M&A 2019 Community Bank: A Game-Changing Year for the Industry

With ink on the deal still drying, Independent Bank Group’s purchase of Texas Capital Bancshares was yet another huge merger announcement that confirmed 2019 as a watershed year in community banking M&A… and the year is not even over yet.

Here are the most game-changing mergers announced this year:

·        January 28th: TCF Financial Corporation merges with Chemical Financial Corporation in a deal that closed on 8/1/2019 for approximately $3.5 billion.

·        February 7th: BB&T Corporation merges with Suntrust in a deal initially valued at $28.3 billion; closed on 12/6/2019 for roughly $31 billion.

·        June 17th: Prosperity Bancshares, Inc. acquires LegacyTexas Financial Group in a deal valued at $2.2 billion. Closes 10/31/2019.

·        November 3rd: First Horizon National Corporation merges with IBERIABANK in a deal that will close in Spring 2020, valued at $3.9 billion.

·        December 9th: Independent Bank Group, Inc. merges with Texas Capital Bancshares in a reverse merger of equals valued at $3.1 billion, to close in Q2/Q3 2020.

Why did these mergers occur?

Funding. Competition for client deposits has always been difficult, but today's consumer is wiser, and it's more challenging than ever. This is especially true when you add in direct competition with mega-banks, credit unions, and technological disruptors. Instead of fighting with your fellow competitor over table scraps, why not just team up? Some of these mergers saw a deeper, lower-cost deposit base get matched up with a fast-growth asset producer… a slam-dunk combination.

Scale and Technology. In almost every situation, these already large organizations joined forces to be able to compete directly with larger competitors like Wells Fargo, Bank of America and others. These mega-banks spend upwards of $10 billion yearly on tech investments. BNY Mellon just announced that it is bracing for an even larger tech spend in 2020. BB&T and SunTrust, now Truist Financial, will be able to invest more in technology. (Editors note: love or hate the "Truist" name, there's no such thing as bad press.) Their CEO, Kelly King, has spoken candidly about the banking industry’s strides in mobile delivery, machine learning, and artificial intelligence, especially as it relates to effective marketing. Now, with the scale and some inherited best practices from both entities, they are primed to develop a stronger infrastructure, add newly perfected services and offerings, and more precisely target their overall message to increase market share.

Greg Bixby, previous EVP, Chief Technology and Operations Officer at Chemical Bank told me that, on top of obvious geographic and business segment synergies, technology was “definitely a sizable component” of their decision to merge TCF and Chemical. He continued, “[TCF] had already started their digital transformation and a move toward a product orientation and agile methodology vs. a traditional project and service model” within technology, while Chemical had invested heavily in its core and ancillary technology. Both banks advanced their tech initiative by at least three years by joining forces.

What does this mean for the rest of us?

Consumers. On the whole, they may be the ultimate winner here as their beloved community banks wind up being absorbed or merged. Initially, there will be growing pains and attrition during the integration periods, which could last 12-18 months (or more) on deals these sizes, over massive geographies. In the long run, the best-in-class technological offerings will continue to reward the customers who stay with their banks, due to deeper commitments in cutting-edge services and interactivity. 

Commercial Clients. Even as the big get bigger, other banks will still have a shot to have the last laugh. Commercial clients don’t necessarily have brand allegiance, they have banker allegiance. When consolidation occurs, talent- especially on the production side- is always more likely to have their antennae up to jump ship. Time and again, our firm speaks to top talent at acquisitive organizations who seem jaded by their banks’ jumbled and diluted growth culture. Instead of staying with a larger, apparently less personal institution, lenders may finally defect to revisit the more entrepreneurial community bank vibe that they enjoyed earlier in their career. That is, if they don’t have a non-compete. (Best practice alert!)

Also, for the most part, commercial clients like to do business with people in their community: the old “local decisioning” maxim. Larger organizations may tend to streamline and centralize their credit divisions, potentially adding an extra cog in the wheel of a deal, which could hamper a lender’s control of that deal and lead to the perception of a less personalized process.

Other Institutions. Community banks that are geographically near these market disruptions will need to make sure they up their game through strong recruitment strategy and making investments or enhancements to their technology. They just can’t afford for their customer base to complain about out-of-date mobile apps or prehistoric P2P offerings. Spending on data analytics could also assist in the marketing and messaging in your region, and expanded wallet size and customer acquisition.

Will this trend continue?

Most likely. I don’t have a crystal ball, but with an election year upon us, 2020 is shaping up to be another potentially turbulent year for the market, with bank earnings theoretically staying flat. That, combined with the above constraints around funding and technology, lead me to believe there will be more of these types of mergers to come. What do you think?

Brian Love, Head of Depository Search and Community Bank Advisory

The Travillian Group, LLC / 610-994-1786 /www.travilliangroup.com