A Seller’s Perspective on the Return of Bank M&A

Any thoughts of a lingering impact on mergers and acquisitions as a result of the 2020 economic downturn caused by Covid-19 should be long gone: 2021 bank transaction value exceeded $50 billion for the first time since 2007.

Continued low interest rates on loans and related compression of net interest margin, coupled with limited avenues to park excess liquidity have made many banks consider whether they can provide sustainable returns in the future. Sustainability will become increasingly difficult in the face of continued waves of change: declining branch transactions, increasing cryptocurrency activity and competition from fintechs. Additionally, the fintech role in M&A activity in 2021 cannot be ignored, as its impact is only expected to increase.

Reviewing 2021 M&A transactions, one could argue that the market for bank-to-bank transactions parallels the current residential home market: a finite amount of supply for a large amount of demand. While more houses are being built as quickly as possible, the ability for banks to organically grow loans and deposits is a much slower process; sluggish economic growth has only compounded the problem. Everyone is chasing the same dollars.

As a result, much like the housing market, there are multiple buyers vying for the same institutions and paying multiples that, just a few years ago, would have seemed outlandish. For sellers, while the multiples are high, there is a limit to the amount a buyer is willing to pay. They must consider known short-term gains in exchange for potential long-term returns.

For banks that are not considering an outright sale, this year has also seen a significant uptick in divestures of certain lines of business that were long considered part of the community bank approach to be a “one-stop shop” for customer needs. Banks are piecemeal selling wealth management, trust and insurance services in an attempt to right-size themselves and focus on the growth of core products. However, this approach does not come without its own trade-offs: fee income from these lines of business has been one of the largest components of valuable non-interest income supporting bank profitability recently.

Faced with limited ability to grow their core business, banks must decide if they are willing to stay the course to overcome the waves of change, or accept the favorable multiples they’re offered. Staying the course does not mean putting down an anchor and hoping for calmer waters. Rather, banks must focus on what plans to implement and confront the waves as they come. These plans may include cost cutting measures with a direct financial impact, such as branch closures and workforce reductions, but should entail investments in technology, cybersecurity and other areas where returns may not be quantifiable.

So with the looming changes and significant multiples being offered, one might wonder why haven’t every bank that has been approached by a buyer decides to sell? For one, as much as technology continues to increasingly affect our everyday lives, there is a significant portion of the population that still finds value in areas where technology cannot supplant personal contact. They may no longer go to a branch, but appreciate knowing they have a single point of contact who will pick up the phone when they call with questions. Additionally, many banks have spent years as the backbone of economic development and sustainability in their communities, and feel a sense of pride and responsibility to provide ongoing support.

In the current record-setting pace of M&A activity, you will be hard pressed to not find willing buyers and sellers. The landscape for banks will continue to change. Some banks will attack the change head-on and succeed; some will decide their definition of success is capitalizing on the current returns offered for the brand they have built and exit the market. Both are success stories.

Fintechs Are Starting to Buy Banks, But Why?

A common maxim in the mergers and acquisitions industry is that very small banks have a tough time finding buyers. But last week, we learned there’s an exception. And it comes from financial technology companies, one of which announced plans to buy a $154 million bank in Seattle called First Sound Bank for $23 million.

The acquirer is BM Technologies, the Radnor, Pennsylvania-based technology company that was spun off from Customers Bancorp earlier this year and trades on the New York Stock Exchange. The price translates to a premium of 166.4% for the bank, which trades on the pink sheets, according to investment bank Hovde Group.

“Fintechs are getting more aggressive in buying small bank charters,” says Curtis Carpenter, senior managing director for the investment bank Hovde Group, which was not involved in the deal. Fintechs may also be willing to pay more for a small bank than another bank will. For a large fintech company, getting access to a bank charter may be critical for their business plan going forward; paying an extra $1 million or $2 million may not be a lot of money for the fintech, but might be meaningful for the small bank.

