In our initial article announcing our top 10 considerations for financial institutions in 2016, which can be found here, our first consideration was financial institution merger and acquisition activity in 2016. As we saw in 2015, merger and acquisition activity in the banking and broader financial institution space was quite robust. The consensus expectation is that this focus on M&A will continue through 2016. Whether it’s purchasing a healthy bank, purchasing good assets from an unhealthy bank, or purchasing a specific line of business, opportunities abound for healthy financial institutions with strong balance sheets and supervisory ratings to make substantial progress on growth plans. 

On the sell-side, we have noticed a number of reasons justifying the sale of assets or the whole institution. Some of these justifications include unmanageable regulatory costs, limited growth opportunities, an inability to achieve necessary economies of scale to compete going forward, shareholder demand for a liquidity event, and unclear succession plans. Each of these reasons certainly has its merits, but these are just a few of the common justifications we have identified. Over the next few years, the reality is, especially in the community banking and smaller financial institution space, that if you are not an acquirer, you are a potential target.  

On the buy-side, we continue to hear classic justifications for purchases - growth and achieving more efficient economies of scale. By growing and achieving more efficient economies of scale, or by growing to enter new business lines, a financial institution can control its own destiny, to a degree. Despite this, some buyers need to consider the regulatory perspective before pursuing an acquisition of any size. Especially in the banking space, the regulatory agencies have no appetite for a proposed acquisition from a buyer that does not have its own house in order. Potential buyers need to make sure their own balance sheet, capital ratios and supervisory ratings are, and have been for some time, squeaky clean.

Overall, we expect to see continued consolidation in the financial institution industry, specifically with regard to smaller institutions looking to sell and mid-sized and regional  institutions looking to grow and achieve more efficient economies of scale. Motivated buyers and sellers abound and larger community banks (between $1 and $10 billion in assets) and nonbank lenders are poised to thrive going forward.  If you’re not a buyer, you might be a seller.