Merger and acquisition activity has been on the rise in the last few years among community banks.
Extensive research has been done historically on M&A activity in the industry, but an interesting analysis of voluntary mergers post-financial crisis was conducted recently by FDIC economists Eric C. Breitenstein and Nathan L. Hinton.
The report focuses on the performance related characteristics of acquired institutions relative to peers. The study examines voluntary mergers between 2010 – 2016.
What is a Community Bank?
Perhaps the first question that should be answered is what is a community bank?
While no concise, comprehensive definition exists, the FDIC has identified certain characteristics that define community banks. Key in this definition is that most banks (9 out of 10) are considered community banks.
Generally, community banks are what most people think of when thinking about a bank: they have strong ties to the community; their business is built on relationships; they operate in a limited geographic area; lending is their primary activity; and their lending is not concentrated in a specialty such as credit cards or trust management.
For more details and statistics on community banks, see:
https://www.fdic.gov/regulations/resources/cbi/report/cbsi-1.pdf
Acquired Community Banks
Acquired institutions under-perform with respect to profitability – acquired banks had lower ROA’s and Net Interest Margins than their peers. They also had lower non-interest income relative to assets. This is consistent with past research, post-crisis.
Acquired institutions had better asset quality than peers – this finding was a departure from past studies, as acquired institutions post-financial crisis tended to have weaker asset quality. Acquired institutions had significantly lower levels of charge-offs and non-performing assets.
Acquired institutions had higher ratios of core deposits-to-assets and lower loans- to-assets – the balance sheets of acquired institutions reflected higher proportions of funds from stable sources than peers, both of which suggests less risk and strong ties to the community.
However, they also had significantly lower capital ratios than peers. For example, the data indicated that the median Tier 1 Leverage Ratio was 9.8 for acquired institutions and 10.8 for their peers. The acquired banks in the study, however, were deemed to be well capitalized.
Summary
The overall findings suggest that acquired community banks in the post-crisis era are stable, conservative, have a lower level of risk with respect to their asset mix, and have strong community ties.
The community ties aspect is more subjective, but this is critical as most institutions have learned that have attempted to branch into new markets as opposed to doing so through acquisition of a legacy institution.
They also have lower levels of capital than peers, which work to the acquiring institution’s benefit with respect to the cost of the transaction.
The complete report can be found here:
https://www.fdic.gov/bank/analytical/quarterly/2017-vol11-4/fdic-v11n4-3q2017-article2.pdf
How to cite this blog post (APA Style):
Premier Insights. (2018, January 22). Characteristics of Acquired Community Banks Post-Financial Crisis [Blog post]. Retrieved from https://www.premierinsights.com/blog/characteristics-of-acquired-community-banks-post-financial-crisis
