Matchmaker, Matchmaker: The 2020 M&A Outlook

By Robert Klingler

The passage of time invites us once again to look into our crystal ball to identify trends that are likely to affect merger and acquisition activity for the banking market in 2020. While some may say that age is only a number, the effects of the passage of time also can’t be fought. Personally, this means a prescription for progressive lenses. To the extent the forecast turns out dramatically incorrect, I’ll blame the small print.

The forces contributing to the consolidation of the industry show little to no sign of dissipating. While we are reluctant to say that there is a minimum size for viability or success, it is also easy to conclude that larger institutions frequently have several advantages. The ability to spread out regulatory costs, to finance innovation, to achieve meaningful diversification of loans and income streams, and the recognition that, as an industry, larger banks tend to earn better returns (and are thus rewarded with better pricing) will all continue to create economic incentives towards consolidation.

However, the continued consolidation, particularly without replacement of charters through a meaningful number of de novo institutions, will also likely begin to affect the marketplace for community bank M&A activity. While any given transaction only requires one willing and able buyer and seller, a well-functioning market generally requires sufficient volume of buyers and sellers to be active in the market. We are increasingly seeing potential buyers disappointed with the lack of perceived qualified sellers while, at the same time, potential sellers have found no buyer interest or have had to resort to non-traditional buyers. For 2020, we see neither a buyer’s market nor a seller’s market, but rather see an increasing value to investment bankers and other financial intermediaries who can serve as effective matchmakers in an increasingly segmented market.

Seller scarcity

We often hear from potential acquirers that finding a bank to acquire is increasingly difficult. As a result of the last several years of consistent levels of bank M&A activity, the large number of receiverships before that, and the continued lack of a strong de novo pipeline, the number of community banks has continued to fall. Even if one assumes that the percentage of banks deciding to sell in any given year remains relatively stable, we would expect the absolute number of deals to decline given the reduced number of total charters.

However, I don’t believe we should expect to continue to see the same percentage of banks electing to sell each year. We have long thought that, fundamentally, banks are sold rather than bought. A component of this viewpoint means that a critical element in whether there is a bank merger or acquisition to be had is whether the characteristics of any particular bank support that bank’s board making a determination that it is time to sell. One frequent characteristic of banks looking to sell is the age and experience of that bank’s management team and board of directors. When the bank’s organizing group (both management and the board) is ready to retire, there is often an internal pressure to maximize that group’s return by selling the bank.

While each bank’s sale decision reflects its own characteristics, the age of the bank is one potential indication of the bank’s interest and ability to survive generational change. Banks over 100 years old still make the decision to sell, but one can also be certain that both the management and board of such banks have successfully transitioned before (even if certain members of the board may look to be old enough to have served the entire history of the bank).

In the last 20 years, the total number of banks in the United States has fallen almost in half. That fact is the opening slide in every forecast of community bank M&A activity. However, if you look more closely at the ages of the outstanding banks, it tells an even more striking story. The number of banks that were established within the last 20 years has fallen by over 75 percent, from almost 2,200 banks in 1999 to just over 500 banks in 2019. Conversely, the number of banks established more than 100 years ago has actually increased by almost 500 banks in the last twenty years. As of 2019, over-100-year-old banks now represent almost half of the remaining banks.

Banks that are less than 20 years old now represent less than 10 percent of the remaining charters, down from 18 percent of bank charters just five years ago. Of course, part of this trend is simply that time must advance, and banks will get older (just as my eyesight reminds me that I’m getting older).

Over-100-year-old banks have a varied history and face different issues, but often they are family or locally owned institutions (even extremely patient private equity tends to have a shorter time horizon), frequently in lower-growth markets. While they face many of the same universal pressures towards consolidation and may have their own succession issues (such as the fourth generation of bankers being unable to convince the potential fifth generation of bankers to stay in the industry), these institutions have a demonstrated ability to survive change-overs in management and board members. I think it’s foolish to think that these over-100-year-old banks will reach a decision to sell at the same rate as their younger peers.

