Bank agreed to be acquired by CoVantage Credit Union while on April 29th, Legacy Bank was acquired by InBankshares, Corp (OTCQX: INBC), (party advised by Olsen Palmer indicated in bold).
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