Coronavirus takes toll on bank M&A

June 29, 2020 9:30 PM

Bank consolidation was chugging along until the coronavirus outbreak took hold.

Despite growing concerns about an economic slowdown, banks announced 257 deals in 2019, making it one of the busiest years for M&A since the financial crisis. The new year also showed promise, with 17 merger agreements reached in January.

Growing concerns about COVID-19 began to cut into activity the next month; deals have been few and far between ever since.

The number of deals announced in 2020, through June 28, fell 70% from a year earlier, with 40 transactions, according to data from Keefe, Bruyette & Woods and S&P Global Market Intelligence. Four of those deals have since been terminated.

“As in most areas of life, change has come with a vengeance to the bank M&A environment,” Christopher Olsen, a partner at the investment bank Olsen Palmer, wrote in a note to clients.

Industry experts, by and large, expect sluggish M&A to be the norm as long as the pandemic outbreak has everyone distracted on day-to-day operations.

The global pandemic is influencing more than just the pace of merger activity.

Banks participating in large deals have added coronavirus as a risk factor that could determine when — or if — they complete mergers. Some shareholder votes have been delayed, or moved to virtual formats.

Here’s a look at how coronavirus is altering M&A planning and what to expect over the rest of this year.

Mergers have been terminated

Several bank deals have been called off because of the pandemic and the recession it caused.

The biggest among them: The $35.9 billion-asset Texas Capital Bancshares in Dallas and the $15.6 billion-asset Independent Bank Group in McKinney, Texas, called off their planned $3.1 billion merger in May. The two split after the coronavirus hampered markets and the companies’ ability to meet the merger’s objectives. Notably, the crisis has roiled the energy sector in Texas.

Others have blamed fallout from the pandemic for nixed deals.

Citing “the meaningful impacts of COVID-19 on global markets and the economy,” Ally Financial and CardWorks recently agreed to terminate Ally's $2.7 billion deal to buy the lender.

The $183 billion-asset Ally, which is based in Detroit, agreed to buy CardWorks, a subprime credit card and consumer finance lender based in Woodbury, N.Y., in February. CardWorks is also the parent of the $4.1 billion-asset Merrick Bank.

It was the second-biggest bank acquisition deal announced in 2020.

Among prominent community bank deals, meanwhile, Nicolet Bankshares in Green Bay, Wis., and Commerce Financial Holdings in West Bend, Wis., nixed their planned $130 million merger.

The companies in May said their agreement had a clause that allowed either one of them to cancel the deal if the $3.7 billion-asset Nicolet’s stock price was below $62 a share at the time set for closing. The company’s shares had not traded above $60 in more than two months leading up to the termination.

Suncoast Credit Union’s deal to purchase of Apollo Bank in Miami, which would have been the biggest credit union-bank deal, was terminated when the sides struggled to get regulatory approval. They cited the pandemic as a complication.

A prolonged pandemic will increase the likelihood of more falling short of the finish line, industry observers have said.

Prices are falling

Buyers should expect to pay less as potential sellers grapplewith a long list of challenges.

The average premium for the first half of 2020 fell by 9% from a year earlier, to 145% of a seller’s tangible common equity.

Uncertainty over credit quality and the lingering impact of emergency interest rate cuts could further undercut boards’ expectations for hefty premiums.

Market volatility could also influence pricing.

Case in point: United Community Banks’ pending purchase of Three Shores Bancorp. By some estimates, the premium for the $180 million deal fell from 152% of Three Shores' tangible book value to 111% over the week prior to March 9 announcement.

Another deal announced in March — Provident Financial Services' agreement to buy SB One Bancorp — had a 121% premium that was significantly lower than the 2019 average.

It could also take some time for sellers to accept lower premiums, which could temper consolidation for the foreseeable future. Only five whole-bank deals were announced in the second quarter.

Banks add pandemic to risk disclosures

More banks have added the pandemic to a required list of issues that could delay or derail deals.

