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 [1] 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:
- The number of banks will continue to shrink from the present 6,700, and we won’t ever see more banks than we have today. While we may see an uptick in the number of new bank charters from the near zero we have today, too many other industries with less regulation will attract capital.
For better or for worse (probably worse), banking has become a scale business. The costs of regulatory compliance, investments in new technology, investments in physical and digital channels, and thinning industry margins mean banks will need to be of a “certain” size to succeed long term. A decade ago the Cornerstone team would pontificate that that number was around $500 million. If you ask me now, I would say the minimum scale point has probably doubled to the $1 billion range. The fact that the number of banks under $500 million has shrunk by more that 50% in the last 20 years appears to bear this out. [See chart above.]- Mergers of equals are hard to pull off and are fewer and farther between than outright acquisitions. For this and other reasons, I don’t think we’ll see a tremendous amount of $500 million and $600 million banks combining to reach that magic $1 billion threshold. Instead I think we’ll see $1 billion and $2 billion banks acquiring banks that size.
- In 10 to 15 years, that $1 billion scale threshold will likely be closer to $5 billion.
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.
- Define Your Value Proposition. Think e-Harmony or Match.com. You need to define what makes you an attractive acquirer and why someone would want to go to the prom with you. The list of possibilities are endless, but to get the creative juices flowing think things like: increase in shareholder value for the acquired bank; generous management payouts; a board seat(s); your track record of performance; the ability to negotiate over system choices; your willingness to make management decisions based on merit rather than clearing the decks of the acquired bank; or maybe a business model that allows the acquired bank to maintain its current brand and management team in a holding company type structure.
Identify M&A Partners. Define “filters” for your framework to narrow down what targets make the list. Useful filters could include qualities like geography, asset size, branch network, balance sheet mix, capital levels and niche businesses. Once the filters are in place, tools like the FDIC [3] Web site or SNL [4] can help you produce your target list. Ideally, you should stack rank your target list starting with most attractive prom date to least by assigning weighted values to your filters.- Cultivate the Courtship. If you are the acquirer, you won’t find a prom date by waiting for the phone to ring (or receive a text in today’s world). An active outreach program must be developed that includes management, directors and shareholders depending on the target. There is more art than science to courtship, but your outreach program needs to involve a consistent manner in which your value proposition is communicated to your target banks. Courtship could also involve some dating techniques like offering to provide shared services for a common core platform, inviting select management/directors to your strategic planning session, or offering the target the ability to outsource from you your more sophisticated trust/wealth management platforms and expertise. The point here is to get creative.
- Define the Merger Value. Once you find someone who responds to your pickup lines, you will need to paint a clear picture of the value a merger will bring to shareholders and possibly management of the target bank that goes beyond the pro forma financial model. The target bank will want to know about management team composition, board seat(s), branch closures, surviving systems and products, efficiency targets, headcount reductions, branding, etc.
- Conduct Due Diligence and Begin Negotiations. If you’ve made it this far, the M&A strategy and framework you have laid out is obviously working. Have at it!
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.
-SAS
[6]With new partnerships come new challenges
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 [7] can help you smooth over the rough patches in your new relationship and instill the integration mindset that is so critical to a winning partnership.
Visit our website [7] to learn about Cornerstone’s Mergers & Acquisitions Consulting Solutions [7].