It’s tough to see what kinds of premiums fintechs are paying for banks, because most fintechs are privately owned or the deals are so small, the financials sometimes aren’t disclosed. Granted, there are not a lot of U.S. financial technology companies buying banks. This year, there were six such announced deals. They included San Francisco-based SoFi Technologies’ planned purchase in March of $150 million Golden Pacific Bancorp in Sacramento, California, according to an analysis by Piper Sandler & Co. using S&P Global Market Intelligence data.

U.S. Financial Technology Companies Buying Banks

Deal announcement Buyer Target
Nov. 15, 2021 BM Technologies First Sound Bank
Aug. 2, 2021 Newtek Business Services Corp. National Bank of New York City
June 15, 2021 KMD Partners Liberty Bank
June 14, 2021 Cornerstone Home Lending The Roscoe State Bank
March 9, 2021 SoFi Technologies Golden Pacific Bancorp
Jan. 1, 2021 DXC Technology Co. AXA Bank AG
Feb. 18, 2020 LendingClub Corp. Radius Bancorp
Nov. 18, 2019 Crossroads Systems Rice Bancshares

SOURCE: Piper Sandler & Co. using data from S&P Global Market Intelligence

 

There’s not a lot of banks buying fintechs either, as Bank Director Vice President of Research Emily McCormick explored recently. Banks aren’t as interested in buying fintechs as they are interested in buying other banks, mostly because of cultural hurdles and lack of comfort with valuations, according to Bank Director’s 2021 M&A Survey. Fintechs, on the other hand, have started to get really drawn to bank charters, as Bank Director Managing Editor Kiah Haslett showed in her second quarter 2021 magazine story, “The Latest, Oldest Thing in Banking” (available with a subscription).

“I think there’s a phenomenon out there; what you want is a bank charter,” says Chris Donat, a managing director and senior equity research analyst at Piper Sandler & Co. “If you go back to the financial crisis, when Ally Financial created its bank, having a bank as a source of deposits to fund loans is generally one of your cheaper ways to fund loans and is also more stable.” Fintechs also get access to the national payment rail networks and the Federal Reserve’s discount window for liquidity purposes.

As fintechs grow their businesses, a stable source of low-cost deposits is incredibly useful. “They’re interested in the paperwork if you will, the charter, and not the deposit franchise of having branches and the loan officers,” Donat says.

BM Technologies will leverage the charter to grow its national digitally focused banking services, which include student loan disbursement services to 725 colleges and universities as well as banking services to about 2 million students, plus a flagship banking program with T-Mobile US, according to an analyst note from Michael Diana, managing director of Maxim Group. But BM Technologies will keep the community bank at First Sound Bank focused on the Seattle area. First Sound Bank CEO Marty Steele will lead the community bank division and serve as COO of the newly formed BMTX Bank, the two companies announced. BM Technologies’ CEO Luvleen Sidhu will serve as chair and CEO of BMTX Bank.

“Together we are looking forward to this partnership to create a nationwide deposit gathering and lending platform with the power to deliver an integrated customer experience at the highest level,” Steele said in a release about the deal.

Diana says First Sound is a successful community bank. Plus, BM Technologies’ acquisition means it avoids having to pay bank partners to hold insured deposits.  When online marketplace LendingClub Corp. bought Radius Bancorp last year for about $185 million in cash and stock, it was for a similar reason.

“It’s all about deposits,” Diana says. “You don’t have to pay anyone else for holding and servicing.”

Data is the Secret Weapon for Successful M&A

The topic of data and analytics at financial institutions typically focuses on how data can be used to enhance the consumer experience. As the volume of M&A in the banking industry intensifies to 180 deals this year, first-party data is a critical asset that can be leveraged to model and optimize M&A decisions.

