Pending, Future Bank M&A Challenged by Coronavirus Crisis

The coronavirus pandemic has complicated bank M&A, throwing prospective buyers and sellers into limbo.

The crisis and economic fallout have made mergers and acquisitions an even-more tenuous proposition for banks that find themselves in the middle of a uniquely challenging operating environment. Industry experts believe that activity may come to a standstill for the time being but see opportunity for patient buyers once it thaws.

“I think it’s kind of high drama in every situation, if you put yourself on the board of either side of these transactions,” says Curtis Carpenter, principal and head of investment banking at Sheshunoff & Co. Investment Banking. “I’m really surprised that more deals have not fallen apart, quite frankly.”

Deals that have held together so far are most likely situations where both parties have been equally impacted by the economic shutdown and believe that the transaction’s merits will remain unchanged once the pandemic subsides, he says.

But the selloff in the equity markets has weighed on valuations for stock-based deals, making them untenable for some parties. Increasing credit risk, low interest rates, net interest margin compression and high unemployment are all headwinds for bank earnings, creating a potential ceiling on stock valuations. The average share price of an acquirer with an outstanding transaction has dropped about 20% in the last three months, says Crowe partner Rick Childs. If a transaction was all stock, the discount is fully included in the price; a split between cash and stock dilutes the selloff discount.

Half of the eight deals that have been terminated since the start of the year were impacted by the coronavirus crisis, Childs says. The largest of the terminated deals was the proposed $3.3 billion merger between the $36 billion Texas Capital Bancshares, based in Dallas, and Independent Bank Group, which is based in McKinney, Texas, and has $16 billion in assets. Several more have been postponed or renegotiated.

Buyers may try to argue that stock declines are temporary, though some are choosing to renegotiate. San Diego-based Southern California Bancorp, which has $852 million in assets, disclosed in April that it had renegotiated its October 2019 merger agreement with CalWest Bancorp. It lowered its all-cash offer by 19% for the Rancho Santa Margarita, California-based bank, to $25.9 million. The acquisition of the $226 million bank closed June 1.

But there is still risk for cash buyers and other parties committing to closing a deal. For years, credit had been so clean that buyers risked “giving lip service” to doing due diligence on a seller, Childs says. Now, acquirers must take pains to understand the potential risks they might be buying, especially as banks process deferrals and loan forgiveness applications for the Small Business Administration’s Paycheck Protection Program.

Deals may also take longer to close during the pandemic because regulators have limited capacity, though not in every case. Childs is involved in some delayed deals because regulators have shifted their attention away from applications to assisting banks with changing policies and emerging issues or questions. Banks that have announced delays are adding an average of two additional months, he says.

However, some banks have managed to receive timely, or early, approvals. CenterState Bank Corp., which has $19 billion in assets and is based in Winter Haven, Florida, disclosed that it had received all regulatory approvals ahead of schedule for its merger with South State Corp., which has $17 billion in assets and is based in Columbia, South Carolina.

While the environment may be challenging for pending deals, it could be productive for prospective ones. Childs says cash buyers may find management teams with an increased interest in selling because of crisis fatigue and the anticipation of a long road to economic recovery, which could lead to compelling valuations. Carpenter counters that sellers may not want to accept a cash deal because it would be a permanent discounted valuation. Accepting equity gives the seller’s shareholders a way to ride out the recovery and could make a lower initial valuation more palpable. Both Childs and Carpenter are working on deals that have yet to be announced.

Buyers that have stock may want to include struggling fintechs in their search for potential targets, Childs says. Fintechs may have superior technology or capabilities that could add a business line or increase a buyer’s capabilities, but face funding or capital challenges because of the economic crisis.

“Either taking a significant ownership stake or buying it outright might be a heck of a deal for you, and your stock is probably going to be better than their stock,” he says.

In the meantime, Childs advises banks to trim the fat from their financial statements. If a bank has been on the fence about assets, business lines or portfolios it owns, now is an opportunistic time to sell them and raise cash. It is also a good time for cash buyers to establish credit lines or loan arrangements they may use to finance a deal, but cautioned stock buyers against raising equity capital until prices recover.

