2021 Banking Industry Consolidation: The Tortoise, not the Hare!

2021 industry consolidation underperformed relative to the historical averages. While the COVID pandemic significantly impacted consolidation during the first half of the year, it had a waning impact during the second half.

• The Banking Industry Consolidation Rate was 3.3% for the trailing 4 quarters compared to the long term annual rate of 3.7%.

• The Bank Merger Rate was only 3.3% L4Q compared to the 4.5% rate over the past 3+ decades.

• The Bank Failure Rate over the L4Q was 0.0% with no failures, showing the financial strength of the industry today.

• And, while the De Novo Bank Replenishment Rate was 5.2% - primarily due to the drop in bank merger activity rather than a resurgence of de novo banking, this rate remained well below the average rate of 21.1% over the past several decades.

Overall, the number of banks in the U.S. fell to 4,839 at the end of Q4 2021 - down 163 from one year ago.

The largest declines occurred in Community Banks with less than $250 million in total assets.

And, importantly, the largest declines occurred in rural markets with populations of less than 50 thousand.

The rate of banking industry consolidation remained below the historical average of 3.7%.

For the L4Q, the Banking Industry Consolidation Rate was 3.3%, or approximately 33 banking charters disappeared for each 1,000 banks existing one year ago.

Community Banks consolidated at a rate of 3.5% with several states showing a consolidation rate of greater than 4%: Indiana, Minnesota, Tennessee, and Oklahoma.

While starting the year out quite restrained, bank merger activity picked up during the second half of 2021. The Bank Merger Rate was 3.3% compared to an average rate of 4.5% since 1990. Q4 2021 activity - at an annualized rate -approximated the historical averages.

While de novo banking activity has seen a pick up, it remains significantly below historical averages. The De Novo Bank Replenishment Rate was 5.2% for L4Q, or approximately 5 new banks formed to replace every 100 lost to merger or failure. But this rate remains well below the historical average of 21.1%, or 21 new banks chartered to replace banks lost to merger or failure.

There were no bank failures during 2021. Hence, the Bank Failure Rate was 0.0%.

Financially, the industry is sound. Earnings were solid. Credit quality looks good. And capital levels are strong.

Outlook for 2022: Continued moderate pace with banking industry consolidation continuing slightly below historic averages. This will result from moderate rate of bank mergers. No reason to believe any unusual resurgence. The bank failure rate should continue hovering just above zero. And de novo bank activity will continue to be nominal.

Pandemic Continues to Slow Bank Consolidation Through L4Q Q3 2021.

The pace of the continuing banking industry consolidation remains impacted by the COVID pandemic. The Banking Industry Consolidation Rate was 2.4% for the trailing 4 quarters compared to the long term annual rate of 3.7%.

The Bank Merger Rate was only 2.4% L4Q compared to the 4.4% rate over the past 3+ decades.

The Bank Failure Rate over the L4Q was nearly 0.0%, showing the financial strength of the industry today.

And, while the De Novo Bank Replenishment Rate rose to 8.8% - primarily due to the drop in bank merger activity rather than a resurgence of de novo banking, this rate remained well below the average rate of 21.7% over the past several decades.

Overall, the number of banks in the U.S. fell to 4,914 at the end of Q3 2021 - down 88 from one year ago.

The largest declines occurred in Community Banks with less than $250 million in total assets.

And, importantly, the largest declines occurred in rural markets with populations of less than 50 thousand.

The rate of banking industry consolidation remained below the historical average of 3.7%.

For the L4Q, the Banking Industry Consolidation Rate was 2.4%, or approximately 24 banking charters disappeared for each 1,000 banks existing one year ago.

Community Banks consolidated at a rate of 2.7% with several states showing a consolidation rate of greater than 4%: Indiana, Minnesota, Tennessee, New York and Alabama.

For the L4Q, bank merger activity was restrained due to the pandemic. The Bank Merger Rate was 2.4% compared to an average rate of 4.4% since 1990. Preliminary data for Q4 2021 does show a pick up in activity with an annualized rate approximating the historical averages.

De novo banking activity has seen a pick up, but remains significantly below historical averages. The De Novo Bank Replenishment Rate was 8.8% for L4Q, or approximately 9 new banks formed to replace every 100 lost to merger or failure. But this rate remains well below the historical average of 21.7%.

There were no bank failures during 2021 and only 2 failures L4Q. Hence, the Bank Failure Rate was near 0.0%.

Financially, the industry is sound. Credit quality looks good. And capital levels are strong.

Pandemic Continues to Slow the Pace of Bank Consolidation During 2021

The pace of the continuing banking industry consolidation remains impacted by the COVID pandemic. The Banking Industry Consolidation Rate was 2.3% for the trailing 4 quarters compared to the long term annual rate of 3.7%.

The Bank Merger Rate was only 2.3% L4Q compared to the 4.4% rate over the past 3+ decades.

The Bank Failure Rate over the L4Q was nearly 0.0%, showing the financial strength of the industry today.

And, while the De Novo Bank Replenishment Rate rose to 7.4% - primarily due to the drop in bank merger activity rather than a resurgence of de novo banking, this rate remained well below the average rate of 21.8% over the past several decades.

YTD Q2 2021 there was a net loss of 51 banking charters. On an annualized basis of 102, this decline is even lower than the drop of 175 bank charters in 2020 - the Year of COVID.

The banking industry consolidation rate was only 2.0% on an annualized rate for the first half of 2021. These low rates of consolidation were last seen during the years leading up to the Great Recession as banks found organic growth preferred over acquisition growth - they were fooled!

The Bank Merger Rate for the first half of 2021 was only 2.1% - at near historic lows going back to the 1980’s! As seen during 2020, Community Banks continue to be leading the bank merger activity (or what exists), accounting for over 80 percent of transactions.

There has been some de novo bank activity. The De Novo Bank Replenishment Rate was 7.4% L4Q. But this level was achieved primarily because bank merger activity had declined significantly.

One of the positive signs for the banking industry has been the lack of bank failures. The Bank Failure Rate was near 0.0% L4Q. Solid earnings. Excellent credit quality. Strong capital levels. And - most importantly, no fraudulent activity!

The consolidation of the banking industry will continue. It may take another quarter or two before it starts to move toward its historic average rate. Bank mergers will pick up. Bank failures will continue to be the one off. De novo bank will also be more of the one or two offs as it has seen its role decline as the regulatory burden remains high. Consolidation has been ongoing for decades - and it may continue for decades.

So let’s watch the Q3 results later this year.

Bank Consolidation Continues Pause LTM Q1 2021

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.

BANKING INDUSTRY CONSOLIDATION RATE = 2.7%

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.

BANK MERGER RATE = 2.7%

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.

BANK FAILURE RATE = 0.1%

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.

DE NOVO BANK REPLENISHMENT RATE = 5.0%

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.

COMMUNITY BANK CONSOLIDATION RATE = 3.1%

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.

Q1 UPDATE: 2021 OUTLOOK FOR BANKING INDUSTRY CONSOLIDATION

• 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%.

2020 Bank Consolidation: Slowed by COVID!

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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.

BANKING INDUSTRY CONSOLIDATION RATE = 3.4%

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.

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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%.

BANK MERGER RATE = 3.2%

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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.

BANK FAILURE RATE = 0.1%

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.

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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.

DE NOVO BANK REPLENISHMENT RATE = 3.5%

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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.

COMMUNITY BANK CONSOLIDATION RATE = 3.7%

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.

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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%.

2021 OUTLOOK FOR BANKING INDUSTRY CONSOLIDATION

• 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%.