Small US banks are merging to pursue greater scale and cost efficiencies

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Banking subscribers. To receive the full story plus other insights each morning, click here.
A sizable group of community banks are in various stages of consolidation, highlighting how the industry-wide merger and acquisition (M&A) trend is extending down market, as community and regional banks pursue greater scale and cost efficiencies.

M&A fever has already gripped the nation’s super-regionals and top banks. BB&T announced in February that it was acquiring SunTrust for $66 billion to form Truist, marking the largest bank merger since the 2008 financial crisis. Meanwhile, major banks like JPMorgan Chase are also looking to make more acquisitions, CEO Jamie Dimon noted.

But it’s not only larger banks tying up, as evidenced by several recently announced or rumored local bank mergers.

New Jersey-based regional bank OceanFirst announced two separate community bank acquisitions. OceanFirst, which counts $8 billion in assets, will acquire New Jersey-based Two River Bank and New York-based Country Bank, for $182.2 million and $102.2 million, respectively. OceanFirst, which has acquired five banks since 2014, would merge with Two River, which has $1.2 billion in assets and 14 branches. And Country Bank, which counts $783.4 million in assets, will extend OceanFirst’s branch network into New York City for the first time.
Michigan-based Chemical Bank merged with Minnesota-based bank TCF Financial, per Times Herald. The move, which comes following Chemical Bank’s 2016 merger with Trust and Talmer Bank, will create a combined company holding over $47 billion in assets and operating 500 branches across nine Midwestern states. The banks plan to combine their IT platforms in 2020.
Chicago-based Byline Bank is rumored to be merging with Parkway Bank & Trust, per Crain’s Chicago Business. The deal would boost Byline’s assets to about $8 billion — an increase of 50% — and continue its string of acquisitions, including First Bank & Trust of Evanston in 2018 and Community Bank of Oak Park River Forest in 2019. This reported merger continues a trend of consolidation in local Chicago banks: There have been over 20 mergers since 2016, six of which are priced at over $100 million.

Smaller banks are consolidating as a means to drive up deposits, which are heavily concentrated among major banks.

Declines in smaller banks’ assets combined with the digital threat from industry giants are fueling consolidation. Banks with under $1 billion in assets hold 6% of US assets — down from 25% in 1994 — while the 9 largest US banks control 49.2%. At the same time, major banks have astronomical tech budgets — Chase, Bank of America, and Wells Fargo had tech budgets of $11.4 billion, $10 billion, and $9 billion, respectively — that allow them to roll out advanced digital features that help attract customers. Merging is becoming increasingly necessary for smaller firms to get the resources to effectively compete.
More M&A activity is anticipated, particularly among smaller banks which aren’t subject to the same regulations. Former Wells Fargo CEO Richard Kovacevich told CNBC that depressed bank valuations make now an opportune time for M&A. He predicted that M&A activity will be focused on smaller firms because of regulatory restrictions that larger banks are subject to — which could benefit community and regional banks that are struggling.

Interested in getting the full story? Here are two ways to get access:

Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Banking Briefing, plus more than 250 other expertly researched reports. As an added bonus, you’ll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now
Current subscribers can read the full briefing here.