Data Considerations for Successful Deal Integration

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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

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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.

2021 Compensation Survey Results: Fighting for Talent

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Did Covid-19 create an even more competitive landscape for financial talent?

Most banks increased pay and expanded benefits during the pandemic, according to Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors. The results provide a detailed exploration of employee benefits, in addition to talent and culture trends, CEO performance and pay, and director compensation. 

Eighty-two percent of respondents say their bank expanded or introduced remote work options in response to Covid-19. Flexible scheduling was also broadly expanded or introduced, and more than half say their bank offers caregiver leave. In addition, most offered bonuses to front-line workers, and 62% say their bank awarded bonuses tied to Paycheck Protection Program loans, primarily to lenders and loan production staff.     

And in a year that witnessed massive unemployment, most banks kept employees on the payroll.

Just a quarter of the CEOs, human resources officers, board members and other executives who completed the survey say their bank decreased staff on net last year, primarily branch employees. More than 40% increased the number employed overall in their organization, with respondents identifying commercial and mortgage lending as key growth areas, followed by technology.

The 2021 Compensation Survey was conducted in March and April of 2021. Looking at the same months compared to 2020, the total number of employees remained relatively steady year over year for financial institutions, according to the U.S. Bureau of Labor and Statistics.

Talent forms the foundation of any organization’s success. Banks are no exception, and they proved to be stable employers during trying, unprecedented times.

But given the industry’s low unemployment rate, will financial institutions — particularly smaller banks that don’t offer robust benefit packages like their larger peers — be able to attract and retain the employees they need? The majority — 79% — believe their institution can effectively compete for talent against technology companies and other financial services companies. However, the smallest banks express less confidence, indicating a growing chasm between those that can attract the talent they need to grow, and those forced to make do with dwindling resources. 

Key Findings

Perennial Challenges
Tying compensation to performance (43%) and managing compensation and benefit costs (37%) remain the top two compensation challenges reported by respondents. Just 27% say that adjusting to a post-pandemic work environment is a top concern.

Cultural Shifts
Thirty-nine percent believe that remote work hasn’t changed their institution’s culture, and 38% believe the practice has had a positive effect. However, one-quarter believe remote work has negatively affected their bank’s culture.

M&A Plans
As the industry witnesses a resurgence of bank M&A, more than half have a change-in-control agreement in place for their CEO; 10% put one in place in the last year.

Commercial Loan Demand
More than one-quarter of respondents say their bank has adjusted incentive plan goals for commercial lenders, anticipating more demand. Ten percent expect reduced demand; 60% haven’t adjusted their goals for 2021.

CEO Performance
Following a chaotic and uncertain 2020, a quarter say their board exercised more discretion and/or relied more heavily on qualitative factors in examining CEO performance. More than three-quarters tie performance metrics to CEO pay, including income growth (56%), return on assets (53%) and asset quality (46%). Qualitative factors are less favored, and include strategic goals (56%) and community involvement (29%).

CEO Pay
Median CEO compensation exceeded $600,000 for fiscal year 2020. CEOs of banks over $10 billion in assets earned a median $3.5 million, including salary, incentives, equity compensation, and benefits and perks. 

Director Compensation
More than half of directors believe they’re fairly compensated for their contributions to the bank. Three-quarters indicate that independent directors earn a board meeting fee, at a median of $1,000 per meeting. Sixty-two percent say their board awards an annual cash retainer, at a median of $21,600. 

To view the full results of the survey, click here.

Deal Integration Can Transform Finance, Risk and Regulatory Reporting

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A number of banks announced mergers and acquisitions in 2020, capitalizing on growth opportunities against a forbidding backdrop of chronically low interest rates and anemic economic growth during the Covid-19 pandemic.

The deals ranged from more moderately sized with a few headline-grabbing mega-mergers —a trend that expected to continue through 2021.

The appeal of M&A for regional and superregional institutions in the United States is that the right transaction could create big benefits from economies of scale, and enhance the proforma company’s ability to gain business. While the number of deals announced in this environment are modest, the stakes involved in contemplating and executing them certainly are not. Nor is the work that banks will face after a combination. Once the transaction has been completed, the hard work begins.

