Bank M&A was already slowing down. Then the pandemic hit.

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By Ken McCarthy and Jim Dobbs

Mounting challenges — coronavirus fears, an emergency interest rate cut and chaotic financial markets — are forcing bankers to rethink their approach to consolidation.

What happens in coming months is anybody's guess.

While some industry experts assert that current events will eventually force more banks to sell, others are convinced that buyers and sellers will need time to assess pricing, scrutinize credit quality and adjust to fast-moving changes in the U.S. economy.

Buyers will likely "pump the brakes" on potential deals as they get a lay of the land, said Jim Tubbs, president and CEO of the $1.3 billion-asset State Bank of Cross Plains in Wisconsin. A big hurdle to cross will be the underlying strength of sellers' loan portfolios, he said.

"If this broader stuff drives us into a recession, what will it mean to asset quality?" Tubbs said. "In addition, if one of the currencies you're looking at is your own stock, what's this volatile market doing to the publicly traded currency?"

Volatility and uncertainty will create a much more challenging environment for bank M&A, said Bart Smith, a managing director and partner at Performance Trust Capital Partners. The global pandemic has stoked fears about a potential recession, with the potential outcome dependant largely on the length and magnitude of the coronavirus event, he said.

Bank consolidation was already off to a sluggish start before the stock market swooned on Monday. Activity through March 6 was down 24% from a year earlier, with 32 deals announced, according to data compiled by S&P Global Market Intelligence.

Read more: Complete coverage of the coronavirus impact

Only two deals — United Community Banks' pending purchase of Three Shores Bancorp. and Provident Financial Services' agreement to buy SB One Bancorp — have been announced this week.

Executives as those banks touted specific benefits that go beyond current uncertainty. United will enter new markets in Florida, while Provident will cross over a key regulatory asset threshold and address concerns about management succession.

Provident and SB One plan to work together, as much as they can, to avoid missteps prior to completing their deal.

SB One, for instance, must seek Provident's approval before signing off on any loans for more than $5 million, Christopher Martin, Provident’s chairman and CEO, said during a conference call to discuss the deal.

Tony Labozzetta, SB One's president and CEO, and his team will be involved in sessions to craft Provident's three-year strategic plan. Labozzetta is set to become Provident's president and chief operating officer.

More willing sellers are likely to emerge in coming months, some industry observers said.

“There are a number of bankers out there who are already fatigued,” said Alden McDonald, president and CEO of Liberty Bank in New Orleans. “With even lower rates, they're going to find it more difficult to manage spreads, and I'd think more will look at selling.”

Still, determining pricing might seem like a game of pin the tail on the donkey.

Phil Timyan, a private bank investor who once ran the Riggs Partners investment fund, noted that the premium for the United-Three Shores deal fell from 152% of the seller's tangible book value to 111% between March 2 and its announcement on March 9.

Difficulties reaching an accord on premiums could steer more banks to low-premium deals, likely involving similar-sized parties.

"I would expect the recent trend of MOEs to be the continued bank M&A framework of choice since sellers would be unwilling to sell at depressed multiples," said David Chiaverini, an analyst at Wedbush Securities. "In an MOE both companies’ shareholders would theoretically benefit from the upside in achieving cost synergies."

So in some regards M&A could be a waiting game to see if potential sellers are willing to accept lower premiums and buyers still feel comfortable about the underlying quality of targets' loan books.

Sellers "might think they should get out now while their last 12 months earnings look strong," Tubbs said.

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Community banking M&A Interest rates Coronavirus