Characteristics of Community Bank Mergers

According to a study in the FDIC Quarterly for Q3 2017, the following are key characteristics of acquisitions by community banks:

  1. Typically less profitable than their peers;
  2. Maintained lower capital ratios;
  3. Held a higher percentage of core deposits;
  4. Carried lower loan-to-deposit ratios; and
  5. Had better loan quality indicated by lower ratios of nonperforming assets.

These characteristics are probably similar across the decades of bank acquisitions.

Community banks with successful merger and acquisition strategies and track records typically have a M&A philosophy around three beliefs:

  1. Earnings can be improved and fixed: With your business strategy, you can grow loans, raise loan-to-deposit ratios, improve net interest margins and gain operating efficiencies; thereby, improving earnings post-merger.
  2. Do not pay (or pay a premium) for excess capital: Excess capital for an acquired bank should not receive a premium - especially at levels typical of a bank acquisition.
  3. Stay away from "turn-around" situations resulting from loan and asset quality issues: Assessing loan and asset quality problems in the due diligence stage of any acquisition of a troubled bank is nearly impossible; it is one of the most difficult elements to value and reach agreement with seller; more often than not, it is not worth the risk.

The study can be found at this link: Community Bank Mergers Since the Financial Crisis.