Bank deals slowed to a crawl in the first half of the year, reaching levels not seen since the Great Recession.
At the same time, several deals were announced in June, and analysts report that some banks have reengaged in M&A discussions. As potential buyers and sellers reconvene, deal volume could increase in the coming months, but activity will not get back to the levels seen before COVID-19 until there is more clarity around credit quality, experts said.
"The concept of M&A is alive and well. The timing of announcements is anything but certain," Christopher Marinac, an analyst for Janney Montgomery Scott, said in an interview.
During the first half, there were 50 whole-bank deals announced, the lowest deal volume level for the first half of a year since the Great Recession when 49 whole-bank deals were announced during the first half of 2009.
Deal talks have started to pick back up behind the scenes, said James Stevens, a partner with Troutman Pepper. Banks that were engaging in deal conversations prior to the pandemic are reconvening and new parties are also beginning to explore M&A opportunities, he said in an interview.
"We are definitely seeing people reengaging and talking," he said. "Big shifts like what we have experienced, these massive changes in the economy, are going to loosen people up that maybe were not thinking about doing things before."
Six U.S. bank deals were announced in June, up from only one deal announcement in May. On July 1, Bridge Bancorp Inc. and Dime Community Bancshares Inc. announced their merger of equals.
"There's definitely a lot of discussions, but it's not anything like it was before, and I don't think it will be until we get true clarity about what this looks like. Frankly, that's probably not happening in 2020," Stevens said.
For deal announcements to get back to pre-COVID-19 levels, there needs to be more clarity around credit quality and forbearances for people to feel comfortable announcing a deal, according to both Marinac and Stevens.
"Credit quality is the biggest driver. Whether you're a buyer or a seller, if you have uncertainty on your own books or the other people's books, it's just going to be a drag on your ability to get together with someone," Stevens said.
Though there is still a lot of uncertainty, there is more clarity around COVID-19's economic impact than there was a few months ago, so banks may begin to slowly announce deals this year, Stevens said. Marinac believes deal announcements could increase around September and October.
In a research note, Compass Point managing director and research analyst Laurie Havener Hunsicker wrote that while defensive M&A transactions and discounted deals may continue, an uptick in offensive and premium deals will likely not happen until several quarters after the crisis has eased.
"Even after the crisis has ended, the big question will still remain: will the borrower who has received loan modifications through extensions/forbearance/payment relief eventually return to fully-performing status or become an [net charge-off]? Simply put, bank buyers need to know the sellers balance sheet and understand the potential for credit risk," she wrote.
Though uncertainty will continue to weigh on potential transactions, the pandemic has emphasized the need for M&A in order to gain scale, experts said.
"Banking is a hard business, and it's a lot harder in this environment," Marinac said. "We're in a business where the strong survive."
John Creighton, president and CEO of Flagler, Colo.-based High Plains Bank, which had $210 million in assets as of March 31, said he expects many banks similar to High Plains' size to be acquired after the pandemic.
"This pandemic is going to accelerate mergers and acquisitions, and we're likely to see more community banks our size be acquired," he said. "I think many of our peers won't be around in five years."