There are more than 10,000 financial institutions in the U.S., split in half between banks and credit unions. That’s a lot of targets for potential acquirers to sift through, and it can be difficult to determine the right potential targets. That’s where a bank’s own first-party data can come in handy. Sean Ryan, principal content manager for banking and specialty finance at FactSet, notes that “calculating overlap among branch networks is simple, but calculating overlap among customer bases is more valuable — though it requires much more data and analysis.” Here are two examples of how that data can be used to model and select the right targets:

  • Geographic footprint. There are two primary camps for considering footprint from an M&A perspective: grabbing new territory or doubling down on existing serving areas. Banks can use customer data to help determine the optimal targets for both of these objectives, like using spend data to understand where consumers work and shop to indicate where they should locate new branches and ATMs.
  • Customer segmentation. Banks often look to capturing market share from consumer segments they are not currently serving, or acquire more consumers similar to their existing base. They should use data to help drive decision-making, whether their focus is on finding competitive or synergistic customer bases. Analyzing first-party transaction data from a core processor can indicate the volume of consumers making payments or transfers to a competitor bank, providing insights into which might be the best targets for acquisition. If the strategy is to gain market share by going after direct competitors, a competitive insight report can provide the details on exactly how many payments are being made to a competitor and who is making them.

The work isn’t done when a bank identifies the right M&A target and signs a deal. “When companies merge, they embark on seemingly minor changes that can make a big difference to customers, causing even the most loyal to reevaluate their relationship with the company,” writes Laura Miles and Ted Rouse of Bain & Co. With the right data, it is possible that the newly merged institution minimizes those challenges and creates a path to success. Some examples include:

  • Product rationalization. After a bank completes a merger, executives should analyze specific product utilization at an individual consumer or household level, but understanding consumer behavior at a more granular level will provide even greater insights. For example, knowing that a certain threshold of consumers are making competitive mortgage payments could determine which mortgage products the bank should offer and which it should sunset. Understanding which business customers are using Square for merchant processing can identify how the bank can make merchant solutions more competitive and which to retain post-merger. Additionally, modeling the take rate, product profitability and potential adoption of the examples above can provide executives with the final details to help them make the right product decisions.
  • Customer retention. Merger analysis often indicates that customer communication and retention was either not enough of a focus or was not properly managed, resulting in significant attrition for the proforma bank. FactSet’s Ryan points out that “too frequently, banks have been so focused on hitting their cost save targets that they took actions that drove up customer attrition, so that in the end, while the buyer hit the mark on cost reductions, they missed on actual earnings.” Executives must understand the demographic profiles of their consumers, like the home improver or an outdoor enthusiast, along with the life events they are experiencing, like a new baby, kids headed off to college or in the market for a loan, to drive communications. The focus must be on retaining accountholders. Banks can use predictive attrition models to identify customers at greatest risk of leaving and deploy cross-sell models for relationships that could benefit from additional products and services.

M&A can be risky business in the best of circumstances — too often, a transaction results in the loss of customers, damaged reputations and a failure to deliver shareholder value. Using first-party data effectively to help drive better outcomes can ensure a win-win for all parties and customers being served.

What 2022 Could Hold for Bank M&A

Pent-up deal demand will define 2022, continuing this year’s momentum as pandemic-related credit concerns recede. Stinson LLP Partner Adam Maier believes banks can expect to see a high volume of deals in the space but anticipate approval slowdowns from regulatory scrutiny. He also shares his top advice for directors as their banks prepare for growth next year. Topics include:

  • Deal Demand
  • Regulatory Considerations
  • Advice for Growth

An M&A Checklist for BOLI, Compensation Programs

As bank M&A activity continues to pick up, it is crucial that buyers and sellers understand the implications of any transaction on bank-owned life insurance portfolios, as well as any associated nonqualified deferred compensation (NQDC) programs, to mitigate potential negative tax consequences.