A Closer Look From Regulators
One potential outcome is added scrutiny from the authorities; a new merged entity, with more assets and a broader range of activities, could have more complex risk calculations and reporting obligations to deal with.

Overall, regulators have sharpened their focus on banks during and after the merger process by performing additional audits, more closely scrutinizing key figures and ensuring that the M&A plan is being adhered to. Even if there are no significant changes to a firm’s profile with regulators, or if any needed changes in risk and reporting obligations are manageable, the formidable task of combining the operations of two organizations remains. A single, seamless whole must be assembled from two sets of activities, two work forces with their own culture and two sets of technological assets.

Merging the Parts, Not Just the Wholes
None of these issues is distinct from the others. Consider the technology: The proforma company will have to contend with two data systems — at least. Each company’s data management architecture has staff that makes it run using its own modus operandi developed
over years.

And that is the best-case scenario. Joining so many moving parts is no small feat, but it provides no small opportunity. Deal integration forces the constituent institutions to reassess legacy systems; when handled correctly, it can assemble a comprehensive, fully integrated whole from existing and new tech to meet the combined entity’s compliance and commercial needs.

Creating the ideal unified finance, risk and reporting system starts with an honest evaluation of the multiple systems of the merging partners. Executives should take particular care to assess whether the equipment and processes of the merged entity are better than the acquirer’s, or have certain features that should be incorporated.

Management also should consider the possibility that both sets of legacy systems are not up to present or future challenges. It could be that the corporate combination provides an opportunity to start over, or nearly so, and build something more suitable from the ground up. Another factor they should consider is whether the asset size of the new unified business warrants an independent verification process to supplement the risk and regulatory reporting program.

Understanding What You Have and What You Need
To get the evaluation process under way for the operational merger, a bank should list and assess its critical systems — not just for their functionality, but with respect to licensing or other contractual obligations with suppliers to determine the costs of breaking agreements.

Managers at the combined entity should look for redundancies in the partners’ systems that can be eliminated. A single organization can have a complicated back-end systems architecture, with intricate workarounds and many manual processes. Bringing together multiple organizations of similar complexity can leave the combined entity with expensive and inflexible infrastructure. A subledger and controlling functions can simplify this for finance, risk and regulatory reporting functions. They can consolidate multiple charts of accounts and general ledgers, relieving pressure on the general ledgers. Organizations in some cases can choose to migrate general ledgers to a cloud environment while retaining detailed data in a fat subledger.

Whatever choices executives make, a finance, risk and reporting system should have the latest technology, preferably based in the cloud to ensure it will be adaptable, flexible and scalable. Systems integration is critical to creating a unified financial institution that operates with optimal productivity in its regulatory compliance, reporting efforts and general business.
Integrating systems helps to assure standardization of processes and the accuracy, consistency,
agility and overall ease of use that result from it.

The Three Pillars for Success in Peer Mergers

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Recent trends indicate that many bankers are considering adding significant scale by targeting peer institutions for outright acquisition.

These transactions, which we call “peer mergers,” are comparable to so-called “merger of equals,” except that the management team, operational structure and culture of the acquiring institution will mostly remain the same for the combined institution. This avoids the most obvious difficulty with successfully executing a merger of equals: combining two institutions without one side of the equation feeling “less equal” than the other. Peer mergers still carry plenty of their own risks, but keeping the management team and operational structure mostly intact is appealing and can greatly reduce the need to cut redundancies post-merger by eliminating them at the outset. Here are three key concepts to keep in mind when considering such a merger.

Choose a Good Strategic Fit

Why are we doing this deal? Will we be solving challenges or creating new ones? Is the combined institution greater than the sum of its parts?
Choosing to do a peer merger may be as straightforward as needing to add scale. However, banks desiring scale to fortify their balance sheet and gain operational and regulatory efficiencies may find that the wrong partner creates more headaches than it solves. Long-term solutions may be more difficult to manage at a larger combined institution, especially if there is a significant clash in cultures. In most cases, identifying a target needs to be about more than just scale. Does the merger gain entry into high-growth markets, meaningfully diversify credit risk, add complementary products and teams, or create significant synergies and efficiencies? Does your bank need to merge in order to accomplish those goals, or are there simpler, cleaner alternatives?

