Pandemic threatens to stifle bank M&A for another year

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Bank consolidation remains suppressed — and could remain that way for at least another year — as bankers grapple with valuations and credit exposure.

The industry is on pace to have just 98 deals in 2020, representing a potential 62% decrease from a year earlier and the lowest annual tally in more than two decades, based on data compiled by S&P Global Market Intelligence. And at least four of the bank mergers announced this year have already been terminated.

Industry observers are convinced consolidation will eventually regain momentum, though it will take time.

It could take another three to six months for banks to fully understand whether government stimulus efforts were enough to get consumer and commercial clients “to the other side of this crisis,” Laurie Hunsicker, an analyst at Compass Point, wrote in a Tuesday note to clients.

Bankers, however, say they are confident activity will resume in earnest once visibility improves. They note that the main driver for M&A — creating efficiencies by building scale — has greater importance as banks grapple with a sluggish economy and shifting customer preferences fueled by the coronavirus pandemic.

While uncertainty “is impeding us today,” Billy Carroll, president and CEO of SmartFinancial in Knoxville, Tenn., said during a Tuesday webinar hosted by Olsen Palmer, it “won’t take that long” before conditions improve and banks can revisit acquisitions. The pandemic forced the $3.3 billion-asset SmartFinancial, which completed its last acquisition in early March, to temporarily shelve its M&A ambitions.

Banks will warm up to acquisitions once they get a clearer read of one another’s balance sheets, industry observers said.

“We think that, once we can get even more clarity on credit as we get a couple quarters past the worst of this pandemic, we’ll see more of an increase next year,” said Brian Martin, an analyst at Janney Montgomery Scott.

Most activity this year has involved smaller banks, and that should continue to be the case over the near term.

The average buyer in 2020 has $2.3 billion in assets, down from $6 billion last year, Martin said. The average asset seller size is $800 million, or roughly half what it was in 2019.

The average premium has fallen from 156% of a seller's tangible book value in 2019 to 137% so far this year, according to data compiled by Compass Point and S&P Global.

But there are takeaways from the handful of bank mergers announced this summer. In many cases, discussions began well before the coronavirus stalled the economy.

Seacoast Commerce Banc Holdings in San Diego, which in August agreed to be sold to Enterprise Financial Services in St. Louis, began evaluating a sale in late 2018 as a way to take advantage of strong bank valuations, according to a recent regulatory filing.

Despite “significant market volatility” and a “precipitous decline” in valuations, the $1.3 billion-asset Seacoast still chose to find a buyer because of the “potential upside” of merging with the $8.4 billion-asset Enterprise, the filing said.

Enterprise saw an opportunity to expand geographically and further diversify its sources of revenue. The company’s executives said the $156 million deal will provide access to new markets and a national Small Business Administration lending platform.

Enterprise intends to “drive growth” in San Diego and its surrounding suburbs “from a lending and deposit perspective with the full product and capabilities” of a $9 billion-asset bank, Chief Financial Officer Keene Turner said during a conference call to discuss the deal.

The $489 million merger of Bridge Bancorp in Bridgehampton, N.Y., and Dime Community Bancshares in Brooklyn, N.Y., announced in July, came together as each company pursued heft and associated benefits such as higher lending limits and a more diverse set of products and services.

The combined company, which is keeping Dime's name and would have assets of $11 billion in assets, also plans to cut about $32 million in annual noninterest expenses.

“Increased size and scale cannot be scoffed at,” Kevin O'Connor, Bridge’s president and CEO, said during a conference call to discuss the deal. “We'd be able to use the scale to invest in some revenue-generating areas” and a bigger bank will have “great opportunity to continue to recruit talent.”

A need for scale continues to bring buyers to the table, said Eric Corrigan, a senior managing director at Commerce Street Capital. There should be plenty of sellers as small banks contend with stiff competition, low interest rates and escalating technology costs.

The pandemic has magnified the significance of these factors, industry observers said.

Another impediment to M&A is that bankers have to be “very cautious with capital," Corrigan said. Activity will pick up again when a vaccine is available and fallout from the virus subsides.

“It’s just a matter of timing,” Corrigan said. “There will almost certainly be a spike in deals after we get past this. We’re already starting to see deals — and more conversations about future deals — and that suggests to me there’s a lot of interest out there just waiting for a little more certainty.”

Higher-premium deals might not be struck until late 2021 at the soonest, Hunsicker said.

“While defensive M&A — and discounted deals — might continue, it is unlikely that we will see a resurgence of offensive … M&A until several quarters after the crisis has eased,” Hunsicker said.

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