Identify and Review Target Bank’s BOLI Holdings
The first step is for buyers to identify the total cash surrender value of sellers’ BOLI portfolio and its percentage of regulatory capital. The buyer should identify the types of products held and the amount held in each of the three common BOLI product types:

  • General account
  • Hybrid separate account
  • Separate account (registered or private placement)

In addition to evaluating historical and current policy performance, the buyer should also obtain and evaluate carrier financial and credit rating information for all products, as well as underlying investment fund information for any separate account products.

Accounting and Tax Considerations
From an accounting standpoint, the buyer should ensure that the BOLI has been both properly accounted for in accordance with GAAP (ASC 325-30) and reported in the call reports, with related disclosures of product types and risk weighting. Further, if the policies are associated with a post-retirement split-dollar or survivor income plan, the buyer should ensure that the liabilities have been properly accrued for.

The structure of the transaction as a stock sale or asset sale is critical when assessing the tax implications. In general, with a stock sale, there is no taxable transaction with regard to BOLI — assets and liabilities “carry over” to the buyer. With an asset sale (or a stock sale with election to treat as asset sale), the seller will recognize the accumulated gain in the policies and the buyer will assume the policies with a stepped-up basis.

Regardless of the type of transaction, the buyer needs to evaluate and address the Transfer for Value (TFV) and Reportable Policy Sale (RPS) issues. Policies deemed “transferred for value” or a “reportable policy sale” will result in taxable death benefits. Prior to the Tax Cuts and Jobs Act, the transfer for value analysis was fairly simple: In a stock transaction, the “carryover basis” exception applies to all policies, whether or not the insured individual remained actively employed. In an asset sale, policies on insureds who will be officers or shareholders of the acquiring bank will meet an exception.

The Jobs Act enacted the notion of “reportable policy sales,” which complicated the tax analysis, especially for stock-based transactions now requiring much more detailed analysis of the type of transaction and entity types (C Corp vs S Corp). It is important to note that the RPS rules are in addition to the TFV rule.

Review Risk Management of BOLI
The Interagency Statement on the Purchase and Risk Management of BOLI (OCC 2004-56) establishes requirements for banks to properly document both their pre-purchase due diligence, as well as an annual review of their BOLI programs. The buyer will want to ensure this documentation is in good order. Significant risk considerations include carrier credit quality, policy performance, employment status of insureds, 1035 exchange restrictions or fees and the tax impact of any policy surrenders. Banks should pay particular attention to ensuring that policies are performing efficiently as well as the availability of opportunities to improve policy performance.

Identify and Review NQDC plans
Nonqualified deferred compensation plans can take several forms, including:

  • Voluntary deferred compensation programs
  • Defined benefit plans
  • Defined contributions plans
  • Director deferral or retirement plans
  • Split dollar
  • Other

All plans should be formally documented via plan documents and agreements. Buyers should ascertain that the plans comply with the requirements of Internal Revenue Code Section 409A and that the appropriate “top hat” filings have been made with the U.S. Department of Labor.

General Accounting and Tax Considerations
Liabilities associated with NQDC programs should be accounted for properly on the balance sheet. In evaluating the liabilities, banks should give consideration to the accounting method and the discount rates.

Reviewing historical payroll tax reporting related to the NQDC plans is critical to ensuring there are no hidden liabilities in the plan. Remediating improperly reported payroll taxes for NQDC plans can be both time consuming and expensive. Seek to resolve any reporting issues prior to the deal closure.

Change in Control Accounting and Tax Considerations
More often than not, NQDC plans provide for benefit acceleration in the event of a change in control (CIC), including benefit vesting and/or payments CIC. The trigger may be the CIC itself or a secondary “trigger,” such as termination of employment within a certain time period following a CIC. It is imperative that the buyer understand the financial statement impact of the CIC provisions within the programs.

In addition to the financial statement impact, C corps must also contend with what can be complicated taxation issues under Internal Revenue Code Section 280G, as well as any plan provisions addressing the tax issues of Section 280G. S corps are not subject to the provisions of Section 280G. For additional insight into the impacts of mergers on NQDC programs, see How Mergers Can Impact Deferred Compensation Plans Part I and How Mergers Can Impact Deferred Compensation Plans Part II. 

