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US bank M&A continued apace in 2019 despite dip in median pricing

Large, regional bank mergers of equals dominated U.S. bank deal headlines in 2019, but smaller deals continued to constitute most activity as the industry's yearslong consolidation trend persists.

Bank M&A experts anticipate the regional bank MOE trend to continue into 2020, but some bank experts said overall deal activity may drop in 2020 and going forward. There were 269 U.S. bank and thrift deals in 2019, according to S&P Global Market Intelligence data, up from 264 deals in 2018 and matching the 2017 total. Investors soured on deals with significant deal premiums, contributing to a dip in pricing. The median deal price in 2019 was 157.5% of tangible common equity, down from 170.1% in 2018.

However, in terms of deal value and assets sold, 2019's totals were much higher than in the past few years. Deal value totaled $58.72 billion, up from $30.52 billion the prior year, while assets sold totaled $428.03 billion, more than double the prior-year total. The combination of BB&T and SunTrust Banks Inc. into Truist Financial Corp. alone accounted for $28.28 billion of deal value.

"It only takes one really big deal to radically change the overall deal value and asset size being exchanged," said Robert Klingler, a partner at Bryan Cave Leighton Paisner LLP, who specializes in banking.

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Beyond the Truist deal, 2019 saw several other large mergers of equals enabled by a more relaxed regulatory environment, Klingler said.

Large banks are finding the best way to be profitable is to have scale, said Brian Klock, an analyst with Keefe Bruyette & Woods. "Even larger banks are trying to say that they need bigger scale," he said in an interview.

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Another driver of large deals has been a deceleration in loan growth. Banks are seeing a shift from a "golden age" to a more challenging outlook, Klock said, and merging to gain scale, be more efficient and achieve cost savings over time is appealing. "Reductions in regulations and higher interest rates still didn't generate these great earnings growth trajectories," said Klock. "You're just not getting the demand from loan growth."

Klock said he expects more regional and community banks to merge, including MOEs between banks with $20 billion to $50 billion in assets. Investors have been generally positive about recent mergers of equals despite their no-premium structure.

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While large bank deals have dominated headlines, small bank deals continue to account for the vast majority of consolidation.

"Banks are sold, not bought, so it's largely decisions of smaller institutions deciding that now is the time to sell," Klingler said. Usually, these banks sell because of shareholder demand for liquidity, issues with management succession or the need to grow. He said some of those pressures might be abating, leading to a modest decline in activity for smaller deals as consolidation shrinks the overall number of banks. Also, Klingler said older institutions have been through more natural leadership changes in the past and are less likely to sell, he said.

"Those demographic pressures are going to continue, over time, to reduce the number of M&A transactions," he said.

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A couple of other variables could alter deal volume in the year ahead. The presidential election in November 2020 could weigh on bankers' minds and encourage some to get deals done early in the year, said Klingler. "We could certainly see a lull in the second and third quarter," he said. After the election, there may be a "flurry" of deals, depending on the outcome, he said.

Additionally, some bankers have expressed trepidation over the first-quarter 2020 introduction of the accounting standard known as the current expected credit loss, or CECL. Klingler said the accounting standard will mostly be "noise" that would have a minimal impact on bank deals. Klock also said the impact would be modest, predicting that deals closed after the implementation of CECL will be affected by additional provisioning requirements, but that it would not likely alter decision-making.

"A good deal's a good deal, so if you price it right, it doesn't matter what the CECL impact is," Klock said.

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