FED NOTES: Originally published in the Fall 2020 edition of Bank Owner magazine.
By Mike Scott
A look at merger and acquisition applications during the pandemic
The coronavirus pandemic has had a significant impact on the American economy, which in turn has impacted mergers and acquisitions activity. Although the Federal Reserve System continues to process M&A applications involving banking organizations, there has been a general slowdown in M&A activity in recent months. Additionally, while the FRS always has rigorously reviewed the financial factors in these proposals, pandemic-related uncertainty regarding the current condition and future financial prospects of banking organizations involved in an M&A proposal has prompted additional information gathering and analysis during the application review process. Finally, practical application processing challenges and considerations have arisen because many Federal Reserve System staff and other stakeholders involved in the application process are working remotely.
Pandemic’s impact on M&A activity
There has been a slowdown in M&A activity among banking organizations during 2020. The Federal Reserve Bank of Minneapolis has received five final expansionary M&A application proposals during the first seven months of 2020. This represents an approximate 40 percent reduction in M&A applications activity compared to the same period in 2019, when nine expansionary applications were received. These figures include state member bank merger applications and holding company acquisition applications. This is generally consistent with the slowdown in M&A applications received by the FRS nationwide.
Even with proposals for which regulatory approval is sought, the pandemic has introduced uncertainty. We have seen several M&A proposals that have been delayed or abandoned so the parties can renegotiate the purchase price, discuss terms, or consider whether a transaction is still feasible.
Considerations for M&A proposals
Given the uncertain impact of the pandemic on the financial condition and future prospects of banking organizations, it is more important than ever for applicants and regulators to thoroughly analyze financial factors associated with expansionary M&A proposals.
When considering M&A proposals, banking organizations should assess the pandemic’s potential to have adverse impacts on key elements of the organization’s health, such as capital, liquidity, and asset quality. Applicants should also assess these elements in the context of due diligence of target organizations in order to more fully understand the potential risks of a particular acquisition.
Applicants should expect they will need to provide information so that Reserve Bank staff can understand the applicant’s evaluation of the pandemic’s potential impact on an M&A proposal. In some instances, review of this information may result in longer processing times. Some of the information that applicants should address thoroughly in an application would include:
• The most recent quarter’s pro forma financial information, with a full explanation of the reasonableness of adjustments and assumptions.
• Updated asset quality analysis including, but not limited to, exposure to specific sectors of the economy, such as energy, commercial real estate, residential and consumer lending, and the hospitality industry.
• Assessment of capital adequacy (including capital conservation measures) and earnings, given current and potential deterioration in economic conditions.
• The potential impact of economic conditions on the proposed transaction, including contract changes, purchase price, business strategy or staffing, integration plans, and any anticipated changes to the transaction closing date.
Processing considerations – pre-filing process and electronic filing
Given the challenges of pursuing an M&A proposal during the pandemic, applicants may want to have the Reserve Bank review certain aspects of a proposal before they file a final application. This can be done by using the pre-filing process to provide information to and receive feedback from an applicant’s local Reserve Bank. For details on the pre-filing process, please refer to SR 12-12 / CA 12-11 (Implementation of a New Process for Requesting Guidance from the Federal Reserve Regarding Bank and Nonbank Acquisitions and Other Proposals), which can be found at https://www.federalreserve.gov/supervisionreg/srletters/sr1212.htm. Applicants may also contact local Reserve Bank staff to discuss the pre-filing process.
Since many of the prospective applicants, Reserve Bank staff, and other stakeholders involved in the applications process are working remotely during the pandemic, applicants should file M&A applications electronically rather than using paper mail. The FRB Minneapolis continues to accept applications through our electronic applications platform (E-Apps). Refer to https://www.federalreserve.gov/supervisionreg/afi/eapps_sign_up.htm for further information on signing up to file an application through E-Apps. The FRB Minneapolis also is currently accepting applications filed by email on a temporary basis. Email submissions for applicants located in the Ninth Federal Reserve District may be sent to FRB Minneapolis M&A staff at firstname.lastname@example.org.
Mike Scott is a senior M&A analyst for the Federal Reserve Bank of Minneapolis.