The Uncertain Impact of COVID-19 on the Bank M&A Playbook

As banks across the country grapple with market and economic dynamics heavily influenced by COVID-19, or the new coronavirus, separating data from speculation will become difficult.

The duration and ultimate impact of this market is unknowable at this point. The uncertain fallout of the pandemic is impacting previously announced deals and represents one of the biggest threats to future bank M&A activity. It will force dealmakers to rethink risk management in acquisitions and alter the way deals are structured and negotiated.

As we have seen in other times of financial crisis, buyers will become more disciplined and focused on shifting risk to sellers. Both buyers and sellers should preemptively address the impact of the coronavirus outbreak on their business and customers early in the socialization phase of a deal.

We’ve compiled a non-exhaustive list of potential issues that banks should consider when doing deals in this unprecedented time:

  • Due Diligence. Due diligence will be more challenging as buyers seek to understand, evaluate and quantify the ways in which the coronavirus will impact the business, earnings and financial condition of the target. Expect the due diligence process to become more robust and protracted than we have seen in recent years.
  • Acquisition Funding. Market disruption caused by the virus could compromise the availability and pricing of acquisition financing, including both equity and debt financing alternatives, complicating a buyers’ ability to obtain funding.
  • Price Protections. For deals involving publicly traded buyer stock, the seller will likely be more focused on price floors and could place more negotiating emphasis around caps, floors and collars for equity-based consideration. However, we expect those to be difficult to negotiate amid current volatility. Similarly, termination provisions based upon changes in value should also be carefully negotiated.

In a typical transaction, a “double trigger” termination provision may be used, which provides that both a material decline in buyer stock price on an absolute basis (typically between 15% and 20%) and a material decline relative to an appropriate index will give the seller a termination right. Sellers should consider if that protection is adequate, and buyers should push for the ability to increase the purchase price (or number of shares issued in a stock deal) in order to keep the deal together and avoid triggering termination provisions.

  • Representations and Warranties. As we have seen in other economic downturns, expect buyers to “tighten up” representations and warranties to ensure all material issues have been disclosed. Likewise, buyers will want to consider including additional representations related to the target business’ continuity processes and other areas that may be impacted by the current pandemic situation. Pre-closing due diligence by buyers will also be more extensive.
  • Escrows, Holdbacks and Indemnities. Buyers may require escrows or holdbacks of the merger consideration to indemnify them for unquantifiable/inchoate risk and for breaches of representations and warranties discovered after closing.  
  • Interim operating covenants. Interim operating covenants that require the seller to operate in the ordinary course of business to protect the value of their franchises are standard provisions in bank M&A agreements. In this environment we see many banks deferring interest and principal payments to borrowers and significantly cutting rates on deposits. Sellers will need some flexibility to make needed changes in order to adapt to rapidly changing market conditions; buyers will want to ensure such changes do not fundamentally change the balance sheet and earnings outlook for the seller. Parties to the agreement will need focus on the current realities and develop reasonable compromises on interim operating covenants.
  • Investment Portfolios and AOCI. The impact of the rate cuts has created significant unrealized gains in most bank’s investment portfolio. The impact of large gains and fluctuations in value in investment securities portfolios will also come into focus in deal structure consideration. Many deals have minimum equity delivery requirements; market volatility in the investment portfolio could result in significant swings in shareholders’ equity calculations and impact pricing.
  • MAC Clauses. Material Adverse Change (MAC) definitions should be carefully negotiated to capture or exclude impacts of the coronavirus as appropriate. Buyers may insist that MAC clauses capture COVID-19 and other pandemic risks in order to provide them an opportunity to terminate and walk away if the target’s business is disproportionally affected by this pandemic.
  • Fiduciary Duty Outs. Fiduciary duty out provisions should also be carefully negotiated. While there are many variations of fiduciary duty outs, expect to see more focus on these provisions, particularly around the ability of the target’s board to change its recommendation and terminate because of an “intervening event” rather than exclusively because of a superior proposal. Likewise, buyers will likely become more focused on break-up fees and expense reimbursements when these provisions are triggered.
  • Regulatory approvals. The regulatory approval process could also become more challenging and take longer than normal as banking regulators become more concerned about credit quality deterioration and pro forma capitalization of the merged banks in an unprecedented and deteriorating economic environment. Buyer should also consider including a robust termination right for regulatory approvals with “burdensome conditions” that would adversely affect the combined organization.

While bank M&A may be challenging in the current environment, we believe that ample strategic opportunities will ultimately arise, particularly for cash buyers that can demonstrate patience. Credit marks will be complex if the current uncertainty continues, but valuable franchises may be available at attractive prices in the near future.