Get Ahead of Challenges

What are the challenges posed by the merger? How can those challenges be addressed? How quickly can those challenges be overcome?
We always recommend to our clients to be as proactive as possible about identifying and solving issues as early as they can in the acquisition negotiation process. This is even more true in a peer merger, where the consequences of a miscalculation are amplified by the transaction’s scale. The merger agreement doesn’t need to be signed to start this process. In fact, addressing issues prior to execution may very well reveal even deeper problems than due diligence would have otherwise shown, and allow for solutions or protections to be negotiated into the merger agreement. Especially try to hammer out the compensation of the potentially retained management personnel as early as possible; you don’t want to find out post-signing that key personnel aren’t as keen on staying with the combined institution as you’d thought — especially if that would trigger change in control payments.

Look Down the Road

What are our long-term strategic goals, and how does the merger get us closer to them? What will the combined institution look like 3 to 5 years from now? How does this benefit our shareholders?
Forecasting what the combined institution will look like in the long term involves much more than looking at pro formas and financial projections. Will your operational structure be able to handle the combined institution’s business volume at closing? Will it be able to five years down the road without a difficult and expensive overhaul? Will you be operating in your target markets, or will further geographic growth be needed and how will you achieve it? Will you cross asset size thresholds that trigger more onerous regulatory oversight in the near future?

Another important consideration is the impact on your shareholders — both the old and the new. Consider how you will give your shareholders the ability to cash out their investments. Will you conduct stock buybacks? Is a public listing on the table? Do you give target shareholders the opportunity to cash out at closing?

Both the potential benefits and risks of a typical merger are magnified in a peer merger, due to the scale of the transaction. With extensive strategic and operational foresight and careful navigation of the potential pitfalls, peer mergers offer a way to quickly add scale and supercharge your bank.

Positive Outlook for Bank M&A as the Pandemic Subsides

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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.

With Sector Primed to Consolidate Further, Large Mergers Magnify Opportunity, Risk

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The highly competitive and regulated US banking industry has grown increasingly concentrated over the past few decades, and continued ultralow interest rates will spur increased consolidation over at least the next two years, particularly among small and midsized banks that rely heavily on net interest income. Mergers and acquisitions (M&A) offer these banks opportunity to achieve greater scale, efficiency and profitability, a credit positive, but also introduce execution and integration risks that can erode these benefits.

Low interest rates are not the sole driver of consolidation but they increase the likelihood of a jump in M&A activity. The pace of sector consolidation slowed in 2020 as the coronavirus pandemic subdued business activity. But small and mid-sized banks retain a particular motivation to pursue M&A because their earnings potential rests more heavily on net interest income, which is hobbled in the current low interest rate environment. Other motivations for M&A include opportunities to cut expenses and the need to obtain and invest in emerging technologies.

In-market transactions present the greatest cost-saving opportunities. Acquisition targets that present the opportunity for efficiency gains have greater relative value. They are also easier for management teams to assess and evaluate, particularly because loan growth and business activity remain hard to forecast in the present economic environment. Branch reductions are a primary means of reducing expenses.

Banks have warmed up to larger deals and so-called ‘mergers of equals.’ The attractiveness of these transactions has grown in the past couple of years, partly because of favorable equity market response. However, execution risk grows with the size of a transaction because issues such as cultural fit become more prominent, with the potential to erode the credit benefits of the combination.

Click here to explore these trends further as part of Moody’s research.

Cloudy M&A Expectations for 2021

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Due to the Covid-19 pandemic, related economic downturn and recent presidential election, 2020 was a historic year characterized by high levels of uncertainty. These circumstances resulted in a significant drop in M&A activity in the banking sector, as stock prices dropped and bankers’ focused on serving customers and supporting their staff.

Bank Director’s 2021 Bank M&A Survey, sponsored by Crowe LLP, explores this unique environment. Rick Childs, a partner at Crowe, offers his perspective on the survey results — and what they mean for 2021 — in this video.