Insurance services provided through NFP Executive Benefits, LLC. (NFP EB), a subsidiary of NFP Corp. (NFP). Doing business in California as NFP Executive Benefits & Insurance Agency, LLC. (License #OH86767). Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC. Kestra Investment Services, LLC is not affiliated with NFP or NFP EB.
Investor Disclosures: https://bit.ly/KF-Disclosures

How Banks Can Leverage Niche With M&A

After a year of formidable industry change, bank merger and acquisition activity is beginning to bounce back.

July’s 19 announced transactions brings this year’s total to 116 deal announcements so far, compared with 111 overall in 2020, according to data from S&P Global Market Intelligence. Financial institutions are looking to make strategic investments; post-pandemic, that means building seamless digital experiences at a lower cost remains a top priority.

This is a prime opportunity for banks to revisit the outdated traditional playbook of converting newly acquired customers. The conventional model of post-M&A communication is packed with marketing jargon like “commitment” and “service,” followed by a barrage of letters that make it difficult for customers to know what to expect from their new financial partner.

The goal of this approach has always been to reduce churn. But it has led to stagnant or low growth in wallet share and overlooked chances to build stronger relationships. One in four customers surveyed by BankingExchange took some form of action due to an acquisition: 5% closed their account, and an additional 22% eventually opened an account with another financial entity. Customers are increasingly willing to bank elsewhere if their financial needs are not being met.

Financial institutions need a new conversion playbook to keep old customers happy and new customers engaged. Banks should look beyond generic tactics and think like brands to make the M&A process smoother. This approach means the institution isn’t thinking about messaging as a box to check, focusing instead on the customer experience and brainstorming fresh and creative ways to communicate. Brand identity and emotion play a critical role in customer retention. According to a Deloitte study, over 35% of respondents who switched banks cited emotional reasons — they felt their bank was too large to care about their financial needs anymore.

Embracing a new acquisition model requires a proactive approach to post-merger communications and strategy. Framing a compelling story, integrating complex technology and bringing together multiple teams is achievable — but takes time and attention to detail.

A Fresh Approach to the M&A Playbook
Post-deal communications require a fresh approach to connecting emotionally and digitally with new customers. Forming deeper connections and reaching new opportunities for growth requires starting with an innovative model that leverages niche-focused products and services to create a greater affinity with the growing customer base.

Although a niche strategy isn’t an entirely new concept, it’s one of the most undervalued assets used by banks today. “Superior customer value occurs when a company can offer either a unique bundle of value, a comparable value at a lower cost than the competition or a combination of differentiated value and low cost,” research shows. Delivering tailored financial products to niche customer segments allows banks to build a brand that appeals to a new category of customers, creating a lasting connection and brand affinity.

Engaging a niche audience doesn’t mean your bank changes its foundation; it means focusing more deeply on an underserved segment of your newly acquired customer base to deliver a more robust and connected experience. Start by identifying these underserved markets with data to determine what opportunities exist. Maybe there’s a high concentration of gig workers who could benefit from new or newly combined digital bank offerings. As the acquiring bank, you could build an experience that meets these needs and the needs of other gig workers in your current customer base and communities.

This is a prime opportunity to jumpstart research, initiate conversations and craft meaningful marketing strategies that will delight your new audience. The standard welcome letter will not generate the same excitement as a bespoke campaign inviting gig workers to take part in building innovative products that will empower them to manage and grow their finances. This proactive approach demonstrates your dedication to providing top-notch customer services and solidifies your commitment to investing in each individual member.

Banks that take advantage of the new growth opportunities in today’s M&A landscape can move to a truly innovative approach that leverages data analytics to identify, differentiate and deliver value, leading to greater affinity and sustainable growth. Banks are poised to foster deeper trust in their new customers by building brands that deliver focused financial services for specific needs, ultimately creating lifetime value.

