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Banking mergers and acquisitions are picking back up again after the slowest year in recent history, and Virginia is no exception.
Last year marked a modern low in merger and acquisition activity, with only 98 deals completed nationwide. That’s not just the lowest level of activity since the pandemic — it’s the slowest year since 2004. Industry analysts with Morgan Stanley Research predicted the trend would reverse in 2024, forecasting a potential 50% increase in mergers and acquisitions.
The banking industry has steadily trended toward consolidation since the 1994 passage of a federal law that allowed banks to branch across state lines. Increasingly tighter margins, new regulations and the need to adjust to changing technology has pushed banks to become more efficient, with larger banks able to tap into economies of scale not available to smaller operations.
“Virginia’s mirrored a lot of the national trend line on M&A activity,” says Matthew Bruning, executive vice president of government and member relations for the Virginia Bankers Association.
After a pandemic slowdown for banking mergers and acquisitions, activity picked up a little in 2023, “but it was still anemic,” Bruning says. “I’ve seen prognosticators talking about ’24 picking up, and rightfully so. The dynamic hasn’t changed as far as the drivers on that, with compliance costs and the burden on that side of things, [and] the need for economies of scale for banks of all sizes. What’s different over the last decade is the lack of new bank formation.”
The most recent batch of Virginia bank mergers and acquisitions varies by deal, but a common factor has seen banks seeking to grow in new markets, especially in metro areas.
These banks see an opportunity to “look at markets they’re not in, and to build scale and invest in technology to reach customers, while still having commitment to their legacy markets,” Bruning says.
That applies not only to large banks, but smaller ones as well. Since 2012, there have been 48 mergers among community banks in Virginia alone, says Virginia Association of Community Banks President and CEO Steve Yeakel.
Banks of all sizes are affected by the “challenges of scale and the regulatory environment,” Yeakel says. “It’s fair to say this trend will continue in some way or another to the foreseeable future.”
Credit card combo
Virginia already has seen deal activity increase among banks and credit unions over the last year.
The biggest, by far, is McLean-based Capital One Financial’s blockbuster proposed purchase of Discover Financial Services for $35.3 billion. If federal regulators sign off on the all-stock deal, it would be Capital One’s largest ever acquisition and would make it the nation’s biggest credit card lender.
“We believe strongly that this merger will increase competition among banks and credit card issuers and payment networks, and provide significant benefits for consumers, merchants and the communities that we serve,” Capital One founder, Chairman and CEO Richard Fairbank said during the bank’s first quarter earnings call in April. “We believe the facts will show that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses and greatly enhancing opportunities and benefits for merchants.”
The proposed deal has received pushback from both Democratic and Republican U.S. senators. President Joe Biden also has taken a wary approach to large mergers, fighting an airline consolidation and issuing an executive order calling on the Federal Reserve, the Federal Deposit Insurance Corp. and other agencies to update their guidelines “to provide more robust scrutiny” of banking mergers.
The Capital One-Discover transaction is expected to close in late 2024 or early 2025. At close, Capital One shareholders will own about 60% of the combined company and Discover shareholders will hold the remaining approximately 40%.
“It’s a really big deal,” says Matt Schulz, chief credit analyst at LendingTree. “Those are two giant companies and two really significant players. The credit card space is already so thoroughly dominated by a relatively small number of financial institutions that I understand people’s concern about further consolidation. But I also think that one of the things that is really interesting about this is the payment network aspect of this.”
The deal grants Capital One access to Discover’s payment processing services. The combined company’s sheer size would give it the potential to significantly influence the industry’s payment systems, a fact that’s attracting the attention of many others in the industry.
“We’re not concerned about direct impacts,” says Yeakel with the Virginia Association of Community Banks, but “we’re watching, thinking closely about what that merger would do in the payment system.”
Schulz explains: “With most credit cards, you have the payment network who provides the infrastructure that lets the transactions happen. Visa and Mastercard are the giant gorilla behemoths of the space. American Express is its own thing, both card issuer and network. There’s already been a [big] push to inject more competition against Visa and Mastercard through legislation, but the possibility of a giant issuer like Capital One having a payment network of their own really presents the possibility of having another payment network that’s an even more serious competitor.”
Despite the enormity of the deal, Schulz speculates it probably won’t affect consumers all that much.
“Personally, I think it may not have that much of an impact, especially if they let the Discover brand of credit card stand, because the space is already dominated by relatively small group of players,” Schulz says. “I don’t know that this is going to change things all that much.”
Industry change
The Capital One-Discover deal stands out as a Virginia mega-deal, but it’s far from the only banking M&A activity in the commonwealth playing out this year.
Richmond-based Atlantic Union Bank completed its $407 million merger with Danville-based American National Bank in May. That deal was first announced in June 2023 and approved by the Federal Reserve’s Board of Governors in February 2024.
The merger, Atlantic Union President and CEO John C. Asbury says, was the culmination of a 40-year relationship between the banks.
“For better or for worse, consolidation is a reality in this industry,” Asbury says. “The need to invest in technology, increased regulatory requirements and changing customer expectations have driven a lot of change in the industry. It means a lot of investment needs to occur. From American National Bank’s standpoint, they really had two choices: to make change happen on their own over time, which is expensive, or to join with a friendly party that they knew quite well.”
The consolidation will mean expanded lending capacity and a more robust wealth management and trust business for the newly merged bank, Asbury says. Atlantic Union also picked up American National’s branches, which expanded its reach in Southern Virginia, Roanoke and North Carolina.