“I think we’ll have a few more deals called off between now and their expected closing dates, but probably what we’ll see is very few announced deals unless we come back in a big way,” Childs says. “We may end up having a great fourth quarter because of pent-up demand, but there will probably be a dip in the middle part of the year.”

Leading Through Crisis

In the early 2000s, The LEGO Group was on the verge of collapse.

It sounds hard to believe today, since the company is one of the largest and most successful toy sellers in the world. But in 2003, the Denmark-based company was on the brink of insolvency, with massive debt and a negative cash flow of DKK $1 billion.

LEGO needed new leadership. It promoted Jørgen Vig Knudstorp, a former consultant, to CEO. Along with Chief Financial Officer Jesper Ovesen — a former banker — Knudstorp gradually righted the ship by instilling organizational discipline and forming a strong financial foundation for the company.

The new executives were brutally honest with LEGO’s board and employees about the challenges the company faced. To survive, everyone needed to focus on turning things around, correcting the company’s problems so they could plan its future.

That required clear thinking and a dose of reality.

“Before LEGO could even begin to reignite a sense of what was possible for LEGO, they first had to persuade people that decades of unfettered growth offered no assurance that the company would ever get its groove back,” writes David Robertson in “Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry.”

Crises come in all shapes and sizes. They can be small and isolated in a single company, like LEGO’s need to refocus itself after years of mismanagement. Or they can be caused by broader, external factors that affect industries and economies.  

No matter the source, crises call for strong leadership. The coronavirus pandemic is just the latest example.

Carla Harris, vice chairman of wealth management and a senior client advisor at Morgan Stanley, shares what leaders today must do to weather the current crisis in a discussion that kicks off Microsoft’s Envision Virtual Forum for Financial Services.

First, great leaders are visible, says Harris. “There’s something powerful in being able to see the person that you’re following.”

They’re also transparent and empathetic. Employees and other stakeholders “want to see empathy, but they also want to see confidence and positivity,” she says. It’s an uncertain environment, and we’re all feeling a wide range of emotions due to the health and economic consequences of this crisis.

“One of the biggest learning moments for me as a leader was watching financial services leadership during the financial crisis. There were some leaders who didn’t really say anything to their people, and there were some leaders who were out front every day,” she says. Harris has spent over three decades on Wall Street, joining Morgan Stanley in 1987. “There was a regular cadence that people came to rely on, and that was frankly empowering.”

While the unfolding crisis is unique even among crises, with an especially broad range of potential outcomes, leaders have arguably never been better equipped from a technology standpoint to take action. Companies may be locked down for the most part, with employees largely working remotely, but leaders can still communicate directly with staff. For example, Boston-based State Street Corp. uses video conferencing technology to host virtual forums where employees can interact with senior executives to get answers to their questions.

Harris also recommends that leaders be flexible in today’s environment and open themselves up to input from diverse viewpoints. Strategic goals may shift in response to the Covid-19 environment, or leaders may need to consider new ways to achieve their objectives. “Don’t have rigid views of what you think things are going to look like on the other side” of this crisis, she says. “This is the time now to be an inclusive leader, and the hallmark of being an inclusive leader is to solicit other peoples’ voices.”

I’d suggest one addition to the actions Harris outlines, based on my conversations with business leaders like Horst Schulze, the co-founder and former president of the Ritz-Carlton Hotel Co.

Lead with purpose.

There is no one-size-fits-all personality for leaders, and leadership skills are developed over time. But all great leaders share one trait: They have a vision and inspire employees to achieve it.

“We need leadership,” says Schulze. “Leadership implies, ‘I have a destination in mind.’ It means, ‘I show my people the destination, and I show them how it’s beautiful for them, how it’s great for them, how it’s exciting for them, how they should join me in reaching that destination.’”

Great leaders are rare. But in times like these, they can be the difference between surviving a crisis or thriving despite it.

Former CFPB Head on a Post-Pandemic Banking Industry

Banks across the country have been frontline responders in the unfolding economic crisis.

Many are offering forbearance and modifications to borrowers facing health emergencies or financial hardship. But they should take care not to assume business will get back to normal for their consumers, even as states reopen and economic activity thaws, says former CFPB Director Richard Cordray.

