Community Banks and 2020 Bank Merger Activity

99% OF ALL BANKS SOLD IN 2020 WERE COMMUNITY BANKS.

When we think of bank M&A, we think of the big banks. Often, these are the headline deals. Is bank M&A simply bigger banks swallowing up smaller banks? No!

Yes - small banks generally comprise the largest group of bank sellers. Using a simplistic definition of banks with less than $10 billion in total assets, Community Banks represented 99 percent of all bank sellers during 2020. And Community Banks with less than $1 billion in total assets comprised 88 percent of all bank sellers.

 

IN 89% OF BANK MERGERS IN 2020, COMMUNITY BANKS WERE ACQUIRERS.

However, as it turns out, Community Banks are leaders - as acquirers - in bank M&A.

During 2020, Community Banks represented 89 percent of all bank acquirers.

Even smaller Community Banks were active acquirers. Community Banks with less than $1 billion in total assets comprised 45 percent of all bank acquirers last year.

COMMUNITY BANKS AS SELLERS ARE LOCATED PRIMARILY IN SMALL & MID-SIZED MARKETS.

Where were these selling banks headquartered?

Fully 67 percent of all selling banks in 2020 were headquartered in counties with populations under 250,000. 40 percent of selling banks were located in communities of less than 50,000 people. And often selling to another Community Bank in an adjacent county.

And, 26 percent of all bank merger activity by sellers were in larger counties of 500,000 or more. Much of the de novo bank activity of the 1990’s and 2000’s occurred in counties of this size and some of these banks eventually sell.

AS ACQUIRERS, COMMUNITY BANKS ARE ACTIVE IN COMMUNITIES OF ALL SIZES.

And where were the acquiring banks headquartered?

Perhaps surprisingly, 60 percent of all acquirers were headquartered in counties with populations of 250,000 or less. And 34 percent of acquiring banks were in counties with less than 50,000 people. These are our Community Banks.

Community Banks were also active in larger markets (> 500,00 populations) representing 32 percent of all bank mergers last year.

Community Banks of all sizes and in markets of all sizes continue to implement acquisition strategies as a key element of their strategic plans.

COMMUNITY BANK MERGERS HAVE BIGGEST IMPACT ON SMALLER COMMUNITIES.

The net impact of Community Bank merger activity resulted in fewer Community Banks across markets of all sizes.

In 2020, the decline was greatest in very small and more rural markets with populations of less than 50,000. These counties lost a net 81 headquartered banks. These markets may continue to be served by branch offices of the acquiring banks.

Larger markets also saw declines. There were 47 fewer Community Banks in markets with populations of 500,000 or more. The current state of de novo banking is insufficient to replenish much of this decline.

COMMUNITY BANKS REMAIN LEADING CENTERS OF FINANCE IN SMALLER MARKETS, BUT SERVE ALL.

At the end of 2020, Community Banks (blue shaded cubes in graph) continue to serve their important roles across markets of all sizes.

They continue to be principal centers of finance in communities with less than 50,000 people.

They also serve a key role in the larger markets. In counties with more than 750,000 population, Community Banks have a major presence and continue to grow in size - in part, through bank mergers.

OUTLOOK FOR 2021

Expect bank merger activity to continue in 2021. Due to the COVID pandemic, we would expect to see lesser activity during the first half of 2021. However, as vaccinations become the norm and life becomes more normal, the pent up bank merger activity should be slowly released during the last six months of the year.

And Community Banks will continue to participate - both as sellers and as acquirers - in 2021 and beyond. Bank M&A is a strategic tool for Community Banks. And they excel at it!

Note: Primary FDIC data source is the Events & Changes feature in the BankFind Suite.

How are Banks Using their Balance Sheets During the COVID Pandemic?

Nearly one year into the COVID-19 pandemic and economic collapse, let’s see how Small (SCB) Commercial Banks and Large (LCB) Commercial Banks have been using their balance sheet. The balance sheet changes reflect a variety of actions by customers, regulatory agencies, Congress and the Administration and bank management.

The data is from the weekly FRB H.8 Report. LCBs for this report are the largest twenty-five (25) commercial banks. The remainder (~5,000) are broadly designated as SCBs here.

