Coronavirus crisis forces banks to scuttle merger plans
Fallout from the coronavirus outbreak has led several banks to rethink or rework deals announced before the pandemic hit.
At least four mergers have been terminated since COVID-19 was declared a global pandemic. Several have been restructured with lower prices, and others have been delayed as the banks decide how to proceed.
The latest nixed deal: the $3.3 billion pending merger between the $36 billion-asset Texas Capital in Dallas and the $16 billion-asset Independent Bank Group in McKinney, Texas.
More deals will likely fall through, even as coronavirus worries stymie new mergers, industry experts said. So it could be a while before any of the impacted banks find new partners.
“The uncertainty about the ultimate impact of the virus creates some pretty big risk with some deals, so you’re seeing a lot of questions around M&A and when — or whether — some deals will close,” said Stephen Scouten, an analyst at Piper Sandler.
Texas Capital-Independent was by far the industry's biggest deal to be called off due to COVID-19.
But the pandemic also ended the proposed mergers of Nicolet Bankshares in Green Bay, Wis., and Commerce Financial Holdings in West Bend, Wis.; Suncoast Credit Union in Tampa, Fla., and Apollo Bank Miami; and Beach Community Bank in Fort Walton Beach, Fla., and First City Bank of Florida in Fort Walton Beach.
The reasons vary, but all are connected by the pandemic’s impact on the economy.
Texas Capital reported a first-quarter loss that reflected a large loan-loss provision to cover two energy loans and borrowers’ potential struggles with the outbreak.
Texas Capital’s stock has decreased by 43% since late February, while Independent’s shares have fallen by 33%. Independent’s stock jumped by nearly 14% Monday on news of the deal’s demise.
“Due to the unprecedented impact of the COVID-19 pandemic, both companies’ boards … believe it is in the best interests of our employees, clients and all of our shareholders to focus on managing our business during this time,” Larry Helm, Texas Capital’s chairman, said in a press release announcing the termination.
A depressed stock price sunk the $3.7 billion-asset Nicolet’s pending acquisition of the $729 million-asset Commerce. Since the announcement of the deal in February, Nicolet’s shares have decreased by more than 30%.
Nicolet invoked a clause in the merger agreement that let it terminate the deal if its own shares traded below $62 at the time set for closing. Shares fell beneath that level in March, and amid continued economic uncertainty, the company determined it was unlikely the stock would rally before a scheduled midsummer closing.
While Texas Capital and Independent did not assess termination fees, Nicolet agreed to pay Commerce $500,000 and surrender the 4,000 shares of Commerce stock it owns to compensate for walking away.
“Deciding to terminate the deal versus buying into the unknown makes sense,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods.
The pandemic has also made it harder to secure shareholder and regulatory approval.
The $5 billion-asset Northfield Bancorp in Woodbridge, N.J., and the $378 million-asset VSB Bancorp in Staten Island, N.Y., delayed their special meetings because of complications tied to the pandemic.
The $11 billion-asset Suncoast and the $747 million-asset Apollo, when announcing a decision to terminate their merger, said regulatory approval for their deal was delayed by the outbreak.
First BanCorp in San Juan, Puerto Rico, also cited regulatory delays when it said its proposed buyout of Santander’s lending operations in Puerto Rico was unlikely to close on time.
“Yes, people are working but the pace of progress is different," Aurelio Alemán-Bermudez, First BanCorp’s president and CEO, said during the $12.6 billion-asset company's recent earnings call.
Regulators and bankers alike bankers are swamped as they try to get a read on the damage inflicted by the outbreak and what new dangers lurk, Scouten said, adding that strained resources could lead to more delays.
A number of banks have reworked the pricing of deals to take into account the economic downturn and continued uncertainty.
The deal value for Bank of Southern California’s pending purchase of CalWest Bancorp was lowered by 19%, to $25.9 million, on April 29.
The value of Three Rivers Federal Credit Union’s deal for West End Bank in Richmond, Ind., was reduced by nearly 5% to $41.3 million on May 11, according to S&P Global Market Intelligence. And New Bancorp in South Bend, Ind., agreed on May 1 to lower the price of its sale to Teachers Credit Union by 9%, to $19.4 million.
If there is an upside, it's that calling off a deal allows the banks involved to focus more attention on assisting clients and assessing their own financial circumstances, industry experts said.
“Most banks that we talk to are scrambling just to try to figure out how severe the fallout will be,” said Ron Shevlin, an analyst at Cornerstone Advisors.
Not all deals are being held up by the pandemic.
The $47 billion-asset First Horizon National in Memphis, Tenn., said last month that it was on track to complete its $3.9 billion merger with the $32 billion-asset Iberiabank in Lafayette, La., by June 30.
The $18.6 billion-asset CenterState in Winter Haven, Fla., said last week that its $6 billion merger with the $16.6 billion-asset South State in Columbia, S.C., had received all regulatory approvals, putting the companies on pace to complete their merger a month ahead of schedule.
The pandemic “won’t throw everything into disarray,” said Charles Wendel, president of Financial Institutions Consulting. “But we will see more M&A disruption and delay because of this thing.”