“If you look at the map, it’s a hand-in-glove fit,” Asbury says. “It’s perfect infill.”
The merger cements Atlantic Union’s ascendance as a growing, mid-sized bank. Atlantic Union started as a community bank, but although it still considers itself a community bank compared with the nationals, it’s larger than the Virginia Association of Community Banks’ definition, which caps its membership at $10 billion in assets. The combined Atlantic Union has total assets of $23.7 billion.
Another ongoing Virginia merger, though, remains firmly within the narrower definition of “community bank.”
Bigger footprints
Strasburg-based First National is in the process of acquiring Prince George-based Touchstone Bankshares in an all-stock transaction worth roughly $47 million. First Bank will combine with Touchstone to form what will be the ninth largest community bank in Virginia, with 32 branches and expected total assets of about $2.1 billion.
The deal comes on the heels of First Bank’s 2021 acquisition of the Bank of Fincastle, which expanded its footprint from the Shenandoah Valley and Central Virginia into the Roanoke metro area. The Touchstone deal would take it into Southern Virginia, parts of North Carolina, and the lucrative Richmond region. If approved, the merger would be implemented in early 2025.
CEO Scott Harvard arrived at First Bank in 2011. Four years later, it acquired six branches from Bank of America when the national bank withdrew from smaller communities. Places like Staunton, Waynesboro and Woodstock have become First Bank’s bread and butter. With the Touchstone deal, it’s expanding its footprint with seven new branches in the Richmond metro area.
“Even though they’ve got metro Richmond, they’re on the fringes of it and serve smaller communities — which are culturally very similar to the Shenandoah Valley,” Harvard says. “They’re community-oriented, which is what we like. That’s who we are as a community banking company.”
Banks in general operate under increasingly tight margins that particularly squeeze smaller banks, Harvard says. That’s been further exacerbated during the last couple of years when short-term interest rates have exceeded long-term rates, creating an inverted yield curve that makes it challenging for banks to attain viable margins.
That dynamic has further pushed banks to scale up, all but ensuring a continuation of the industry trend toward mergers.
“In 1994, we had 164 banks in Virginia, but every 10 years since, the number of banks headquartered here has dropped by about 25% to 30%,” says Harvard at First National. “In 2014, it was down to 91 banks. In 2024, there are 60 or 61 banks in Virginia. It’s likely you’ll continue to see consolidation at a similar-type pace. You see it across the country as well. I don’t know it’ll cascade or be a huge waterfall, but it will continue to happen over time.”
Another deal occurred in May, when Alexandria-based Burke & Herbert completed its acquisition of West Virginia-based Summit Financial Group. The all-stock deal, valued at $371.5 million, creates a bank with $8.3 billion in assets. As with the Atlantic Union and First Bank deals, this merger expands Burke & Herbert’s reach, essentially tripling its footprint, growing it from its current presence in Richmond, Fredericksburg and Northern Virginia to include Delaware, Kentucky, West Virginia and Maryland’s Eastern Shore.
“This alliance doesn’t just extend our influence; it strategically positions us for future growth,” bank President Charles Maddy III said in a statement. “It also lays the foundation for cultivating richer relationships and underscores our aspiration to become the most sought-after community bank in our markets.”
Credit unions consolidate too
It’s not just Virginia banks that are consolidating; Virginia credit unions are merging as well.
In June, Apple Federal Credit Union and NextMark Credit Union, both based in Fairfax County, announced plans to merge, with the deal slated to close in November. Founded in 1956, Apple has $4.4 billion in assets and 245,000 members, and will integrate the much smaller NextMark into its operations. Post-merger, Apple will have nearly $5 billion in assets and about 260,000 members.
An even bigger credit union deal was announced in January, as Richmond-based Virginia Credit Union announced it would merge with Roanoke-based Member One to create the third largest credit union in Virginia. If the deal is approved, the newly merged credit union will have $6.8 billion in assets, 37 branches and nearly 500,000 members.
Virginia Credit Union is the larger of the two operations, with 22 branches, mostly in the Richmond area, compared with Member One’s 15 branches across Roanoke, Lynchburg and the New River Valley.
According to Deb Wreden of the Virginia Credit Union, the deal has received initial approval from the National Credit Union Administration. Pending a positive vote by Member One’s membership, the merger is planned to take effect on Aug. 1.
Virginia Credit Union spokesman Lewis Wood cited “the costs, challenges and requirements associated with regulatory compliance, cybersecurity, technology, fraud and the realities of today’s economy” as factors in the merger.
Credit union mergers look different from bank mergers due to their ownership by members instead of stockholders. But credit unions also have been consolidating on a steady clip, from 263 mergers in 2014 to 146 in 2023, with the decrease due in part to the shrinking number of credit unions overall. Virginia has effectively mirrored that national trend, with several mergers each year.
“The rate of mergers has been fairly steady,” says J.T. Blau, chief advocacy officer of the Virginia Credit Union League. “Mergers happen for different reasons. One of the reasons is that compliance burden, the regulatory burden that all credit unions face. Compliance costs continue to rise and are difficult for small credit unions. A lot of regulations are one-size-fits-all and can weigh heavily on smaller credit unions.”
Those macro trends continue to pressure banks and credit unions to consolidate. The process can be alarming for customers, but banks are handing it well, says Bruning of the Virginia Bankers Association.
“We’ve seen it every time there’s a merger announcement: There are certainly questions from customers, but banks do a great job explaining what’s going on through the entire process,” Bruning says. “Be patient and check in with your bank if it’s going through that process. It usually ends up being able to offer more products and services in the end.”
