More research needed into why banks decide to sell, regulators say

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ST. LOUIS — The Federal Reserve’s Michelle Bowman and the Federal Deposit Insurance Corp.’s Jelena McWilliams called this week for more research into the reasons for, and the impact of, bank consolidation.

While the pace of M&A has been slower in 2019 than prior years, more than 180 mergers have been announced through the end of September. A survey of 571 bankers by the Conference of State Bank Supervisors between April and July indicated that merger activity will eventually accelerate.

About 85% of the respondents said they had received an acquisition offer in the last 12 months. Three-fourths had offered to buy another bank in the last 12 months.

So the reasons for M&A were a popular topic during a conference on the future of community banking held this week at the Federal Reserve Bank of St. Louis.

Bowman, a Fed governor, said Tuesday that how much banks earn — as opposed to how big they are, or whether they serve a “very limited geographic area” — seems to be the main determinant of which ones sell and which ones remain independent.

A day later, Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia, expressed a different opinion about which factors drive M&A.

Banks that “don’t have sufficient scale, or don’t meet a specific need, are the ones being acquired … because they don’t have a compelling story,” Harker said in response to an attendee’s question.

The CSBS survey found that nearly 70% of participants viewed a lack of scale and compliance costs as “very important” or “important” factors for considering an acquisition offer.

Another area that could stand more study is succession planning, especially at small privately held banks, Julie Stackhouse, managing officer of banking supervision, credit, community development and learning innovation at the St. Louis Fed, said Wednesday. Half of the bankers surveyed listed succession as a “very important” or “important” reason to mull selling.

McWilliams, chairman of the FDIC, said in an interview Tuesday that she wants examiners to tell her when bankers, especially in rural areas, have concerns about their businesses. McWilliams also said she wants a learn more about the reasons why banks are selling, particularly in instances where a seller’s business model was disrupted.

"In situations where banks are unable to conduct business as they have in the past, I think we need to understand why that is happening," McWilliams said.

"If it’s regulatory burden, then it's something we should take a look at," she continued. "You want to understand what’s going on. … If it is [because of] us, then let’s do something about the regulation. That warrants a deeper look."

Bowman, the community bank representative on the Fed board, also discussed M&A’s impact on communities. While the number of banks per local market has been “quite stable” in rural and urban communities, she said there is evidence that local investment declines when a market loses a bank.

Citing performance evaluations from Community Reinvestment Act exams, Bowman pointed to reduced donations for child care, homeless shelters, scholarship programs and other local needs as well as a decline in community service.

“Acquiring banks need to consider that when you purchase a community bank and enter into a new market, along with the new customers and opportunities come a responsibility to be a part of, and to support, that community,” Bowman said.

Harker said he had not seen “to a large extent” an increase in unbanked populations stemming from mergers.

“What we have seen happen, when larger regional banks go in and acquire someone, is opportunities for community banks to rush right on in,” Harker said. “We’re starting to see that as the large players come in, the smaller community banks have been expanding by acquiring the talent. And they’ve been pretty successful.”

Still, Bowman urged attendees, who included several dozen academics, to conduct more research on how M&A affects community outreach and philanthropy. She said such studies could determine if the instances she found in her CRA research were isolated or part of a broader trend.

“Deeper and more creative research is certainly needed to understand how acquisitions affect many communities, small businesses and consumers,” Bowman said. “While [it] might be hard to measure, I think it is essential that researchers try to do so.”

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