Motivation for Mergers Will Grow as Interest Rates, Loan Growth Stay Low

The pace of announced mergers among rated U.S. banks has accelerated and is likely to gain steam.

The limited prospect of material loan growth makes asset growth via mergers and acquisitions increasingly attractive. And as we anticipated, more banks are favoring large transformational deals. We expect the industry will continue to consolidate in the second half of 2021. Greater size and efficiency will remain primary drivers of consolidation in the face of continued low interest rates, as will the imperative to invest in new technologies at scale.

  • There was a substantial jump in transformational M&A activity during the second quarter. Four sizable deals were announced in the period, and each envisions an enlarged entity that benefits from greater diversification and economies of scale. All four transactions promise eventual benefits for creditors, but each presents significant execution risk that is an immediate credit negative.
  • The main drivers of consolidation will continue for the next 12 to 18 months. Interest rates are unlikely to rise until 2023, increasing the likelihood of a jump in M&A activity. Technology upgrades will require substantial investment, which prospective cost savings from acquisitions can help fund. And loan growth will remain subdued because of the massive deposit holdings of U.S. companies and households.
  • Difficulty forecasting business activity and loan growth, as well as rising bank share prices, may have held back some deals. The value of an acquisition target is harder to gauge in an uncertain economic and market environment, which likely helped slow overall sector consolidation in 2020 and first quarter 2021, but nonetheless did not prevent the prominent deals we highlight in this report.

Data Considerations for Successful Deal Integration

Bank M&A activity is heating up in 2021; already, a number of banks have announced deals this year. Is your bank considering a combination with another institution?

Banks initiate mergers because of synergies between institutions, and to achieve economies of scale along with anticipated cost savings. Acquiring institutions typically intend to leverage the newly acquired customer base, but this can be difficult to execute upon without a data strategy.

Whether your bank is considering are buying or selling, it has never been more important to evaluate whether your data house is in order. Unresolved acquisition data challenges can result in poor customer experiences, inaccurate reporting and significant inefficiency after the merger closes. What causes these types of data challenges?

  • Both institutions possess massive volumes of data and multiple systems, while disparate systems prevent a holistic view of the combined entity. In a merger, the acquirer does not have access to the target’s data until legal close, and data is not consolidated until the core conversion is completed.
  • Systems are often antiquated, and it is difficult to access high-value customer data. Data integrity is often an issue that impedes anticipated synergies that could promote revenue generation.
  • Absence of enterprise knowledge or insight into target’s customer portfolio. This makes it difficult to identify growth opportunities and plan the strategy for the combined institution. It also creates a barrier to pivoting in the event a key relationship manager leaves the institution.

Baltimore-based Howard Bancorp has conducted five successful acquisitions in the last eight years. Steven Poynot, Howard’s CIO, recommends looking internally first and getting your house in order prior to any merger. “If you don’t understand all of the pieces of your bank’s data and portfolio well, how are you going to overlay your information in combination with the other bank’s data for reporting?”

Five solutions to merger data challenges include:

  • Create a data governance strategy before a deal is in the works. Identify the source and location of all pertinent data. Evaluate whether customer data is clean and up to date. Stale customer information such as old land line phone numbers and inaccurate email addresses yield roadblocks for relationship managers attempting to use data effectively. If your bank does identify data issues, implement a clean-up project based on a data governance policy framework. This initiative will benefit all banks, not just those looking to merge.
  • Develop an M&A integration plan that sets expectations and goals. Involve the CIO quickly and identify tools needed for the integration. Make a strategic determination of what data fields need to be integrated for reporting purposes. Acquire tools to allow for enterprise reporting and to highlight sales opportunities. Partner with vendors who understand the specific challenges of the banking industry.
  • Unify Disparate Systems. Prioritize data integration with a seamless transition for customers as the top priority. Plan for mapping and consolidating data along with reporting for the combined institution. Take product and data mapping beyond what is needed for the system mapping required for core integration. Use the information gleaned from the data to support product analytics, risk assessment, business development and cross selling strategies. The goal is to combine and integrate systems quickly to leverage the data as an asset.
  • Discourage Data Silos. Make data available and easily accessible to all who need it to do their jobs. Banking is a relationship business, and relationship managers need current customer relationship information readily available to them.
  • Analyze. Once the data has been consolidated, analyze and leverage it to identify opportunities that will drive revenue.

