Hope, it is said, springs eternal. A particularly poignant sentiment for Spring of 2020 as the U.S. begins a measured re-opening following a months-long lockdown across almost all 50 states. That said, economic damage has undeniably been done: the U.S. unemployment rate spiked to 14.7% in April (on its way higher in May); consumer spending dropped precipitously in March (and likely even further in April); and GDP is on track to decline by more than 30% in Q2.
However, as previously expressed in this space but worthy of repetition: the U.S. economy will almost certainly endure and, ultimately, thrive again just as it did after 2 World Wars; a great depression; a great recession; black Monday; the energy crisis; the missile crisis; and 9/11 (et al.)
In the meantime, bank M&A activity has unsurprisingly been slow. Indeed, April 2020 saw only 3 whole-bank M&A transactions announced, the lowest monthly deal count since at least 1990 and a far cry from the long-term median of 22 transactions per month (as reflected in the Chart of the Month of the April issue of The M&A Monitor, Olsen Palmer’s monthly summary of M&A in the banking industry). In recent weeks, buyers and sellers alike have understandably shifted their respective attentions to crafting a not-so-standard operating procedure.
With that said, as the landscape stabilizes in the coming quarters, we continue to expect a pronounced spike in bank M&A activity, especially as the factors driving consolidation pre-COVID all largely still hold and are arguably now further-exacerbated by lower interest rates and slowing loan growth.
For many community banks, recent weeks have also included ably fielding and processing a veritable tidal wave of PPP applications across two phases. Of particular note, PPP origination fees will serve as an enormous de facto capital injection into the banking industry: aggregate origination fees of more than $20 billion will likely be realized, based on loan size data released to-date reflecting an aggregate fee of 3.1%. We suspect these fees will blunt much of the near term earnings pain caused by elevated provision expenses (at least in Q1), a finding anecdotally confirmed in our conversations with clients.
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