2020 Bank Consolidation: Slowed by COVID!
For more than three decades, the banking industry has undergone a steady consolidation. Since 1990, the number of banks has decreased by 67 percent. During 2020, this consolidation continued.
The number of U.S. banks fell to nearly 5,000. During 2020, there was a net decline in banks of 176. This compares to a drop of 229 in 2019 and 264 in 2018.
While the pace slowed in 2020 - primarily due to the COVID pandemic, the consolidation trend continues. Near-term, the pace will be slower and the 2021 decline in number of banking charters may be below the 2020 drop.
Our Banking Industry Consolidation Rate (BICR) was 3.4% in 2020. The BICR is calculated as the change in number of banks divided by the number of banks chartered as of the beginning of the year.
The BICR was slightly below the long term trend rate of 3.6%, but down more significantly from recent years when it exceed 4%.
Three factors impact this rate: (1) bank mergers, (2) bank failures, and (3) new, or de novo, banks.
The effects of the COVID pandemic have been seen impacting these factors during the last half of 2020 and may continue into the first half of 2021.
OUTLOOK FOR 2021: Expecting slightly lower number of bank mergers and de novo bank openings and bank failures remaining on par with 2020. The Banking Industry Consolidation Rate should fall below 3%.
OUTLOOK FOR 2021: Until COVID pandemic ends, bank merger activity will be lower. The Bank Merger Rates drops below 3% - levels not seen since the 1980’s.
Our Bank Merger Rate (BMR) was 3.2% in 2020. The BMR was down significantly from the +4% merger rates seen over the previous five years. And significantly below the 4.4% average rate since 1990. The BMR is calculated as the number of banks that merged during the year divided by the number of banks chartered as of the beginning of the year.
The impact of COVID pandemic is clearly seen in the BMR. The COVID pandemic and guidelines impacted all key processes of a bank merger: valuation, due diligence, regulatory approval processes and timelines and merger integration activities. Many bank mergers have probably been deferred until the uncertainty of the COVID pandemic is greatly reduced or eliminated.
The Bank Failure Rate (BFR) remained low at 0.1% in 2020. The BFR was comparable to levels seen in the late 1990’s and early 2000’s.
There were only four (4) bank failures during 2020. Two of the failures involved fraud schemes. These failures were of banks with less than $150 million in deposits. Each was located in a different state.
The BFR rate is calculated as the number of bank failures during the year divided by the number of banks chartered as of the beginning of the year.
OUTLOOK FOR 2021: With the banking industry in good health, expect bank failures to continue to be low. The Bank Failure Rate should remain at the 0.1% level.
OUTLOOK FOR 2021: De novo activity will continue to be at low levels with new bank openings around the 2021 levels. The De Novo Bank Replenishment Rate should remain in 3 to 4% range.
The De Novo Bank Replenishment Rate (DNBRR) was 3.5% in 2020. While well below the 32% DNBRR seen during the 1990’s and 2000’s, this rate remained comparable to levels in recent years.
The DNBRR is calculated as the number of de novo banks opened during the year divided by the sum of bank mergers and bank failures during that year. It reflects the percentage that new banks replenish those banks lost to mergers or failures.
We did see a slowdown in both the regulatory processing of de novo bank applications as well as a lengthening of the time between regulatory approval and the opening of the new bank.
Within the Community Banking group, the Community Bank Consolidation Rate (CBCR) was 3.7% in 2020. For simplicity, Community Banks are defined as banks with total assets less than $10 billion.
The rate of consolidation varied by state. Above average consolidation occurred in New York, Kentucky, Wisconsin, Florida and Indiana where the CBCR exceeded 6%. Three states had CBCRs of less than 2%: Georgia, Minnesota and Louisiana.
Consolidation among the Community Banking group slowed later in 2020 as the impact of the COVID pandemic was felt.
OUTLOOK FOR 2021: Consolidation among Community Banks will be influenced by a variety of factors, including COVID recovery, state of local economies, management succession and financial performance. Look for the Community Bank Consolidation Rate to hover near 3%.
Bank Mergers: Slowdown that occurred in last half of 2020 will continue into the first half of 2021; as COVID pandemic becomes controlled, bank merger activity will pick up later in 2021. Overall, the Bank Merger Rate will be lower in 2021 than in 2020.
Bank Failures: The banking industry is in solid position financially and from a credit quality perspective. Bank failures should be nominal in 2021 with the Bank Failure Rate comparable to the 2020 rate.
De Novo Bank Replenishment Rate: With two de novo banks opened through early March 2021, the number of new banks opened in 2021 should be higher than in 2020. And with fewer bank mergers, the De Novo Bank Replenishment Rate should rise slightly in 2021.
Banking Industry Consolidation: Because of lower bank mergers, the overall decline in banking charters is expected to be below the 176 seen in 2020. Expect net loss of banking charters to fall into a range of 125 to 150. The Banking Industry Consolidation Rate is expected to be well below 3%.