In a merger, the sooner that data is combined, the earlier decisions can be made from the information. As data silos are removed and data becomes easily accessible across the organization, data becomes an enterprise-wide asset that can be used effectively in the bank’s strategy.

Navigating Four Common Post-Signing Requests for Additional Information

Consolidation in the banking industry is heating up. Regulatory compliance costs, declining economies of scale, tiny net interest margins, shareholder liquidity demands, concerns about possible changes in tax laws and succession planning continue driving acquisitions for strategic growth.

Unlike many industries, where the signing and closing of an acquisition agreement may be nearly simultaneous, the execution of a definitive acquisition agreement in the bank space is really just the beginning of the acquisition process. Once the definitive agreement is executed, the parties begin compiling the information necessary to complete the regulatory applications that must be submitted to the appropriate state and federal bank regulatory agencies. Upon receipt and a quick review of a filed application, the agencies send an acknowledgement letter and likely a request for additional information. The comprehensive review begins under the relevant statutory factors and criteria found in the Bank Merger Act, Bank Holding Company Act or other relevant statutes or regulations. Formal review generally takes 30 to 60 days after an application is “complete.”

The process specifically considers, among other things: (1) competitive factors; (2) the financial and managerial resources and future prospects of the company or companies and the banks concerned; (3) the supervisory records of the financial institutions involved; (4) the convenience and needs of the communities to be served and the banks’ Community Reinvestment Act (CRA) records; (5) the effectiveness of the banks in combating money laundering activities; and (6) the extent to which a proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system.

During this process, the applicant and regulator will exchange questions, answers, and clarifications back and forth in order to satisfy the applicable statutory factors or decision criteria towards final approval of the transaction. Each of the requests for additional information and clarifications are focused on making sure that the application record is complete. Just because information or documents are shared during the course of the supervisory process does not mean that the same information or documents will not be requested during the application process. The discussions and review of materials during the supervisory process is separate from the “application record,” so it helps bank management teams to be prepared to reproduce information already shared with the supervisory teams. A best practice for banks is to document what happens during the supervisory process so they have it handy in case something specific is re-requested as part of an application.

Recently, we consistently received a number of requests for additional information that include questions not otherwise included in the standard application forms. Below, we review four of the more common requests.

1. Impact of the Covid-19 Pandemic. Regulators are requesting additional information focused on the impact of the coronavirus pandemic. Both state and federal regulators are requesting a statement on the impact of the Covid-19 pandemic that discusses the impact on capital, asset quality, earnings, liquidity and the local economy. State and federal agencies are including a request to discuss trends in delinquency loan modifications and problem loans when reviewing the impact on asset quality, and an estimate for the volume of temporary surge deposits when reviewing the impact on liquidity.

2. Additional, Specific Financial Information. Beyond the traditional pro forma balance sheets and income statements that banks are accustomed to providing as part of the application process, we are receiving rather extensive requests for additional financial information and clarifications. Two specific requests are particular noteworthy. First, a request for financial information around potential stress scenarios, which we are receiving for acquirors and transactions of all sizes.

Second, and almost as a bolt-on to the stress scenario discussion, are the requests related to capital planning. These questions focus on the acquiror’s plan where financial targets are not met or the need to raise capital arises due to a stressed environment. While not actually asking for a capital plan, the agencies have not been disappointed to receive one in response to this line of inquiry.