Small Commercial Banks: Total Assets expanded by approximately $1 trillion, or 18%. On balance sheet loans grew $343 billion with the Payroll Protection Program (PPP) loans representing a substantial factor (through end of 2020, banks under $50 billion in total assets made $333 billion in PPP loans, according to the SBA). The Small Bank group held $111 billion more in agency MBS, continuing a trend favoring holdings of MBS over whole loans. Small Banks added $94 billion in other securities (i.e., not agency MBS or U.S. Treasuries). And the largest increase was in Cash, totaling $419 billion, to augment on balance sheet liquidity; comparable to their experience during the 2008-2009 Great Recession. Most of these cash balances were held at various Federal Reserve banks as excess reserves.

Large Commercial Banks (25 largest banks): Total Assets increased by $1.8 trillion, or 17%. Loans decreased by a net $(76) billion with declines in credit card, residential mortgages and C&I loans. This Large Bank group held $355 billion more in agency MBS, continuing a longer term trend favoring MBS over whole loans. Large Banks added $367 billion in U.S. Treasuries, in part to support collateral requirements relating to certain customer deposit inflows. As with SCBs, the largest increase for LCBs was in Cash, totaling $936 billion, to augment liquidity and comparable to their experience during the 2008-2009 Great Recession. Again most of these cash balances were held as excess reserves at various Federal Reserve banks.

Loans as % of Balance Sheet: Both Large Banks and Small Banks showed a decline in the ratio of total loans as a percent of total assets - comparable to that experienced during the Great Recession; but deeper for the Large Bank group. The simple conclusion that lending declined or slowed is not the full explanation. The cause for the decline in this ratio is more complex. Investment securities as percent of total assets are rising. With mortgage originations surging during this period of record low mortgage rates, whole loan originations are being sold into the secondary market and agency MBS (classified as Investments rather than loans) - much obtained directly through single-family lender swaps with Fannie Mae and Freddie Mac - are added to the balance sheet. Liquidity and risk-based capital objectives are driving this long term trend. Depositors are moving funds back into the banking system at rates much faster than loan demand can utilize these funds. And some of this deposit flow at Large Banks requires collateral; resulting in the expansion in holdings of U.S. Treasury securities. Cash holdings have risen as a liquidity response during this crisis and to meet LCR regulatory requirements for those large banks. And loan demand may have fallen off in certain categories - large customers taking advantage of low interest rates and a receptive corporate bond market and consumers paying down credit card balances- as well as lending terms may have tightened in other categories.

Cash as % of Balance Sheet: Banks across all sizes have elevated their cash balances as percent of total assets. This elevation started during the Great Recession and as bank regulators implemented new liquidity regulations and supervisory guidance and expectations. Year over year, Large Banks nearly doubled the percentage of total assets held in cash to 14.4%. Even the Small Bank group nearly doubled to 11.7%. Much of this cash is held as excess reserves at Federal Reserve banks.

Preliminary View on 2020 Banking Industry Consolidation Slowdown

While awaiting the final FDIC quarterly statistics, preliminary analysis shows that the banking industry consolidation slowed significantly in 2020, showing the impact of the COVID-19 pandemic.

The Banking Industry Consolidation Rate slowed to 3.2% in 2020, down from 4.2% in 2019.

The Bank Merger Rate also fell from 4.2% in 2019 to 3.2% in 2020.

The Bank Failure Rate remained low at 0.1%, comparable to the 2019 rate.

And the De Novo Bank Replenishment Rate fell to 4.2% during 2020 from 5.7% during 2019. That is, only 4 de novo banks replaced every 100 banks that failed or merged.

The impact of COVID-19 was very significant during Q4 and would be expected to have depressing effect on bank mergers during the first and second quarters of 2021.

These banking industry consolidation figures will be updated when the FDIC reports their official Q4 numbers in March.

Banking Industry Consolidation (Q3 2020 Update)

The decades long consolidation of the banking industry continued through Q3 2020. The Banking Industry Consolidation Rate was 4.2% - above the long term trend rate of 3.7% but slower than recent quarters. The impact of the COVID-19 pandemic is starting to show. It is anticipated that the consolidation rate will decline over the next few quarters.

