The consolidation of the banking industry is not new news. It has been ongoing for more than five decades. Since 1990, the number of banks has decreased by nearly 11,000, or 67 percent.

During latest four quarters ending Q1 2021, this consolidation continued. But it was different.

The number of U.S. banks fell to 4,978. Over the past four quarters, there was a net decline in banks of 138. This compares to a drop of 175 in 2020, 229 in 2019 and 264 in 2018.

While the pace slowed during L4Q 2021 Q1 - 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 should be below the 2020 drop.

Our Banking Industry Consolidation Rate (BICR) was 2.7% during the L4Q 2021 Q1. The BICR was only 1.9% annualized during Q1. 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.

For both L4Q and for the quarter, he BICR was below the long term trend rate of 3.7%. Three factors impact this rate: (1) fewer bank mergers, (2) nominal bank failures, and (3) a handful of new, or de novo, banks.

The effects of the COVID pandemic have been seen impacting these factors during the last half of 2020 and continuing into the Q1 2021. But the pandemic effect should lessen as we move through 2021.

During the L4Q 2021 Q1, the Bank Merger Rate (BMR) was 2.7%. And for Q1 2021 only, the BMR was only 2.0% annualized - nearly one-half the historical trend. The BMR was down significantly from the +4% merger rates seen over the previous five years. And significantly below the 4.5% 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% during the L4Q 2021 Q1. The BFR was comparable to levels seen in the late 1990’s and early 2000’s.

There were no bank failures during Q1 2021 and only three (3) bank failures during the L12M. 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.

There are several banks that currently have Leverage Ratios below 4% and have negative Undivided Profits accounts (i.e., have accumulated net losses over the past several quarters or years. These banks could be subject to closure if not sold.

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.

The De Novo Bank Replenishment Rate (DNBRR) was 5.0% during the L4Q 2021 Q1. While this rate remained comparable to levels in recent years, it was well below the 32% DNBRR seen during the 1990’s and 2000’s. While the DNBRR is focused on de novo banks, it is very much influenced by the number of bank mergers and bank failure. For the latest 12 months, bank mergers were low and bank failures almost non-existent.

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.

During Q1 2021, three (3) de novo banks opened. Also, the FDIC approved five (5) applications this quarter; of which two (2) opened.

Within the Community Banking group, the Community Bank Consolidation Rate (CBCR) was 3.1% during the L4Q 2021 Q1. 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, Tennessee, and Indiana where the CBCR exceeded 5%. Six states had CBCRs of less than 2%: Nebraska, Kansas, Iowa, Georgia, Louisiana, and Ohio.

Consolidation among the Community Banking group slowed later in 2020 as the impact of the COVID pandemic was felt. As COVID begins to wane, the consolidation within the Community Banking group is expected to pick up; although not at historical rates for a while.

• Bank Mergers: Slowdown that occurred in last half of 2020 and Q1 2021 will continue into the until later in 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. However, there are a small number of banks with negative Undivided Profits account and Tangible Equity Ratio less than 4% which could be susceptible to closure by the FDIC. Bank failures should be nominal in 2021 with the Bank Failure Rate comparable to the 2020 rate - 0.1% - and bank failures in the range of five (5) or so.

• De Novo Banking: There are eight (8) approved de novo banks that are moving through their checklist of FDIC requirements to open, including capital raising. There are another twelve (12) applications pending FDIC review. With three (3) de novo banks opened through March 2021, the number of new banks to be opened in 2021 should be higher than the six (6) that opened in 2020 - perhaps as many as twelve (12). 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%.