In 1984 a record high 18,000+ banks existed in the United States. Thirty years later we find that the number has plummeted to 6,700 with all indication pointing to further consolidation. The vast majority of exits came from banks with less than $100 million in assets, and more than 10,000 of these institutions left the financial services landscape between 1984 and 2011 due to mergers and failures. At the same time, the pace of new bank charters has dwindled to near non-existence. For decades and decades, dozens, if not hundreds, of bank charters were issued each year. Between the end of 2010 and 2013, one new bank opened in the United States.
20 years ago 10 years ago Today
Total number of institutions 12,644 9,129 6,739
Total number of banks $1 - $50B in assets 554 553 642
Total number of banks $50B+ in assets 8 27 37
Total number of banks less than $500MM in assets 11,688 8,022 5,382
While GonzoBanker’s mother ship Cornerstone Advisors works with banks of all sizes, our sweet spot is the “mid-size” bank space, which we define as banks with roughly $1 billion to $50 billion in assets. And that, my friends, is where I believe all the action will be for the next 10+ years. A few predictions based on the data above:
Pundits have been predicting the demise of mid-size banks for quite some time, but the chart above obviously paints a very different picture. Mid-size banks are in the proverbial catbird seat – they can offer most of the products and sophistication of the top national banks combined with the service culture, community involvement, and local market knowledge of a smaller community bank. In fact, I think as the Millenials start to age they will be attracted to mid-size banks from the “go local” movement, knowing that their dollars will be put to work in their communities and not siphoned off by a national bank to fund some market rate swap in New York City.
If my predictions bear out, the vast majority of M&A activity/consolidation will take place in the mid-size banks either with smaller mid-size banks buying community banks or with banks at the upper end of the mid-size scale acquiring $3 billion, $5 billion and $8 billion banks. Will the number of $50 billion+ banks grow from the current 37 over the next 10 to 15 years? Sure – but slowly. Simply put, the current top 20 banks are literally so big that practically any acquisition they would undertake wouldn’t materially change their balance sheets. Add to that the tremendous amount of regulatory scrutiny and political backlash that would likely occur as the top 20 banks got even bigger in our “too big to fail” environment.
This data leads me to conclude the following: While I have always been a long time proponent of having a solid organic growth strategy, mid-size banks will need to develop AND execute upon a solid M&A strategy to survive. After spending over a decade in management and board retreats facilitating strategic planning sessions, rare is the bank client I have worked with whose M&A strategy couldn’t best be described as “opportunistic.” Most of the time that means waiting for the investment banker to call with a proposed deal. This simply won’t cut it in the fast-consolidating, commoditized industry we call banking today. This is a call to arms for mid-size banks to develop their M&A strategies. While space and time won’t permit me to lay out a complete framework, what follows are some key areas your M&A strategy should address.
At the end of the day, mid-size banks, you have two choices: rely on your current, decades-old organic growth strategy, or get in the game and execute upon a carefully defined M&A strategy. The risk of being left behind as other mid-size banks scale up is not one I would want to take with my bank. The underlying theme for the conference “Acquire or Be Acquired” has never been more relevant than now for mid-size banks. Happy deal-making!
All for now.
Any financial institution involved in M&A activity can expect to experience big organizational and cultural differences. Add to this the reality of “marrying” each organization’s technology systems, and the prospect of a successful integration can seem overwhelming.
Cornerstone Advisors can help smooth over the rough patches of your new relationship. From the early stages of negotiation and due diligence to when the final deal is inked, we work with you to instill the integration mindset that is so critical to a winning partnership.