Cordray, the former Ohio Attorney General, headed up the Consumer Financial Protection Bureau after its inception in the passage of the Dodd-Frank Act until his resignation in 2017. The sometimes-controversial agency focuses on consumers’ financial rights and protections; its jurisdiction extends to institutions above $10 billion in assets.

Bank Director recently spoke with Cordray after a COMPLY Summit Series webinar that he participated in about how banks can navigate customer relationships during and after the pandemic.

BD: This pandemic has led banks to roll out consumer-friendly policies, like waiving or suspending overdraft or late fees. Do you think these changes are permanent, or do you see them coming back?
RC: The fees have been put on hiatus at certain banks, but they’re still out there. It has been better practice for banks, during this crisis, to be very consumer friendly —  recognizing that, through what is clearly no fault of their own, many of their customers have been required to stay at home, their businesses have been shuttered and they don’t have income coming in — and give them a break.

BD: What should guide banks as they decide how to help consumers?
RC: At this point, I think the pressure on banks is mostly reputational. If banks are not perceived as serving their customers in involuntary distress well, they end up in trouble as a matter of public branding. There’s a certain normative effect on banks now, in the depths this crisis, that has nothing to do with what they’re legally allowed or not allowed to do.

If bank customers are going regain their footing in the future, shoving them into bankruptcy or financial ruin is not helpful and it’s not in the bank’s own interest. Reputational risk is a real and significant thing that banks have to think about. All you have to do is think about Wells Fargo and how their reputation has been damaged in recent years. Banks do not want to take on the brand of being a company that’s not sensitive to their customers.

BD: There have also been consumer-friendly practices coming out of the CARES act and different edicts from state government for moratoriums on evictions. How can financial institutions aid in these efforts?
RC: To the extent that banks hold car loans or mortgages [that aren’t subject to CARES Act relief], they have a judgment to make: Are they going to afford similar relief to their customers? Some are, some aren’t. If you’re holding auto loans, you can dictate that there will be no auto repossessions during this period. I think that would be by far the better practice.

BD: We’ve seen announcements from regulators encouraging banks to work with customers. Is there anything regulators or banks could be doing more of?
RC: I think it would make sense for mortgages holders to give forbearance to their customers, whether or not its mandated by the CARES Act. Foreclosure is a last resort. If we have a rash of foreclosures, they’re going to get tied up in the courts and it’ll be difficult for mortgage holders to foreclose quickly. They will start to suffer the loss of the abandoned and vacant houses that we saw during the last crisis, and that’s something to be avoided at all costs for them.

BD: Once we return to a more normal operating environment, I imagine many of these types of forbearance relief will go away. Do you have any thoughts about how banks can help customers through this transition?
RC: The wrong way to do this would be to say that debts accumulated over the course of the emergency orders need to be repaid all at once. That is not realistic and is not going to be successful. If people couldn’t make those payments during this period, they’re not going to have all that money suddenly to pay it just because we came to the end of this period. The result will be foreclosures, evictions and repossessions. The right thing to do is have that amount be repayable over time or put it on the back end of the loan.

Strengthening Corporate Culture During Covid-19

Before Covid-19, watercooler talk was an integral part of office culture. Groups of workers would gather in the breakroom for coffee and chat about their day, or the latest Netflix binge, or what they planned to do over the weekend. But today, with so many now working remotely and the rest encouraged to socially distance themselves from their coworkers, office culture has temporarily — and perhaps permanently — changed. For many, the big looming question is whether we return to that environment at all, given the potential for cost savings and the possibility of a second and third wave of the coronavirus later in the year.

But employees still need to interact with one another to foster relationships and collaborate. They also need to connect with managers, and create and maintain bonds with mentors.

The technology to enable this existed before the coronavirus struck the U.S., but many companies are only now shifting their practices to take advantage of it. These tools include video conferencing, and scheduling and productivity applications offered by providers like Microsoft Corp., Slack Technologies, Zoom Video Communications and Alphabet, the holding company for Google.

The savviest companies are finding ways to be more effective in the transition. One of these is State Street Corp. Christy Strawbridge, senior vice president and transformation director, shares the Boston-based bank’s experience in a discussion that took place as part of Microsoft’s Envision Virtual Forum for Financial Services.

