6 takeaways from bank M&A in 2019

January 5, 2020 9:00 PM

The pace of bank consolidation quickened in 2019.

Despite a sluggish start, last year ended up being the busiest year for deals since 2016 in terms of the number of mergers announced. Aggregate deal value was in line with what took place a year earlier, excluding the megamerger of BB&T and SunTrust that closed in December.

While the year featured a number of headline-grabbing combinations, led by BB&T-SunTrust, a slew of mergers between smaller banks took place. Overall premiums were down, largely because of no-premium mergers of equals and the high percentage of small transactions.

A handful of states were responsible for a large percentage of industry consolidation.

Credit unions stepped up efforts to buy banks, drawing even more ire from the banking industry.

Here is a deeper look at the key trends of 2019 bank M&A, which will likely continue in the new year.

Pace of consolidation accelerated slightly

Overall, 271 mergers were announced last year, a 5% increase from 2018 and the busiest year since 2015, according to data compiled by Compass Point and S&P Global Market Intelligence.

A lot of that activity occurred in the second half of the year due to a combination of fiscal, market and other factors.

The new tax reform law gave some would-be buyers a reason to delay selling, while a decline in bank stocks forced many bankers to revisit pricing expectations.

The three rate cuts by the Federal Reserve, which began in August, seemed to jolt a number of on-the-fence sellers, creating concerns that margin pressure would further crimp profits. And it took some time for the BB&T-SunTrust megamerger, announced in February, to spur other deals involving large institutions.

MOEs became more popular

A number of banks characterized their deals as mergers of equals. The underlying goals were similar: find ways to be more efficient and allocate more funds to tech upgrades and marketing.

The year’s biggest deal, by far, was BB&T’s $30.8 billion purchase of SunTrust Banks. It created the $430 billion-asset Truist Financial and rekindled longtime debates about systemic risk and whether banks that large should be allowed to merge.

There were other deals involving large companies.

TCF Financial in Wayzata, Minn., and Chemical Financial in Detroit announced a $3.5 billion combination in January. That deal closed in August, creating a $45 billion-asset regional bank in the Midwest.

Largely inspired by BB&T-SunTrust, First Horizon National in Memphis, Tenn., and Iberiabank in Lafayette, La., announced their $3.9 billion merger in November. The combined company would have roughly $75 billion in assets.

At lease one proposed MOE fell through.

SmartFinancial in Knoxville, Tenn., agreed in mid-January to merge with Entegra Financial in Franklin, Tenn. But the deal was terminated when Entegra negotiated a more favorable sale to First Citizens BancShares in Raleigh, N.C.

Most deals were very small

While the large MOE-like deals garnered the biggest headlines, most M&A in 2019 involved smaller sellers.

Three-fourths of the banks that agreed to sell this year had less than $500 million in assets, and most of those were half that size, based on data from S&P Global Market Intelligence. To put it another way, only 24 deals involved sellers with more than $1 billion in assets.

That trend is expected to continue, and perhaps intensify, in the year ahead. Thousands of small banks remain, and they are dealing with thinning net interest margins, decelerating loan growth and intense competition from banks and nonbanks. At the same time, there are fewer midsize banks.

Premiums fell

Smaller deals tend to have smaller premiums, and that showed in the pricing data for 2019 bank transactions.

The average seller sold at a price equal to 157% of its tangible book value, according to data from Compass Point. The average was 175% in 2018, when bank stocks were surging after tax reform. The average premium in 2019 was the lowest since 2016.

Meanwhile, the core deposit premium in 2019 fell to 8.5% from 9.5% a year earlier.

Pricing is expected to remain at lower levels in 2020, according to industry experts. Deals will likely involve smaller sellers, and operating conditions are expected to become more challenging.

The Current Expected Credit Losses accounting rule for loan losses is another factor that could restrain pricing, industry experts said. They note that CECL forces buyers to use new accounting methods for certain acquired loans, which complicates the math for mergers by increasing the size of the credit marks they must take.

Two states were M&A hot spots

Illinois and Texas led the nation in terms of the number of bank sellers.

Those states each had 22 sellers, accounting for 16% of all deals announced in 2019. Illinois is home to 429 banks, while Texas has 430, according to data compiled by S&P Global Market Intelligence.

Texas surpassed Illinois by overall deal value ($5.8 billion) and assets set to change hands ($30.6 billion). That was largely the result of a pair of big bank mergers: Texas Capital Bancshares’ proposed $3.1 billion purchase of Independent Bank Group and Prosperity Bancshares’ $2.1 billion deal for LegacyTexas Financial Group.

Consolidation in Illinois largely centered on smaller, closely held banks in the Chicago area. The biggest seller was SBC Inc., parent of the $594 million-asset Countryside Bank, which in July said it had agreed to merge with Wintrust Financial. The deal was valued at $90.5 million.

Wisconsin was a surprising entry on the list of most active states for bank deals, with 17 sellers. As with Illinois, many of the sellers were smaller banks looking for more liquid stock from potential acquirers.

More credit unions agreed to buy banks

Credit unions set a record for bank takeovers.

Credit unions announced 16 bank deals in 2019, nearly twice the number in 2018. While most of the deals involved smaller banks — many with less than $250 million in assets — several were notably larger.

MidFlorida Credit Union agreed in May to buy the $733 million-asset Community Bank and Trust of Florida. At the time, it was the biggest credit union-bank deal ever announced.

It would soon be topped.

In December, Suncoast Credit Union in Tampa, Fla., announced it was buying the $747 million-asset Apollo Bank in Miami. Apollo is the biggest bank to agree to be sold to a credit union, and the $10.4 billion-asset Suncoast is the largest credit union to announce a deal to buy a bank.

The trend has raised concerns among bankers. In October the Independent Community Bankers of America announced Wake Up, a new offensive in its fight with credit unions. The initiative aims to provide more evidence to lawmakers and consumers that credit unions have an unfair competitive advantage over community banks.