Merger of Equals and Its Increasing Popularity for Community Banks

Written by: Patrick McClellan

Beginning in 2020, the financial institution industry has seen a steady decline in merger of equals activity. However, with the recent failure of Silicon Valley Bank, Signature Bank, and First Republic Bank during the first quarter of 2023, a merger of equals has become a viable option for community banks who are looking to expand their operations and realize growth from these failures. Below, we will discuss the financial and developmental benefits of a merger of equals with community banks.

Recent Merger of Equals Activity

Due to the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank during the first quarter of 2023, regional and national financial institutions have had to deal with the issue of liquidity and stabilizing cash levels to meet depositor demands. This, coupled with macroeconomic uncertainties, has seemingly diminished the public’s trust in large banking institutions. A recent poll conducted by the Associated Press: NOCR Center for Public Affairs Research, suggested that the public confidence in large banking institutions has fallen to nearly 10% compared to 22% in 2020. Despite decreasing consumer confidence in large banking institutions, as of December 31, 2022, approximately 79 million U.S. consumers and 5.7 million small businesses continue to bank at JP Morgan Chase, America’s largest financial institution based on asset size.

One of the main issues community banks must grapple with is the technological capabilities large financial institutions maintain due to their capital resources. With the digital age reshaping our economic landscape, national and international banks have invested in technologies that ease the use of their products for consumers. Each year alone, JP Morgan Chase invests $12 billion in the technological advancement of their bank, which has ultimately enhanced the digital interface between the bank’s multiple service lines, platforms, and the consumer.

While community banks are seemingly the pillars of local economies, human and financial constraints have inhibited their ability to make similar investments of scale within the technological space. However, the recent merger of equals activity suggests that community banks are seeking to close the gap. Out of the last 20 most recently announced merger of equals with banks in the United States, the majority have involved community banks, including LINKBANCORP, Inc. and Partners Bancorp in June 2023, and Main Street Financial Services Corp. and Wayne Savings Bancshares Inc. in February 2023. Both mergers of equals allowed the consolidated entities to surpass $1 billion in assets.

What Does This Allow?

Given the lower stock prices in the banking sector this past year, mergers of equals are gaining attractiveness, as banks are shifting their focus away from deal premiums and towards recognizing the advantages that mergers can offer. With the increasing popularity of a merger of equals amongst community and local banks, it is becoming more plausible for the technological gap between them and national banks to diminish. Despite low consumer confidence in national banks, the ease at which their products can be used is attractive to most Americans. The expansion of human and financial capital resulting from a merger of equals is allowing community banks to spread the investment in technology and their product offerings across a larger asset base, which can enhance and simplify the consumer experience. Further, it will allow banks to expand their operations into additional markets, create synergies across organizations to increase income and reduce costs, and spread overall overhead costs across multiple operating segments.

What Can We Do?

Wolf & Company has a multitude of experience dealing with mergers and acquisitions of community banks and is equipped with the resources to assist in any such transactions. If you have any questions regarding a merger of equals, please reach out to a member of Wolf’s Audit Team.