  • Top Deal Drivers

  • Pricing Expectations

  • Looking Ahead

Will We Ever See Three Times Book Again?

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Mergers and acquisitions are examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

In the late 1990s, the economy was doing well.

Bank stocks traded at such rich multiples that no one batted an eye when a management team sold their bank for two times book. That valuation meant you were a mediocre bank.

Take Fifth Third Bancorp in Cincinnati. In the ‘90s, its stock traded at more than five times book value. A well run and efficient bank, it had the currency to gobble up competitors and it did.

It announced a deal in 1999 to buy Evansville, Indiana-based CNB Bancshares for 3.6 times tangible book value and 32 times earnings. “That was not completely unheard of,” says Jeff Davis, managing director at consultancy Mercer Capital. Fifth Third announced a deal in 2000 to buy Old Kent Financial Corp for a 42% premium.

In fact, Fifth Third was a little late to the M&A premium game. The average bank M&A deal price reached a peak of 2.6 times tangible book value in 1998. The median price was 24 times earnings that year.

M&A Pricing Peaked in 1998

Source: Mercer Capital, S&P Global Market Intelligence and FDIC.

It was such a hot market for bank acquisitions, investors rushed into bank stocks in order to speculate on who would get purchased next. I remember sitting down with then-president of the Tennessee Bankers Association, Bradley Barrett, in the mid-2000s. He predicted the market would fall and many banks would suffer.

Boy, was he right. He was probably the first to school me in banking cycles.

Fast forward two decades. The industry is in a relatively depressed trough for bank valuations. Selling a bank for three times book value in the 2020s seems a remote fantasy. And it is. The pandemic and the economic uncertainty that kicked off this decade took a huge chunk out of banks’ earning potential and dragged down shares. As of Feb. 2, the KBW Nasdaq Bank Index was down 4% compared to a year ago. The S&P 500 was up 18% in the same time frame.

Granted, bank stock valuations have improved during the last six months. Investors tie bank stocks to the health of the economy: When the economy is improving, so will bank stocks, the thinking goes. As pricing improves, bankers should be more interested in doing deals in 2021, Davis says. Much of bank M&A pricing is dependent on the value of the acquirer’s stock, since most deals have a stock component.

But rising stock prices haven’t translated into higher prices for deals — at least not yet. The average price to tangible book value for a bank deal at the end of 2020 was 116%, according to Davis, presenting slides during a session of Inspired by Acquire or Be Acquired.

Improved stock valuations alone can’t alleviate the pressure holding down M&A premiums. Newer loans are pricing lower as companies and individuals refinance or take on new loans at lower rates, slimming net interest margins.

Plus, investors have also been less receptive recently to banks paying big premiums for sellers, says William Burgess, co-head of investment banking for financial institutions at Piper Sandler, during an Inspired By presentation.

There’s usually a rise of mergers of equals in times after an economic crisis, and that’s exactly what the industry is experiencing. The rollout of the vaccine and improving economic conditions could lead to more confidence on the part of buyers, higher stock prices and more bank M&A. Sellers, meanwhile, are under pressure with low interest rates, slim margins and the costs of rapidly changing technology.

“We think there’s going to be a real resurgence in M&A in late spring, early summer,” Burgess says.

To see M&A pricing rise to three times book, though, interest rates would have to rise substantially, Davis says. But higher interest rates could pose broader problems for the economy, given the heavy debt loads at so many corporations and governments. Corporations, homeowners and individuals could struggle to make debt payments if interest rates rose. So would the United States government. By the end of 2020, America’s debt reached 14.9% of gross domestic product, the highest it has been since World War II. In an environment like this, it might be hard for the Federal Reserve to raise rates substantially.

“The Fed seems to be locked into a low-rate regime for some time,” Davis says. “I don’t know how we get out of this. The system is really stuck.”

Masks and Zoom Conferencing: What Dealmaking Looks Like During a Pandemic

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M&A will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired featured on BankDirector.com. Click here to access the content.

Bank mergers and acquisitions fall apart for any number of reasons. Try doing one in a pandemic.