Pacific Premier Bancorp in Irvine, Calif.; First Horizon National in Memphis, Tenn.; and South State in Columbia, S.C.; all mentioned coronavirus as a risk factor in regulatory filings tied to mergers.

In each instance, the companies warned that the mergers could become more costly to complete or integrate, depending on what happens with the pandemic and the federal government’s response.

Two of those banks were able to close their deals in the second quarter. Pacific Premier recently bought Opus Bank in Irvine, and South State just completed its merger with CenterState Bank in Winter Haven, Fla.

First Horizon is on pace to merge with Iberiabank in Lafayette, La., on Wednesday.

Closings delayed

Some banks have had to delay their deals.

Flushing Financial in Uniondale, N.Y., became the first bank to announce a delayed closing date because of coronavirus — and it was not the last.

The $7 billion-asset Flushing agreed in late October to buy the $1 billion-asset Empire Bancorp in Islandia, N.Y., for $111.6 million. The companies pushed back the completion date for their deal from April 4 to later this summer. The deal is still pending.

The companies are based in New York, which was hammered in the initial weeks of the pandemic. They said in a press release disclosing the delay that the decision reflected “unprecedented operational challenges” from the outbreak.

Flushing and Empire also pointed to “severe instability and volatility in the U.S. financial and stock markets” and the disruption of “business, commerce, travel and normal daily activities in the New York metropolitan area.”

More delays followed, including the $47 billion-asset First Horizon’s plan to buy branches in Georgia, North Carolina and Virginia from Truist Financial. The branch deal is now on pace to close in the third quarter.

Other deals that have been delayed include the sale of Santander Bancorp’s Puerto Rican operations to First BanCorp, the merger of Virginia Bank Bankshares and Pinnacle Bankshares in Virginia and the combination of VSB Bancorp and Northfield Bancorp in New Jersey.

Voting goes virtual

Banks are taking their shareholder meetings online earlier to comply with social distancing guidelines and avoid delays.

Many had to amend their bylaws to allow for virtual votes.

United Bankshares in Charleston, W.Va., held a virtual meeting on April 2 so shareholders could approve its proposed $1.1 billion purchase of Carolina Financial in Charleston, S.C. While Carolina Financial kept a physical location, it offered shareholders an online option.

The deal closed in May as planned.

Southwest Georgia Financial in Moultrie, which agreed in December to be sold to First Bancshares in Hattiesburg, Miss., moved its March 27 meeting to the web. The company cited a statewide restriction limiting gatherings to no more than 10 people.

The sale was finalized in April.

M&A outlook remains bleak

Given uncertainty over the pandemic’s duration and severity, as well as its impact on credit quality, bank deals will likely be few and far between this year.

The economic toll of the health crisis — a recession and millions of lost jobs — makes it difficult for buyers to assesswould-be sellers' loan books, South State CEO John Corbett said in a June interview.

Though South State completed its $3.2 billion merger with CenterState, Corbett said he is unlikely to pursue another deal anytime soon — at least not until a vaccine is developed or Americans can prove they can go about day-to-day life without spreading the disease in large numbers.

That appears unlikely in the near term. The U.S. on June 24 reached a daily record number of virus cases, exceeding 45,500, according to Johns Hopkins University.

“We have solidly entered a cycle of depressed and defensive merger activity that may continue for several quarters even after the crisis has eased,” Laurie Havener Hunsicker, an analyst at Compass Point, wrote in a recent note to clients.

As the pandemic eventually lifts and a new normal emerges, industry observers suspect a large number of banks will try to find buyers — either because of management exhaustion or an inability to overcome hits endured during the recession.

"A lot of community banks will need to raise capital” to absorb loan losses, said Joseph Bonner, a former bank CEO and head of the consulting group Community Bank Advocates. “Those who can’t will need to look for merger partners."

Still, that wave of activity will likely have to wait until 2021, at the earliest.