Most of State Street’s employees are working from home and returning to the office isn’t a top priority, says Strawbridge. “We are not going to be rushing people back into the office; we’re going to help [them] work from home effectively,” she says.

It’s a stressful time, so the company is keeping communication lines open.

“Senior leaders are communicating formally and informally on a regular basis,” Strawbridge says. Employees can dial in to live, virtual forums hosted by senior executives — even CEO Ronald O’Hanley — to get answers on everything from technology needs to mental burnout. “It keeps us all connected,” she says. “It keeps us up to date on what’s going on.”

A number of companies now host virtual employee happy hours and other events using video communications technology. These intentional social interactions are vital to maintaining corporate culture, says Strawbridge. “We’re not running into each other in the elevator, so we need to be more deliberate on those social interactions,” she says, “because they’re not happening ad hoc.”

“It’s really important, now more than ever, that we stay connected,” she adds.

Employees are also encouraged to take time off. Maybe they can’t take the cruise they planned or visit Disney World with their family but taking time to do simple things — a day off for a hike, for example — can help prevent burnout.

Agility has grown increasingly important as the banking industry responds to the shifts and changes the coronavirus crisis has brought to bear on the U.S. economy. Financial institutions are rapidly deploying new technologies and practices to better serve customers and enable employees to work safely. Strawbridge points out that for State Street, their strategic goals remain the same but the path to achieve those aims is being adjusted.

“[Some] priorities have shifted in this environment, so we need to pivot work to other people on the team who might be more freed up,” says Strawbridge. “We have really uncovered the art of the possible here. We are realizing that there were things that we thought maybe we couldn’t do, or would be hugely challenging, or would take us three years to do — and we’ve done them in two months.” She credits more effective communication and collaboration — along with employee initiative — with these achievements. “We have a laser focus on prioritization in this environment that we can’t lose when we go back.” 

The company is empowering and engaging employees to solve problems — something Strawbridge believes will help State Street weather, and emerge stronger, from the crisis.

The foundation for a strong culture was built before the pandemic, but smart companies will foster and strengthen it during this crisis.

On the Radar For the Pandemic’s Next Phase

The banking industry must address and satisfy several competing interests as executives and the workforce adjust to the new normal of life during a pandemic.

Banks across the nation have stepped up as leaders in the fight against the Covid-19 pandemic. Now as the dust settles from the initial shock in mid-March, what are issues that your bank should be prepared to address looking forward?

When and how should we reopen our physical locations?

While banks have continued operations during the pandemic, many limited their services. It is not clear when these services will fully ramp back up. As your bank debates the best course of action for your circumstance, consider the following:

  • Prioritize health and safety by installing physical protection at branches and offices, including sneeze guards at teller windows, medical screening of employees, enhanced cleaning procedures and required use of personal protective equipment.
  • When considering return-to-work policies, be flexible and responsive to employee concerns and location-specific issues.
  • Apply the lessons learned during this period and embrace (or even improve) the technology for working remotely.
  • Task teams with understanding federal, state and local requirements related to the pandemic and the bank’s corresponding compliance obligations. These teams should meet regularly to ensure full compliance at all locations.

The ABA published a free matrix to assist banks in their reopening efforts.

We participated in the Paycheck Protection Program; now what?

There are some important post-lending matters for banks that participated in the Paycheck Protection Program to consider:

Brace for litigation. Some banks have faced lawsuits from applicants that failed to receive PPP funding. While your bank may not be able to avoid a similar lawsuit, it should avoid liability in these suits by following established procedures and demonstrating that your bankers did not deny applicants on a prohibited basis (race, religion, gender, age, among others).

Additionally, banks have encountered complaints filed by agents of borrowers seeking lender fees. You should not face liability in these suits if you did not execute a binding agreement with an agent before loan origination. Your bank’s defense will be even stronger if you mitigated this issue on the front end —for example by requiring borrowers to certify whether they used an agent, and if so, requiring the agent to complete a Form 159.