In March, Kenneth Mahon, CEO of $6.6 billion Dime Community Bancshares, was on the edge of announcing a major deal in the New York metropolitan area. His Brooklyn, New York-based executive team and that of $6.3 billion Bridge Bancorp in Bridgehampton, New York, had agreed to a $489 million merger of equals. Each had fully vetted the other’s balance sheets.

Then came the body bags. It was late March in New York City, which had become ground zero for one of America’s first Covid-19 death waves. Mahon remembers hearing the news that morgues were overflowing and body bags were being delivered to the city.

“We had a conversation in the next day or so about whether that was really the right time [to announce a deal],” he says.

M&A took a nose-dive in 2020, with only 112 announced deals — less than half of the announced deals from the year before, according to S&P Global Market Intelligence. That may be changing. Deal volume increased in the fourth quarter last year as stock prices improved and banks felt more comfortable about asset quality, which could lead to even more M&A ahead. But those who did get deals done during the pandemic learned a whole lot about remote consolidation and online negotiation, skills they were forced to learn quickly.

In Dime’s case, Mahon knew that putting a deal on hold is never a good thing. Rumors can spread and the news may leak, causing uncertainty among staff and impacting the value of the transaction. But this was not a good time to shake hands, in person or not. As the pandemic suspended life in New York City  midstream, so it did the bank’s announcement.

It wasn’t until July that the two institutions announced the deal, after the exchange ratio of Dime stock to Bridge stock came back to the agreed upon 0.648%. Bridge CEO Kevin O’Connor will serve as CEO of the combined institution when the deal closes, which is expected within weeks. The merged banking company will have $11 billion in assets and go by the name Dime Community Bancshares. Mahon will serve as executive chairman.

Doing a deal remotely over video conferencing software hasn’t been easy. Mahon logs onto Zoom Video Communications meetings from a 400-square-foot studio apartment in Brooklyn. What is it like to build trust with a mask concealing your face? Not easy.

Mahon says he meets in person regularly with four other executives where they sit apart in a conference room and lift the masks. “Body language is important,” he says.

Curtis Carpenter, a senior managing director at investment bank Hovde Group, is amazed at how many executives and board members are still willing to travel to meet in person, jumping on private planes or flying commercially. He mostly serves banks in the Texas and Oklahoma region. One meeting was called off when one of the attendees got Covid. But mostly, people could still get together, he says.

“Everyone would wear a mask when entering the bank and when entering the conference room. In most cases, the mask would come off,” he adds. “It’s hard to have a discussion about buying and selling and executive contracts, of such an important personal nature; you want to see the person’s face.”

Others say they got a deal done without shedding the masks. “We were following appropriate safety measures,” says Keene Turner, executive vice president and CFO of $8.4 billion Enterprise Financial Services Corp. in Clayton, Missouri, which bought Seacoast Commerce Banc Holdings in San Diego for $169 million in November 2020.

The bank had already started discussions pre-pandemic with Seacoast. Executives knew each other, having first met attending a Bank Director conference years ago, Turner says. “That familiarity was built up over time,” he says. “In this case, we were comfortable with each other already.” The bank has gathered employees, all wearing a mask, to go over processes and procedures, but most meetings are remote.

Training new employees online is tricky — and so is data conversion. “It’s kind of like baptism by fire,” says Mark Tryniski, CEO of $13 billion Community Bank System in Dewitt, New York.  “We had never done it that way.”

Tryniski says the bank used a lot of screen sharing and software collaboration tools in its merger with Steuben Trust Corp., which was completed in June 2020.

The pandemic created time delays and additional work for everybody.

Tupelo, Mississippi-based BancorpSouth Bank has managed two deal announcements during the pandemic. Dan Rollins III, chairman and CEO of the $24 billion bank, says his executive team ended up doing due diligence on a seller three times.

Several bankers say they think remote work is less efficient and that meetings take longer over video conferencing software, despite saving travel time. Most are eager to get back into the office again.

“If I had a choice, I wouldn’t choose to do a deal in a pandemic,” Mahon says. “It hasn’t been impossible. We have professionals who are getting it done.”