2019 Financial Services M&A and Capital Markets Year in Review

Financial Services Law

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Although it was very quiet on the western front (in particular, in California), 2019 was generally a solid year for banks pursuing merger and acquisition opportunities and accessing the capital markets. Some forthcoming regulatory changes and a “new player in town”—credit unions—mean 2020 may have a fair amount of interesting developments. Below, we count down our top four takeaways in 2019 and what to expect in 2020:

1. Mergers of equals. Mergers of equals continue to grow in popularity, headlined in 2019 by the merger of BB&T with SunTrust. While these types of combinations have always made strategic sense, issues around social and leadership integration have historically been the largest impediments to bringing these transactions to fruition. Additional factors, however, have become important considerations. The high cost of regulatory compliance, greater investments in technology, compression in interest margins, business model disruption resulting from fintech companies, and management and board fatigue make mergers compelling and present the opportunity to enhance shareholder value. Look for more of the same in 2020, perhaps even dropping down to smaller community banks, where MOE has been historically hard to implement.

2. Access to capital markets. Wide-open credit markets and the relative ease with which community banks can obtain investment-grade debt ratings because of their strong balance sheets (and high-quality loan portfolios) have meant another strong year for subordinated debt transactions. A bank holding company’s ability to downstream the proceeds from this type of Tier 2 capital raise to its subsidiary banks as Tier 1 capital has also meant banks have not moved to shed their holding companies in the numbers that were forecasted just a few years ago. Some additional costs and regulatory oversight of a holding company have not deterred banks from keeping their holding companies in place, if only for the capital-raising flexibility of subordinated debt. This nondilutive form of financing has predominated over common stock offerings. To the extent there is any weakness in credit quality over the next couple of years, watch for this to change and for preferred and common equity to retake the lead.

3. Credit union developments. Credit unions are flexing their tax-exempt muscles and buying small commercial banks at an accelerated pace. These all-cash combinations are providing a high level of liquidity for their targets and allowing credit unions to add personnel and customer depth in a manner that credit unions normally did not engage. Such transactions also allow credit unions to expand their product offerings to consumers. We believe these types of transactions will continue into the new decade at an increasingly frequent (and larger) clip unless Congress intervenes to make these transactions more difficult or subject to enhanced scrutiny, as some threatened community banks are advocating.

4. Deposit growth. Strong balance sheets mean banks need to see more growth on the deposit side to continue to competitively position themselves for 2020. Look for acquirers to take advantage of their trading multiples to pull in complementary franchises, while still trying to be conservative with their currency and not overpay. But don’t expect the need for deposits to drive branch acquisitions. With limited exceptions, the old “build by branching” model for deposit growth is no longer a driver for banks. This coupled with the FDIC’s recent proposal to further limit what constitutes “brokered deposits” in light of technological changes that have occurred over the past decade may further inhibit branch transactions.

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All the best from Manatt financial services for a prosperous 2020!