Stay current on loan forgiveness requirements. The Small Business Administration stated that it would review all PPP loans over $2 million following each loan forgiveness application submission. Thankfully for lenders, banks can rely on borrower certifications on loan forgiveness amounts. Nevertheless, agencies continue to release new guidance, and customers will rely on lenders to help them through the process.

Look for new opportunities to serve your customers and communities. There are rumors that Congress may issue a third round of PPP funding that will apply to more eligible borrowers. The Federal Reserve announced the expansion of its Main Street Lending Program, which can be a valuable source of liquidity as banks seek to meet customer needs. The SBA also released guidance on the sale of participating interests in PPP loans.

What regulatory or supervisory concerns should we be prepared to address?

Credit Decisions. Your bank must continue to balance meeting customer needs and making prudent credit decisions in the current economic environment. Many banks have started tightening credit standards, but this comes with a potential uptick in complaints about harmful lending practices. Regulators have indicated that they will scrutinize lending activity to ensure banks comply with applicable laws and meet customer needs in a safe and sound manner. The Office of the Comptroller of the Currency urged banks to “prudently document” their PPP lending decisions. The Consumer Financial Protection Bureau instructed small business owners “who believe they were discriminated against based on race, sex, or other protected category” to file complaints. Your decisions on credit parameters must be well thought out and applied uniformly.

Bank Secrecy Act/Anti-Money laundering Focus. Banks may face heightened risks from new customers or new activities from existing customers. For the first time since 2014, the Federal Financial Institutions Examination Council released updates to the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examination manual. While these updates are not directly related to the pandemic, regulators may scrutinize BSA/AML efforts at your next examination. Use this updated guidance as a springboard to assess your BSA/AML compliance program now.

IT and Security Concerns. Banks used technology enabling virtual or remote interactions during the pandemic, increasing risks associated with IT security. The regulators issued a joint statement addressing security risk management, noting that bank management cannot rely on third-party service providers and must actively ensure technological security. Expect this to be an area of focus at your next examination.

The Covid-19 Shift

For many companies, the Covid-19 pandemic necessitated rapid change. Microsoft Corp. CEO Satya Nadella noted in late April, “We’ve seen two years’ worth of digital transformation in two months,” due to the speedy adoption and implementation of new technology by the U.S. business sector to better serve customers and keep employees working safely during the crisis. 

Navigating the short-term impacts of these shifts has bankers working round-the-clock to keep pace, but the long-term effects could differentiate the companies that take advantage of this extraordinary moment to pivot their operations. This transformation makes up the core of the discussions taking place at Microsoft’s Envision Virtual Forum for Financial Services. As part of that event, Bank Director CEO Al Dominick virtually sat down with Luke Thomas, Microsoft’s managing director, U.S. banking and financial providers, to discuss how financial institutions can use this opportunity to modernize their operations.

They address:

  • Accelerated Adoption of Technology
  • Legacy vs. New Core Providers
  • Ensuring Continued Improvement

Texas Strong: Banks Contend With Dual Threats

“Texas has four seasons: drought, flood, blizzard and twister.” – Anonymous

To that list of afflictions you can add two more — the Covid-19 pandemic and a catastrophic collapse in global oil prices, creating double trouble for the Lone Star State.

There were over 50,500 coronavirus cases in Texas through May 20, an average of 174 per 100,000 people, according to the Center for Systems Science and Engineering at Johns Hopkins University. There were nearly 1,400 coronavirus-related deaths in the state.

In mid-March, Texas Gov. Greg Abbott imposed restrictions that limited social gatherings to 10 people or less, and effectively closed close-proximity businesses like restaurants and bars, health clubs and tattoo parlors. Even as Abbott reopens the state’s economy, many of its small businesses have already been hurt, along with many lodging and entertainment concerns.

Shutting down the economy was probably a good health decision,” says F. Scott Dueser, chairman and CEO at $9.7 billion First Financial Bankshares in Abilene, Texas. “It wasn’t a good economic decision.”

And then there’s oil situation. An oil price war between two major producers — Russia and Saudi Arabia — helped drive down the price of West Texas Intermediate crude from over $60 per barrel in January to less than $12 in late April, before rebounding to approximately $32 currently.

Texas still runs on oil; while it is less dependent on the energy sector than in past cycles, its importance “permeates” the state’s economy, according to Dueser. “It is a major industry and is of great concern for all of us,” he says.

