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2020 in the Rear View Mirror
Last year was a low ebb in bank M&A deals, with levels of inactivity not seen since the 2008 recession. The pandemic has had a chilling effect on deals as low stock prices and the uncertainty of COVID made acquirers particularly cautious.

What Is Propelling M&A Activity?
A combination of factors are at play that are finally triggering more M&A activity. First, like all of us, we are trying to escape COVID fatigue and move on with our lives and back to some level of normalcy. Secondly, with vaccines being administered, there is finally a light at the end of the tunnel and acquirers can get more comfortable with targets’ credit exposure. Bank stock prices also have rebounded giving buyers better currency to do deals. However, I believe the most critical factors are historically low net interest margins and the related need to get bigger and more efficient to combat that. Also, many boards and management teams have simply gotten fatigued and see the next few years as challenging to maintain the institutions, let alone grow profitability.

What Does the Future Hold?
The $7.6 billion M&T Bank merger is a clear signal to me that 2021 could be the most active bank M&A year since 1996 when my firm did nine whole bank deals, the most of any law firm in the West. We are hearing much talk of mergers of equals or strategic alliances. We also are seeing merger talk turning into serious discussions, as the pent up demand by both buyers and sellers is translating into action. With bank stock prices improving, I expect to see a modest increase in deal premiums reflecting stronger currency and reduced credit uncertainty.

The Big Picture
The reality is that we hit the pause button on a lot of things last year, including the continuing consolidation of the banking industry. There is no mystery to the trend. Community banks are being squeezed by their dependence on net interest margins and by the increasing demand and costs of technology. Combine these pressures with new bank formations being few and far between over the past decade, and the movement to 4,000 banks seems inevitable. On the buyers' side, there is an impetus to grow and continue to leverage their platforms.

The Future of Banking
While I believe there will always be a place for well-run community banks, it will be incumbent on the survivors to creatively search for non-interest income sources to offset the uncertainty of net interest margins. Whether it is SBA lending, mortgage banking, wealth management, Fintech ventures, or ownership of non-interest related businesses, I think pursuing some or all of these options will be the formula for success, remaining independent, and meeting investor expectations.