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The number of U.S. banks has trended lower over the past 30 years, dropping from about 14,500 in the mid-1980s to 5,600 today. The number of banks declined for many reasons, such as failures during periods of crisis, consolidation spurred by the relaxation of state branching and national interstate banking restrictions, and voluntary mergers between unaffiliated banks. Since the end of the 2007-09 recession, voluntary mergers have been the primary reason for the decline.
Banks merge for a number of business-related reasons. Mergers allow banks to achieve economies of scale, enhance revenues and cut costs through operational efficiencies, and diversify by expanding business lines or geographic reach. Bank mergers can result in more efficient banks and a sounder banking system and thus benefit the economy, as long as banking markets remain competitive and communities' access to banking services and credit is not diminished.
This article analyzes the financial characteristics of banks with assets of $1 billion or less that were acquired by an unaffiliated bank in a voluntary merger from 2011 to 2014. The analysis finds these mergers are consistent with the goals of greater economies of scale and improved efficiency. Acquired banks are generally smaller, less profitable, less efficient, and in weaker condition than their non-acquired peers. Section I reviews the reasons for bank mergers. Section II describes the data. Section III provides a qualitative assessment of acquired-bank characteristics. Section IV analyzes the mergers to determine the relative importance and significance of an acquired bank's characteristics.
I. Reasons for Bank Mergers
Bank mergers drove the long-term downward trend in the number of banks since 1985. Even in the crisis periods of the late 1980s, early 1990s, and 2007-09, the number of mergers exceeded the number of failures every year.1 Chart 1 shows the number of community banks, defined as banks with assets of $1 billion or less, along with mergers and failures from 2007-14. Community banks are the focus because mergers involving larger banks, particularly banks with assets of more than $10 billion, are rare. For example, about 90 percent of the 1,500 mergers since 2007 involved a bank with less than $1 billion in assets.2
As Chart 1 shows, the number of community banks fell by almost 1,700, or 25 percent, from 2009-11....