The 65-year-old Dueser has been First Financial’s CEO since 2008, and guided the bank successfully through the Great Recession. “I thought I’d be retired by the next recession but unfortunately, we weren’t planning on a pandemic and it has come faster than I thought,” Dueser says.

This downturn could be as bad or worse as the last one. But so far, damage to First Financial’s profitability from the combined effects of the pandemic and cheap oil has been minor. The bank’s first quarter earnings were off just 2.6% year over year, to $37 million. Like most banks, First Financial has negotiated loan modifications with many of its commercial borrowers that defer repayment of principal and/or interest for 90 days.

Dueser won’t know until the expiration of those agreements how many borrowers can begin making payments, and for how much — clouding the bank’s risk exposure for now. But with a Tier 1 capital ratio over 19%, Dueser has the comfort of a fortress balance sheet.

“We unfortunately have been down this road before … and capital is king because it’s what gets you through these times,” he says.

Dueser made a decision early in the pandemic that as much as possible, the bank would remain open for business. It encouraged customers to use branch drive-thru lanes, but lobbies have remained open as well.

“So far we have been very successful here at the bank in staying open, not locking our doors, not limiting hours, keeping our people safe and at the same time serving more customers than we ever have in the history of the bank,” Dueser says.     

The bank has followed Covid-19 safety requirements from the Center for Disease Control. “The most important things are don’t let your people come to work sick and social distancing,” Dueser says. “We split every department, such as technology, phone center, treasury management and so on with having half the department work from home or from another one of our locations. That way we had only half the people here, which allowed us to put people in every other desk or cubicle.”

To date, the bank has had only four Covid-19 cases among its employees. “Thankfully, all four of those individuals are healthy and back at work,” Dueser says. “With each situation we learn more on how to protect our employees and customers.”

Dueser is one of 39 people on a task force appointed by Abbott to advise him on reopening the state’s economy. “I am very supportive of what he is doing, in the fact that we are getting the state back open,” he says. “The virus is not winning the war, which is good. We have a lot to learn so that we can live with the virus without having to go home and hide in a closet.”

One of Dueser’s biggest priorities through the economic hardship was to make sure retail and commercial customers knew that it would stand by them, come what may. That led to a recent marketing campaign designed around the phrase “Texas Strong,” a slogan used throughout the state that traces back to Hurricane Harvey, which devastated Houston in 2017.

“We want our customers to know that we’re safe, sound and strong,” says Will Christoferson, the bank’s senior vice president for advertising and marketing. “What’s stronger than Texas? We couldn’t think of anything.”

Coronavirus Ushers Banks Into New Digital Banking Era

The Covid-19 pandemic has forced dramatic changes in the U.S. economy at a breakneck speed that seemed impossible only a few short months ago.

The banking industry has risen to the challenge, managing more than a million applications for the Small Business Administration’s Paycheck Protection Program, modifying countless loan terms, deferring payments and redesigning the customer experience to minimize in-branch foot traffic — all while shifting a significant portion of operations to employees’ home offices.   

We are in uncharted territory. The business decisions your bank is making now impact your institution’s ability to meet customers where they are today, but also where they expect you to be in the future. The digital bridge you build for online account opening can help take you there.

Even before most of us learned the term “coronavirus,” few banks would have disagreed with the need to automate digital account opening and invest in systems to support the online customer experience. Your institution may have already identified this as a strategic objective for 2020. And even if you already offer the service, shutdowns and closures stemming from Covid-19 may have highlighted friction in the account opening experience that either previously lacked visibility or was considered acceptable for the limited number of customers who took advantage of it. With customers now primarily directed toward a digital channel, you should reconsider the metrics used to define a satisfactory user experience.

The right channel. Online account opening may have been one of several customer channels your bank offered, but it may not have been marketed as the primary or best channel — especially when compared to the high-touch experience of in-person banking. It’s become clear, though, that a digital model that complements, and works cohesively with, a branch model is necessary to meet customers where they are. The steps you take to cultivate online account opening as the right channel for your bank should also establish the hallmarks of a preferred user experience.