Bank M&A: Setting Expectations for 2020

What’s driving bank M&A today? That’s one of the questions explored in Bank Director’s 2020 Bank M&A Survey, sponsored by Crowe LLP. In this video, Crowe Partner Rick Childs explains how M&A drivers and barriers will impact deal activity in 2020. He also weighs in on how to effectively measure the success of a transaction and shares the important role strategic discipline plays in achieving long-term success.

  • Pricing Expectations
  • Defining a Successful Deal
  • Predictions for 2020

In accordance with applicable professional standards, some firm services may not be available to attest clients. © 2020 Crowe LLP, an independent member of Crowe Global.   crowehorwath.com/disclosure

M&A: What Today’s Sellers Need To Know


Pricing is often a deal-breaker in bank M&A, and sellers are seeking the best price possible for their shareholders. Dory Wiley of Commerce Street Capital explains that while pricing likely won’t rise in 2016, some banks will be better positioned for the best price and, more importantly, the best deal.

  • Which Banks Will Get a Higher Price
  • Expected Pricing Trends in 2016
  • How to Get the Best Deal

Bank M&A in 2014: What to Expect


In this video, Rick Childs of Crowe Horwath LLP highlights findings from the 2014 Bank Director & Crowe Horwath LLP Bank M&A survey, revealing a shift in which banks are expected to be the active acquirers this year. In addition, Rick shares his insights on regulatory approval trends, mergers of equals and the continued disconnect between buyers and sellers on pricing.


M&A: Getting the Regulatory Position Right Remains Critical to Deal Activity


1-15-14-FinPro.pngTwo of the biggest obstacles to merger activity are mismatched pricing expectations and regulatory impediments. With the dramatic increase in banking stock prices and trading multiples, buyers now have much better stock currency and thus, the capacity to pay more. The driver of this improvement has been better earnings and improved credit quality resulting in lower credit marks.

With these improving conditions, one might expect a wave of merger activity that advisors dream about. However, we have to keep in mind that equity markets are pricing in the expected future results while banking regulators are focused on past exam results and potential future market stresses. Therefore, regulators are not caught up in the current market euphoria. Regulatory issues can materially delay deals as evidenced by the pending M&T Bank and Hudson City transaction.

Limitations of Joint Meetings with Regulators

Regulatory factors will continue as impediments to deals. One common approach in addressing regulatory factors is a pre-filing meeting with regulators prior to announcement. This pre-filing meeting serves multiple purposes. It provides a courtesy to regulators and helps strengthen the relationship and trust between banker and regulator. Bankers and their advisors also view the meeting as a due diligence tool. Managers report to their boards of directors that they meet with the regulators on the transaction and did not hear any objections. However, it is important to realize that the usefulness of this meeting from a due diligence perspective will depend upon the attendees of the meeting. Regulators are prohibited by law from discussing examination findings with anyone other than the management of the regulated institution and their regulatory advisors, so regulators must limit what is said in a joint meeting with both management teams and advisors. As a solution, the pre-filing meeting should be a two-part meeting. One part should allow for an open dialog on examination matters between the regulator and regulated institution. The second part will allow the buyer, target and their advisors to discuss the application and processing matters with the regulator.

Regulator Impediments

From my experience, regulatory impediments toward mergers revolve around three areas: 1. safety and soundness, 2. compliance and 3. golden parachute restrictions. From a safety and soundness perspective, regulators require that the combined entity be at least pro forma CAMELS rated 2. The key to addressing regulatory concerns from a safety and soundness standpoint is compiling a pro forma enterprise risk management (ERM) analysis. The ERM analysis will provide a framework for management to discuss the resulting entity’s risk profile in a CAMELS format. Regulators will be interested in discussing the impact of any new lines of business, concentrations and new staffing models of the combined entity.

Material buyer compliance issues will usually delay or prevent a transaction. Management teams of buyers have to be vigilant with regulatory compliance and resolve issues pre-announcement, even if the delay is weeks or months. Compliance issues at sellers are easier to resolve. Regulators will be evaluating whether the buyer’s management and policies and procedures are sufficient to provide a sound compliance framework going forward. However, correcting compliance going forward does not absolve buyers from the target’s past issues as JPMorgan Chase & Co. and Bank of America have found in their purchases of Washington Mutual Inc. and Countrywide Financial Corp. Therefore, due diligence remains key in identifying these issues while deal structure helps manage liability. For example, we recently advised two different acquirers that were purchasing banks with significant Bank Secrecy Act/anti-money laundering violations. In the first case, the acquirer built in a walk-away provision in the merger agreement which allowed the acquirer to terminate the deal if fines exceeded a threshold. In the second case, the buyer could not determine the potential liability and elected to structure the transaction as a purchase of assets and assumption of certain liabilities. In this second case, the regulatory fines amounted to almost the entire deal consideration. The buyer was immune from the fines, but the sellers received almost nothing.