Bank mergers across the banking industry slowed. The Bank Merger Rate was 4.3%. Although above the long term trend rate of 4.0%, the merger rate has been decreasing in recent quarters. And it is expected to decline over the next few quarters.

Also impacted by the COVID-19 pandemic was the opening of new banks. The De Novo Bank Replenishment Rate was 3.5%. The rate of new bank openings will never see the long term trend rate of 22.1%, but was also down from prior quarters.

Finally, bank failures continue to be low. The Bank Failure Rate was only 0.1%, below the long term trend rate of 0.4%.

The banking industry consolidation - while occurring across banks of all sizes - continues to impact the Community Bank sector more. The Community Bank Consolidation Rate was 4.5% for the latest 12 months. The number of Community Banks declined by a net 231 banks.

Also noteworthy was where the banking industry consolidation is occurring. The pace of consolidation is highest among communities with population greater than 500,000.

And where is the consolidation rate lowest? Counties with populations of less than 100,000 are showing a lower rate of 3.9% or less.

For additional information on the trends in the banking industry go to BankingStrategist.com.

Recent Bank Failures - There's a "Law & Order" Storyline Here!

Only nine bank failures over the past 35 months. An annualized Bank Failure Rate of less than 0.1%.

No bank larger than $150 million in deposits. No mega-banks. Small ripples across the U.S. financial system.

But many of these small bank failures have interesting background stories.

There is greed - some times within the bank and some times by customers. Or going for the gold by implementing a “can’t lose” new business strategy. There is fraud by bank management or customers. There was arson. And, sadly, there even was death.

Many of these stories would provide a basis for a “Law & Order” episode!

  • Almena State Bank: This bank was associated with an alleged multi-billion dollar check kiting scheme, according to the DOJ District of Kansas indictment. According to the DOJ press release, The indictment alleges the defendants defrauded Almena State Bank in Almena, Kan., and six other banks. The indictment alleges investigators examined unfunded checks and wire transfers totaling more $2 billion sent by defendant as part of the scheme. That included 409 wire transfers and 7,584 checks. Estimated loss: $18.3 million, or 26% of total assets.

  • City National Bank of New Jersey: The inspector general cited the primary cause of City National’s failure as the board and management’s decision to undertake a new business strategy that led to dramatically increased transaction activity from an expanded base of money service business customers. The bank pursued this business strategy without implementing adequate policies, procedures, risk management commensurate with the risk of its activities , or controls to comply with the Bank Secrecy Act. The bank’s increase in money service business customer activity resulted in severe Bank Secrecy Act/Anti-Money Laundering compliance deficiencies.” Estimated loss: $2.5 million, or 2% of total assets.

  • Resolute Bank: The inspector general attributes this failure to the board and management’s poor planning and lack of oversight over bank operations as the bank ventured into mortgage banking, focusing on the origination and sale of government insured and guaranteed loans, without a valid strategic or capital plan. Ineffective oversight of these ventures, combined with excessive overhead expenses, resulted in operating losses and critically deficient earnings, asset quality, and capital. Corporate governance deficiencies also contributed to the bank’s failure; specifically insufficient oversight by the board and management, and weak communication between management and members of the board. Estimated loss: $2.2 million, or 8% of total assets.

  • Ericson State Bank: In this bank failure, the inspector general attributed the failure to a critically deficient Board of Directors (Board) and poor Management oversight. The Bank President exercised unrestrained dominance over the Bank's operations, including the lending function. Specifically, the Bank President serviced loans associated with entities owned by his son (related-entity lending); extended funds to these related entities without seeking Board-required Loan Committee approval; and did not obtain proper documentation to support the credits. Estimated loss: $14.1 million, or 14% of total assets.

  • The Enloe State Bank: In the Enloe State Bank failure, the inspector general indicated that the President and the senior-level Vice President perpetrated fraud by originating and concealing a large number of fraudulent loans over many years.” According to The Dallas Morning News, “When a small-town, East Texas bank caught fire the day before state inspectors were to examine the books, few thought it was a coincidence. The May 2019 fire at Enloe State Bank in Cooper was started in the bank’s board room. Someone had stacked files on a conference table and set it ablaze, court records show. The bank’s former president pleaded guilty to conspiracy to commit bank fraud and arson.” Estimate loss: $21 million, or 57% of total assets.