Impact of Community Bank Mergers on Acquiring Shareholder Returns

ABSTRACT

This investigation expands the evidence that bank merger rarely enhance shareholder get backs regardless of whether the merger increase the depth ofs penetration of an existing market or expands a bank's market area. sole when a merger has unusual characteristics, as was the case for Southern Financial Bank's (SFFB) acquisition of First Savings Bank of Virginia (FSBV) did shareholders earn exces go [i]or[/i] come backs The directors of FSBV had established the goal for the bank to be acquired eight years before SFFB acquired it, and FSBV officers and directors held a large percentage of the outstanding shares, which simplified the merger SFFB's strategy, to combine internal increase with acquisitions by merger, l to expanded market penetration and substantial increases in shareholder value. Unlike SFFB the banks in Virginia that merg and those that did not have similar average go [i]or[/i] come backs over the period that SFFB complet its three acquisitions. later to these transactions, SFFB was, itself, acquired by dint of Provident Bankshares of Baltimore in April 2004

The revised U accounting masterys that mandate using purchase accounting for bank merger instead of pooling, and the different perspectives for loan los provisions through bank regulators and the accounting profession did not present the appearance to have a negative impact upon SFFB.

I. BACKGROUND

Regulatory, technological and competitive changes are encouraging substantial consolidation within the financial services industry, particularly among commercial banks. The Garn - St Germain Act of 1982 allowed the acquisition of weak financial institutions across state lines. Beginning June 1 1997 the Riegle-Neal Act of 1994 permitted national banks to operate branches in more than individual state. The 1999 GrammLeach-Bliley Act permitted banking, insurance and securities firms to affiliate beneath common holding company ownership.

Technological innovations have revolutionized customer relationship management, cross-selling opportunities, and of recent origin product development. To remain technologically competitive, many banks involve to satisfy heightened consumer expectations of that kind as internet banking, debit and credit cards, electronic capitals transfer systems, and ATM networks.

Changes in accounting merger lordships mandate use of the purchase rule of accounting rather than pooling. A Financial Accounting Standards Board (FASB) sway took effect December 31, 2003 that requires banks to separate loans they purchase from loans they originate for accounting drifts Loss reserves for purchased loans are not eligible to be included in acquired withholds because the purchase is recorded at market value. FASB and the financial regulators have also changed in what manner banks account for loan losse (Davenport 2004 American Banker).

This investigation examines (1) two market-deepening merger and single marketexpanding merger by Southern Financial Bank (SFFB) in Virginia and (2) contrasts merging and nonmerging banks in Virginia. The evidence in the literature is that for the couple types of mergers, returns to acquiring shareholders are not enhanced, on the contrary one of the SFBB acquisitions exhibits a distinct, interesting counter example.

IL THE MERGER PARADOX

Despite the large number of bank merger above the past twenty-five years, academic studies have failed to show consistent evidence of value enhancement, take away from savings, and economies of scale for acquirers. (see K wan and Wilcox, 1999; Healy et al., 1997 and De drawn out 2001). Bruner (2002, pp. 49 - 50) reviewed 119 studies that used four research designs to investigate the profitability of merger activity: 85 incident studies, 15 accounting studies, 13 executive views and 6 clinical or case studies. He conclud (2002 p 56) that the circumstance studies showed "positive abnormal get backs to the seller" but "that in the aggregate, abnormal (or marketadjusted) turn backs to buyer shareholders from M & A activity are essentially zero"

Becher and Campbell (2005) examined a variety of merger in the 1990 For market- penetrating merger as well as market-expanding merger in the 1997-1999 time frame, they ground no excess returns above market turn backs Losses resulted where there was significant branch overlap among merger partners.

When an acquired bank obeys different geographic areas, different stamps of borrowers or depositors, or has established market positions in different financial production lines, managers expect mergers to increase get backs Managers expect bank mergers to increase profits by the agency of raising rates and fees upon retail services or increasing efficiency and reducing require to be paid [i]or[/i] undergones Mergers can also reduce bank risk [i]or[/i] part of to the other diversification when the co-variances of the merging organizations' income or profit streams are depressed or negative.

Potential receiptss and Savings

Revenue enhancements can be derived from expanding financial service offerings, cross-selling services, raising compensations and boosting net interest receipts by lowering interest rates upon depositors' balances. A broader product-line may enable a bank to cross-sell financial services using customer information gathered in single type of transaction to make an additional sale of a different financial service or yield Reduced average or marginal take away froms can be achieved by rationalizing back-office activities or spreading take away froms such as loan servicing and marketing, above more depositors and borrowers, and applying technology to check clearing and electronic on-line services.