Feature: Community bank mergers continue to slow

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Consolidation in the banking industry has been occurring for over four decades. Mergers have been the major driving factor for this consolidation, while bank failures and a declining number of new bank entrants have also contributed to a limited extent. More recently, merger activity has slowed, driven by the COVID-19 pandemic, numerous economic factors, and uncertainty surrounding regulatory responses to the bank failures in 2023. This bulletin explores general trends in bank mergers, specifically in transactions where the selling institutions are community banking organizations (“CBO mergers”).^_

Chart 1 shows the number of completed mergers where the seller is a CBO, by buyer type, along with the median asset size of the selling banks. Over the past 10 years there have been slightly more than 1,700 completed CBO mergers. From 2015 to 2019, CBO mergers averaged over 200 per year, but a noticeable decline began around 2020, as pandemic-related stresses took their toll on the broader economy. Since then, factors such as banks’ strategic decisions to extend assets during the COVID-19 pandemic and the effect of certain economic changes including interest rates hikes (which led to tightened bank liquidity and significantly lowered the value of longer-term assets) have hampered the number of deals that have been completed. Though only 60 CBO mergers have been completed thus far in 2024, according to S&P Global, an additional 59 definitive CBO merger agreements have been announced.

As the overall economy has expanded, banks have also grown. This includes the size of the institutions involved in CBO mergers. For buying institutions, the median buyer asset size was $1.9 billion in 2024, compared to $889 million in 2014. For selling CBOs, the median seller asset size was $265 million in 2024, compared to $146 million in 2014.

Generally, most CBO mergers involve two commercial banks, but there are occasions when that is not the case. Though their participation has been relatively limited, thrifts and credit unions have also been involved in bank purchases, a trend that has increased in recent years. Over the past decade, about 8 percent of all completed CBO mergers involved a credit union or thrift as the buyer institution. Of the 60 completed CBO mergers that have occurred in 2024, seven of the deals include a buyer that was a credit union, with two involving a thrift as the buyer. Additionally, of the 59 definitive CBO merger agreements that have been announced this year, 17 of those definitive agreements involve a credit union as the buyer, with one involving a thrift as the buyer.

Geographically, CBO mergers happen all over the U.S. As shown in Chart 2, selling CBOs were headquartered in nearly every state in the continental U.S. However, CBO mergers have occurred more frequently in the Midwest due to the predominance of CBOs headquartered in that region. About 73 percent of the time, CBO mergers involve buyers and sellers that are headquartered in the same state, and though this represents a high percentage, it does not necessarily indicate that those institutions are operating in the same markets. Based on data from S&P Global, in over 50 percent of all completed CBO mergers the acquiring institution expanded into new operating market(s) through the bank purchase. This may indicate that geographic expansion is a motivating factor for purchasing institutions.

Research from a Federal Reserve Bank of Kansas City Economic Review Article suggests that banks acquired in mergers have generally been less profitable and less efficient than nonacquired banks. Thus, mergers may facilitate a transfer of assets to more efficient institutions that can realize the benefits of scale. As shown in Chart 3, selling CBOs tend to earn less than buyer institutions. The lower earnings performance may be attributable to slower growth and less efficient operations. However, selling CBOs also typically have a slightly more stable core deposit base, which can be attractive to buyers.

As the financial system evolves and the industry continues to see consolidation, mergers between CBOs may result in more efficient institutions but monitoring this will remain important to ensure the needs of local communities continue to be met. To see more information on the vital role that community banks play in the U.S. economy, see the Federal Reserve Bank of Kansas City’s The Critical Role of Community Banks page.

Questions or comments? Please contact KC.SRM.SRA.CommunityBankingBulletin@kc.frb.org.