Buyer scarcity

While the potential scarcity of sellers may offer additional opportunities for those institutions that determine it is the right time to sell, we also hear from potential sellers that there are fewer realistic buyers out there. The last several years have seen an increase in larger bank merger activity. In addition to the headline-grabbing merger of BB&T and SunTrust into Truist, a number of serial acquirers, including those formed in the wake of the Great Recession, decided it was time to sell.

Like real estate, location is a key consideration in bank acquisitions. A potential buyer in the Midwest is of little use to a potential seller in the South. Accordingly, whenever identifying potential buyers, it is important to understand the geographies in which potential acquirers have a desire to expand or deepen. Looking specifically at the Southeast, among other transactions, we’ve seen Citizens and Southern sell to Bank OZK, FCB Financial sell to Synovus, National Commerce sell to Center State, Fidelity sell to Ameris, and State Bank Financial sell to Cadence.

In addition to each transaction eliminating a frequent acquirer of community banks, these transactions have also significantly increased the asset size of the remaining institutions. With a new larger size, these entities are now potentially less likely to continue to be as interested in smaller community banks. Although there is no prohibition (and there are always exceptions to the general rule), we’ve generally found that, absent unique circumstances, banks are generally uninterested in completing a bank acquisition that will grow the institution by less than the amount of the bank’s annual organic growth abilities.

As reflected in table 2, in Georgia this consolidation of serial acquirers has moved an entire cohort of potential acquirers from the $3 to $10 billion size up to the $10 to $20 billion size. This creates a scarcity of experienced buyers who may be reliably expected to seek to acquire additional community banks in Georgia.

This scarcity presents a number of potential concerns for community banks intending to seek a sale. First, the scarce number of buyers may reduce competition for even the most attractive community bank target, thereby potentially reducing the price obtained in the process (which could, of course, also reduce the interest of banks considering a sale). Second, the reduced number of potential buyers may make the timing of the transaction depend more on the specific acquisition timing plans of the remaining buyers. As they need time to digest other transactions, potential transactions may be subject to different timing pressures. Third, it increases the likelihood of needing to potentially cast a wider net for potential acquirers or the need to think outside the box. I believe the existence of these concerns increases the value to be received in retaining an investment banker with experience in the community banking space, as the abilities to assess market conditions, understand what potential buyers are looking for and formulate a cohesive story of the acquisition will make investment bankers’ advice increasingly valuable.

Non-traditional transactions

One trend that appears likely to continue in 2019 is the prevalence of non-traditional transactions, including recapitalizations (in lieu of traditional de novo activity) and sales to credit unions. Particularly for community banks in non-urban areas with limited loan demand, these non-traditional transactions often represent the most financially attractive alternatives for those institutions looking to sell.

One of the reasons we’ve continued to see low de novo activity remains the ability for an organizing group to instead acquire an existing bank. Organizers have found that even with paying a reasonable premium, needing to relocate the main office, and addressing legacy loan and deposit portfolios, it is often a smoother (and quicker) process than the de novo route. At least so long as the banking regulators continue to strictly enforce stringent business plans on de novos, I think we will continue to see selling banks finding interested buyers.

Much ink has been spilled in the last two years on banks being acquired by credit unions. As credit union acquisitions were up 300 percent in 2018 and another 150 percent in 2019 (through September), this would appear reasonable. But we should not lose sight of the fact that credit union transactions remain a very, very small part of the overall bank merger and acquisition market, representing less than 5 percent of deals in 2018 and less than 10 percent of deals in 2019 (through September). Credit union acquisitions of banks remain a sensitive topic for the industry, but for individual banks looking to sell, a credit union prospective buyer may easily represent the most financially attractive option.


A scarce number of sellers and buyers, as well as increasing non-traditional activity, is likely to depress the volume of bank merger and acquisition activity in 2020. However, individual bank boards will continue to make the fiduciary decision that now is the right time to sell, and other banks will remain interested in growing through acquisitions. Experienced matchmakers will be required to navigate the M&A market in 2020.

Robert Klingler is a partner at Bryan Cave Leighton Paisner in Atlanta.