3. List of Shareholders. Regardless of whether the banks indicate potential changes in the ownership structure of an acquiror or whether the consideration is entirely cash from the acquiror, agencies (most commonly the Federal Reserve), are requesting a pro forma shareholder listing for the acquiror. Specifically, this shareholder listing should break out those shareholders acting in concert that will own, control, or hold with power to vote 5% or more of an acquiring BHC. Consider this an opportunity for both the acquiror and the Federal Reserve to make sure control filings related to the acquiror are up to date.

4. Integration. Finally, requests for additional information from acquirors have consistently included a request for a discussion on integration of the target, beyond the traditional due diligence line of inquiry included in the application form. The questions focus on how the acquiror will effectively oversee the integration of the target, given the increase in assets size. Acquirors are expected to include a discussion of plan’s to bolster key risk management functions, internal controls, and policies and procedures. Again, we are receiving this request regardless of the size of the acquiror, target or transaction, even in cases where the target is less than 10% of the size of the acquiror.

These are four of the more common requests for additional information that we have encountered as deal activity heats up. As consolidation advances and more banks file applications, staff at the state and federal agencies may take longer to review and respond to applications matters. We see these common requests above as an opportunity to provide more material in the initial phase of the application process, in order to shorten the review timeframe and back and forth as much as possible. In any event, acquirors should be prepared to respond to these requests as part of navigating the regulatory process post-signing.

Positive Outlook for Bank M&A as the Pandemic Subsides

Will there be an acceleration of bank merger and acquisition activity in 2021 and beyond?

The short answer is yes.

As the Covid-19 pandemic recedes, we expect bank M&A activity to rebound, both in terms of branch and whole-bank acquisitions. Banks and their advisors have evolved since the pandemic’s onset forced office closures and the implementation of a new remote working environment. In the past year, institutions and their boards of directors improved technology and online banking capabilities in response to customer needs and expectations. They also gained substantial experience providing banking products and services in a remote environment. This familiarity with technology and remote operations should cause acquirors and sellers alike to reconsider where they stand in the M&A market in 2021 and beyond.

We see a number of factors supporting an improved M&A market in 2021. First, many acquirors and potential deals were sidelined in the spring of 2020, as the pandemic’s uncertainty setting in and the markets were in turmoil. We expect a number of these deals to be rekindled in mid- to late-2021, if they haven’t already resurfaced. We also expect a robust set of acquirors to return to the market looking to add deposits, retail and commercial customers, lending teams, and additional capabilities.

Second, there remains a growing number of small banks struggling to compete that would likely consider potential merger partners with similar cultures and in similar geographic markets. Similarly, risk management and compliance costs continue to challenge bank managers amid tough competition from community banks, credit unions and other non-bank financial institutions. Some small banks have also struggled to provide the digital offerings that have become commonplace since the pandemic began. These challenges are sure to have smaller banks considering merger partners or new investors.

Third, larger banks are looking to grow deposits and market share as they look to compete with more regional players that have the necessary compliance infrastructure and digital offerings. We expect these more regional players to use acquisition partners as a way to grow core deposits and increase efficiencies. Acquiring new deposits and customers also affords these regional banks the ability to cross-sell other products that smaller banks may not have been able to offer the same customers before — increasing revenue in a sustained low-interest rate environment.

Finally, the low-interest rate environment has opened the capital markets to banks of all sizes looking to raise subordinated debt, which may support community bank M&A. Many subordinated debt offerings are priced in the 4% to 5% range, and often are oversubscribed within just a few days. Banks have found these offerings to be an attractive tool to pay off debt with higher interest rates, fund investments in digital infrastructure, provide liquidity to shareholders through buyback programs and seek branch or whole-bank acquisition targets.

We are already seeing activity pick up in bank M&A, and expect that as the economy — and life itself — begins to normalize in 2021, more transactions to be announced. The prospects for an active merger market in 2020 were cut off before spring arrived. This year, as we approach spring once again, the M&A market is not likely to return to pre-pandemic levels, but the outlook is certainly much more optimistic for bank M&A.