An end-to-end strategy. Do your customers need to visit a branch or make a phone call to complete application paperwork? Does your solution provide for safe digital identity verification? Does it support electronic signing? Are your account opening documents optimized for viewing on mobile devices? An online account opening strategy that does not consider these questions will likely reduce efficiency, resulting in a poor user experience that may cause customers to abandon the account opening process before completing it.

Continuing the relationship. Online service must be full service and seamlessly dovetail with your in-person customer model. Offering an online account opening experience that then requires a phone call or a branch trip to manage name or address changes is the sort of partial digital transformation that unnecessarily complicates customer service. Online account maintenance must have the option to be fully driven by customers as an embedded component of your online account experience. Fully embracing a well-conceived online strategy will include opportunities for marketing and cross-selling as part of the digital maintenance experience. If your bank cannot fully service customer needs remotely, they may seek institutions that better address their banking usability preferences.

Continuing the investment. Investment priorities for your organization have undoubtedly been revisited two, potentially three, times in the last few months. Use these opportunities to reevaluate your digital delivery model and the technology that supports it. Technology that speeds up identity verification processes and solutions that support the digital signing of mobile-optimized documents are critical components of your digital architecture that will reduce friction for your customers as they move through the online process.

You have already made vast changes to your operating model to meet the needs of your customers during very trying times. Now is the time to maximize your return on those changes and continue developing your digital strategy.

How Peoples Bancorp Prevailed Through PPP

“You only learn who has been swimming naked when the tide goes out,” wrote Warren Buffett in his 2004 annual letter.

He was referring to operations that trade derivatives. You don’t really know the value of what you hold in opaque markets, he explained, until it’s tested in hard times.

The same can be said about banking.

Rarely has the industry faced an environment as acute as today.

The scope and speed of this downturn are without modern precedent,” said Federal Reserve Chairman Jerome Powell earlier this week. It’s “significantly worse than any recession since World War II.”

It’s hardly an exaggeration to say that bankers bear much of the burden of saving the economy from oblivion. “If doctors and nurses are first responders to those who are sick,” says Robyn Stevens, chief credit officer at Peoples Bancorp, “bankers are the first responders for businesses, communities and economies.”

Stevens would know.

Within its three-state footprint spanning Ohio, West Virginia and Kentucky, Peoples was the top-performing bank in the first round of the Paycheck Protection Program measured by dollars of PPP loans approved per assets.

“A culture is tested when times get tough,” says Ryan Kirkham, general counsel at the $4.5 billion bank based in Marietta, Ohio. “You find out whether it is real or just lip service. We passed the test.”

The success of Peoples in the first round of PPP reveals a flaw in one of the principal narratives that has emerged from the unfolding crisis — that banks with the most advanced technology were the ones best positioned to manage the onslaught of loan applications.

It’s not that Peoples Bank hasn’t invested in technology in recent years, because it has. But the secret to its success in the first round of PPP was simple elbow grease.

Personnel from the top of the bank to the bottom volunteered to enter data into the Small Business Administration portal to process customer loan applications.

“Banks had to decide whether they were going to do it automated or whether they were going to do it manually,” says CEO Chuck Sulerzyski. “Peoples tried an automated approach but then opted for manual.”

“Many of our most senior executives have done data entry until 8, 9, 10, 11, 12 at night,” he adds. “We did over 100 of these loans on Easter Sunday. And when they shut banks over $1 billion out from 6 p.m. to midnight one evening, we had a couple dozen people volunteer to work midnight to 4 a.m. putting in the entries.”

This success reflects a culmination of a decade’s worth of effort, spearheaded by Sulerzyski, who joined the bank from KeyCorp in 2011.

The 62-year-old CEO spent the previous four decades working up the corporate ladder at multiple prominent banks. He worked at Citibank during the Walter Wriston era. He was at Chemical Bank when Walter Shipley was CEO. And he spent eight years at Bank One, working closely with President Don McWhorter and CEO John B. McCoy.

Sulerzyski has been there and done that, in other words. One lesson he’s learned along the way has been the importance of culture and customer relationships. It’s a lesson that has paid off in spades over the past three months.

