The coronavirus crisis has altered the U.S. banking M&A landscape of the past, present and future.

For deals closed in recent years, the 44% sell-off in bank stocks could lead to goodwill impairment charges in first-quarter earnings. For pending deals, the diminished valuation could send sellers or buyers searching merger agreement language for an out clause. For future deals, the billions of lost market capitalization forces potential sellers to swallow a bitter pill to make a deal.

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Deals from the past

With a growing list of banks trading below book value, many companies might need to book a goodwill impairment charge. Three of the nation's largest banks have the most goodwill on their books, holdovers from deals closed more than a decade ago.

More recently, Truist Financial Corp.'s massive merger-of-equals pushed the company toward the top of the list with $24.15 billion of goodwill, a total that amounts to 36.3% of the bank’s total equity.

Among the 25 banks with the most goodwill, Prosperity Bancshares Inc. and PacWest Bancorp stand out for having goodwill that exceeds 50% of the banks' total equity.

Accounting standards require companies to conduct a goodwill impairment test once a year or following a trigger event such as a recession. Banks should book an impairment charge if they believe the acquisition's fair value — what they could sell the acquired bank for today — is likely lower than the recorded value on the bank’s books.

Rick Childs, a partner at Crowe LLP, said he expects a handful of banks to take impairment charges when reporting first-quarter earnings and even more to book charges during the second-quarter earnings season.

"I don't think the market is going to notice," Childs said. "It's not an unexpected, shocking event."

Banks have some flexibility on when to take an impairment charge based on their interpretation of accounting rules, Childs said. The guidelines direct banks to consider impairments if there has been a "sustained decrease in share price."

"You may still conclude that it hasn't reached the level of 'sustained' at June 30," Childs said, saying some banks might wait until their annual exercise, which typically occurs in October.

This quarter, the Financial Accounting Standards Board simplified its goodwill impairment test. Previously, banks would have to evaluate the "implied fair value" of the acquisition's loans and deposits. Now, banks simply have to compare the value of their acquisition on their books compared to what it could fetch on the open market.

Future deals

But that could become an increasingly difficult exercise. Investment bankers said the coronavirus sell-off will hamper deal activity.

"Rightly or wrongly, seller perception is slow to adapt," said Christopher Olsen, managing partner for Olsen Palmer LLC. "So, in the short-term, there will be a disconnect between the bid and ask, and it will slow deal activity."

Bank deals through the first two months of the year were already behind last year's pace, and those figures do not include March, which has proven to be a brutal month for bank valuations. A couple sizable deals were announced last week, but analysts noted the transactions required "incredible guts" in the current market.

The rapidly evolving coronavirus crisis has shut down large chunks of the U.S. economy. Meanwhile, oil prices have collapsed, causing disproportionate stock price pain for energy-exposed banks.

Therefore, sellers and buyers alike could be wary. Just as sellers might be unwilling to accept today's valuation, buyers might be opposed to issuing shares at current prices, Olsen said. Further, buyers might be worried about buying a bank chockfull of unknown credit risks right at the start of a recession.

"I don't think we're there today, but it seems like we're locked into a recessionary track ahead," Olsen said.

On the other hand, while the crisis will slow deals to a near halt in the short-term, it could lead to elevated activity once the market stabilizes, Olsen said. Shareholders could pressure small banks to offer better liquidity after an intense sell-off during which shareholders had no exit options.

Further, a potential recession would likely amplify many of the reasons that have driven deals over the last decade, Olsen said. For example, a difficult rate environment that has pressured net interest margins has only gotten tougher in recent weeks.

Lee Burrows, vice chairman of investment banking for Performance Trust Capital Partners, also said deal activity should accelerate once the market stabilizes, predicting a "flurry of activity, particularly among the community banks that don't offer liquidity."

Deals in the present

A sell-off also calls into question the viability of deals that have already been announced. There are more than 100 bank-and-thrift deals that have not yet closed. Whether a seller would look to cancel a pending deal largely depends on whether the merger agreement language allows such a change, Olsen and Burrows said.

Shareholders could also vote down deals that are pending approval. In January 2019, PacWest Bancorp's acquisition of El Dorado Savings Bank F.S.B. fell apart due to a lack of shareholder support following a decline in stock prices.

In December 2018, Cadence Bancorp. increased its offer to purchase State Bank Financial Corp. by 4.3 million shares after its stock price declined by 43% since the deal announcement.

Whether buyers will have to similarly pony up more shares due to the coronavirus sell-off remains to be seen. Olsen said it is common for deals to have "double triggers," meaning the seller needs to show that not only has the buyer's stock declined but that it has declined more than peers'. And Burrows said many sellers will realize their share prices have been tied to the buyers' stocks.

"From what I'm hearing, most buyers and sellers are sticking together," he said. "And most sellers understand that if they were independent, their stock would have fallen by the same or even larger amount."