Golden Parachutes as a Problem

One factor used to induce the management teams of sellers to go along with (and sometimes promote) the sale of their institution are golden parachute agreements. However, a renewed focus by regulators on Section 359 of the Federal Deposit Insurance Corp.’s rules and regulations has led to deal hurdles. Section 359 limits the payment of golden parachutes to the management team of institutions in troubled condition. Historically, payments were structured so the acquirer made the payment, not the troubled institution, as a means of sidestepping the issue. But now, the FDIC has strictly limited payments to no more than twelve months salary, regardless of which entity pays it. Therefore, sellers either have to improve their risk profile to remove the regulatory troubled condition or management teams have to accept the severance limitations.

While the market is improving and conditions are ripe for deal making, addressing and evaluating regulatory position needs to be a continued focus.

The Price Is Not Right


ma-research-13-report.pngAn increasing number of banks are interested in making an acquisition, but a significant misalignment between the price that buyers are willing to pay and that sellers are willing to accept will most likely be a barrier to any significant consolidation in 2013, according to a recent email survey of officers and directors conducted by Bank Director and Crowe Horwath LLP.

According to the survey, which was completed by 224 bankers in October, 57 percent of respondents hope to make some form of acquisition this year, which is up from 52 percent last year. Of those, 46 percent want to buy a healthy bank, 21 percent are interested in branches, and 17 percent seek to buy an FDIC assisted institution. Last year, there was less interest in healthy banks at 37 percent but more interest in branches and FDIC assisted transactions—at 27 percent and 24 percent, respectively. 

Respondents looking at acquisitions outside of their core branch banking franchise show particular interest in investment management and/or trust businesses at 40 percent and insurance brokerage and/or agency businesses at 30 percent. Twenty-nine percent of those looking at acquisitions outside of their core banking franchise seek to acquire a residential mortgage origination business.

Chad Kellar, senior manager at Crowe Horwath LLP, explains that acquisitions of mortgage origination businesses are of interest right now given the relatively strong position of mortgage companies that made it through the worst of the financial crisis.

“Sales are very strong right now, and obviously the refinancing boom is continuing,” says Kellar. “So those [mortgage companies] specializing in refinance, in particular, are going gangbusters this year and last year relative to what they had been doing even before the downturn.”

For potential buyers, the top three reasons for making an acquisition did not change this year, with 63 percent of respondents wanting to supplement organic growth, 60 percent looking to increase market share and 41 percent trying to rationalize the cost of regulation over a wider base.

Not surprisingly, pricing is the number-one barrier for both buyers and sellers. Sixty-two percent of buyers cite unrealistically high pricing expectations as a top barrier to an acquisition, and 71 percent of potential sellers feel the pricing is too low to make a deal.

The disagreements over pricing may come down to perceived asset quality—with 59 percent of buyers concerned about the asset quality of potential targets but only 5 percent of sellers reporting subpar asset quality as a barrier to selling their bank.

“From the perspective of an acquirer, there is still significant concern about what the seller is reporting as their asset quality,” says Kellar. “Through a number of transactions where we go in and say, “here’s the potential loss,” it’s still a multiple of what the seller’s board is thinking. So there is a pretty big divide between an acquirer that’s healthy enough to go do a transaction and the seller in a lot of these situations.”

Until these pricing issues are resolved, it appears that any great wave of M&A activity will have to be put on hold. Eighty-nine percent of respondents say they have no intention of selling a bank, branch, line of business, or loan portfolio in the next year. Only 2 percent of respondents report they are planning to sell a bank, which could be bad news for the 46 percent who say they want to buy one.

Rick Childs, director at Crowe, says these results are consistent with what he has been seeing in practice.

“While waves of consolidation have been predicted for a number of years, the survey really indicates that credit quality and pricing concerns have really held back the level of consolidation,” says Childs. “I think banks aren’t as interested in selling as the predictions would suggest. Certainly, increased regulation creates headwinds and the survey shows that banking is not as fun [as it used to be]. But I think these people are still committed to independence, not wanting to have the hometown bank owned by somebody else. There’s still a lot of pride in that.”

For the full summary report, click here.

**A full discussion of survey results will appear in the 1st Quarter 2013 Issue of Bank Director magazine.