“From a competitive standpoint, a lot of the large banks struggled with PPP,” Sulerzyski says. “One of the large regionals couldn’t do any loans the first few days. Another one started, but then had to shut down. Each of the bigger banks we compete against had their own degree of difficulties with this. Because our customers were well taken care of, CPAs and attorneys started referring business to us and it kind of snowballed on itself.”

Sulerzyski’s team speaks in single voice on this.

Our commitment to our communities and the importance that plays resonates with our employees,” says Thomas Frawley, senior vice president, consumer lending. “They start the call as a banker and end the call as a counselor, listening to the fears of our customers while assuring them that we are going to do our best to help them.”

“We have several associates who are working day and night,” says Ann Helmick, director of enterprise risk management. “They are doing this for the good of the client. For most, there will not be a personal gain.”

“It is easy to come up with a mission, vision and values. And when times are good, it can be easy to live by those values,” says Jason Phipps, regional president. “It is when a company or person faces adversity that you find out who a person or who an organization really is.”

One can argue all day long about the importance of scale and technology, and how it could soon be a principle competitive differentiator in banking. But technology is only a tool to help bankers ply their trade. The soul of any organization, and the true source of performance, lies instead in the people who run it.

“Bankers may have got a bad rap during the last crisis,” says Stevens, “but ours have been heroes during this one!”

Coronavirus Considerations for Goodwill Impairment

Given the recent impact of Covid-19 on the economy, unemployment and operations, discussions around potential goodwill impairment — and the related testing — is a hot topic for many financial institutions as the March 31 quarter ended.

Goodwill is defined as an asset representing the future economic benefits arising from other assets acquired in a business combination. Financial institutions record goodwill as a result of a merger or an acquisition. Accounting Standards Codification (ASC) 350, Intangibles – Goodwill and Other, states that entities must evaluate their goodwill for impairment at least annually. However, during interim periods, a goodwill impairment analysis could be necessary if the entity has an indication that the fair value of a reporting unit has fallen below carrying value, defined by the guidance as a triggering event. Determining whether a triggering event has occurred is challenging for many financial institutions.

Under the guidance of ASC 350, impairment testing for goodwill is required annually and upon a triggering event. Private entities electing the accounting alternative are only required to test upon a triggering event. Here are some examples of goodwill triggering events, according to ASC 350-20-35:

Macroeconomic conditions: deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates or other developments in equity and credit markets. 

Industry and market considerations: deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development. 

Overall financial performance: negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.

Other entity-specific events: changes in management, key personnel, strategy or customers; contemplation of bankruptcy or litigation.

Events affecting a reporting unit: a change in the composition or carrying amount of its net assets, a highly probable expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

A sustained decrease in share price: to be considered in both absolute terms and relative to peers.

It is clear that Covid-19 has global impacts on some macroeconomic conditions. Financial institutions may want to assess whether they have experienced a triggering event; if they conclude there has been such an event, they will need to proceed to a goodwill impairment test. Assessing whether there has been a triggering event, as defined by ASC 350, involves judgment.

When it comes to a decline in stock price, the guidance in ASC 350 does not define what “sustained” means. In isolation, a decrease in share price is not an automatic indicator of a triggering event. The guidance suggests comparing the relative decrease to peers — if it is consistent among the industry, one may conclude that the decrease is related to general economic events and not specific to the institution individually. Banks may determine that an overall decline in the market could be indicative of macroeconomic conditions that impact the value of the company. Entities should consider forecasts and projections to determine whether the situation is expected to be temporary, and the reduction in stock price is reflective of short-term market volatility rather than a long-term, sustained decline in fair value.

The guidance does not suggest that the existence of one negative factor results in a triggering event. Rather, the guidance requires companies to assess various factors to determine whether it is probable that the company’s fair value is less than its carrying value. One way to consider the factors mentioned in the guidance is to weight them by their impact on the entity’s fair value. If the company concludes that a triggering event has occurred, then an impairment analysis should be performed to determine if in fact goodwill is impaired.

The determination of a triggering event, or lack thereof, involves judgment; management’s analysis and conclusion should be thoroughly documented. As the economic environment and resulting impacts of Covid-19 continue to shift and evolve, companies should revisit goodwill impairment triggers on a regular basis.