Shifting Drivers of Bank M&A in 2020

By Tyler Mondres, ABA Senior Manager, Economic Research

More than half of banks with plans to acquire another bank in the near future cite achieving economies of scale, expanding their footprint and activating underused potential as important or very important reasons they look to buy, according to the Community Banking in the 21st Century 2019 survey conducted by the Federal Reserve, FDIC and Conference of State Bank Supervisors. Conversely, more than two-thirds of banks that are seriously considering an acquisition offer said that regulatory costs and an inability to achieve scale were important or very important factors guiding their decision. Just under half of these banks cited succession issues as another factor driving them to sell.

These findings were largely echoed in the 2020 Bank Director M&A survey. The top four reasons banks engage in M&A, according to the report, include acquiring an attractive deposit base (60 percent), increasing earnings per share (52 percent), supplementing or replacing organic growth (41%), and rationalizing operating costs over a wider base (41 percent). Banks with assets between $500 million to $10 billion also identified expanding into new markets (46 percent) as an important factor.

Over the last two decades, the average number of bank M&A deals announced has hovered around 250 to 280 deals per year. That number might start to come down, however, in 2020. Just over half of banks surveyed by Bank Director expect fewer than 200 deals this year, with an additional 37 percent expecting between 200-250 deals. The most common barriers to bank M&A cited for 2020 were high pricing expectations (72 percent), a lack of suitable targets in a buyer’s desired market (56 percent), and concerns about asset quality (36 percent).

Sellers are less optimistic about finding buyers at the right price this year. Only 54 percent think it would be easy to find a buyer if their bank sought a sale, down from 68 percent last year. Among those who think it would be difficult (27 percent), the vast majority cite their own bank’s pricing expectations (68 percent).

Robert Klingler, an Atlanta-based bank deal lawyer, also predicts fewer deals in 2020 due to an increasing scarcity of buyers and sellers. Consolidation has reduced the potential pool of small targets, de novo activity has not been enough to replace it, and many fast-growing acquisitive banks have reached sizes where their interest in absorbing smaller community banks has declined. Only 55 percent of M&A target banks announced in 2019 had assets less than $250 million, down from 75 percent in 2005. Meanwhile, the share of targets between $500 million and $10 billion increased by eight percentage points.

This trend is likely to continue into 2020, as more banks signal interest in larger targets or even merger-of-equal deals, according to coverage from S&P Global. On its fourth quarter earnings call, Chicago-based Wintrust Financial said it would look at bigger deals in 2020 given the relatively high pricing of small deals today and margin pressures hitting the industry. “Looking at banks over $1 billion makes some sense for us also right now, given many of them are having the same issues we are,” CEO Edward Wehmer said. Other banks, like Short Hills, N.J.-based Investors Bancorp and Cincinnati-based First Financial Bancorp, have said they are open to mergers of equal if circumstances line up just right.

This may lead to smaller community banks driving a higher portion of M&A activity this year. Fewer large community banks “creates a unique wrinkle in the ongoing consolidation theme,” Chris Marinac, an analyst at Janney Montgomery Scott, wrote in a client note, that “likely entails smaller community banks . . . creating their own M&A activity to position themselves for further growth.”