Ever test the theory that acquiring banks is good? I did.

Every strategic planning retreat has its own flavor. This one particular retreat included a parade of investment bankers conveying the virtues of deal making while the audience of senior bank executives and board members nodded their heads in unison and solidarity.

One question that was unasked was whether it is better to seek acquisitions or go it alone. The conventional wisdom being that doing deals is better than not doing deals. I didn't know the answer, and figured asking an investment banker the question would be like asking a Beverly Hills plastic surgeon if it was better to do a little nip-and-tuck or let nature have its way. (Disclosure: I am also an investment banker, but don't like to admit it at cocktail parties. I am not a plastic surgeon.)

So I went to the spreadsheets. It always comes down to the spreadsheets. The operative question was does doing deals result in better financial performance and total return than not doing deals?

First I had to create some criteria to control for some variables that impact total return and financial performance greatly, such as bank size and asset quality. So I chose publicly traded financial institutions between $1 billion and $20 billion in total assets, with non-performing assets to assets of less than 2%.

I then divided the group into two, deal makers and non deal makers. Deal makers did two or more merger deals for whole institutions since 2010. Non deal makers did one or no deals. There were 46 deal makers and 173 non deal makers. A decent sample, in my opinion.

Their Return on Average Assets and Average Equity performance, at the average, were as follows from 2011 to present.

Deal makers had a better ROA year-to-date: 0.96% versus 0.90% for the non deal makers. But non deal makers had a better ROE: 8.57% versus 8.47% for the deal makers. This may be why you hear so many deal makers talk about return on tangible equity (ROTE) in their earnings conference calls. Better to ignore that goodwill they keep building on their balance sheets as a result of paying premiums for selling financial institutions. Because for ROE, it looks like non deal makers take the brass ring.

And what about three-year total return? Deal makers delivered 73.97% to their shareholders. Non deal makers did better... 75.56% on average.

Does your FI pursue acquisitions? If so, have you tested the conventional wisdom that doing deals is better than going it alone?

~ Jeff

Why Banks Merge: Listen to the Sellers

September 2004, driving from a meeting in New York, on the grossly miss-titled Cross Bronx Expressway, Nathan Stovall, a reporter from SNL Financial gave me a call. The question: What was up with an upstate New York bank? My answer: The CEO was 67 years old and that would obviously be an impetus for a sale. He printed it as I said it. The angry phone call I later received from a bank director was well deserved.

Unfiltered honesty is sometimes a personal blessing, but mostly a curse. Rarely do you see in merger press releases the selling CEO saying, "Hey, I'm tired. I'm out!" But that is often the reason behind the nicely polished words formulated in the Investor Relations Department.

In 2013 there were 246 bank and thrift merger and acquisition deals announced, the highest number since 2007 when there were 318 deals. Year to date through April 22nd, there were 73 announced deals, putting us on track for a similar number of deals to last year. This all comes with fewer banks than there were in 2007.

What is driving deal volume? Investment bankers will tell you the definitive answer, which is of course their opinion. So I thought it would be instructive to take a look at what selling bank CEO's say in the press release when they announce they are turning over the keys to someone else. Yes, these statements are contrived. But within them there is often nuggets of truth. I simply hunt for those nuggets and put my own spin on why the bank was sold. 

These deals were all announced this month.

"Our combined financial institution will offer a wider array of products and services while continuing our long-standing personal commitment to our customers and community."

- Gregory Schreacke, President of First Financial Service Corporation in Elizabethtown, KY on his bank's sale to Community Bank Shares of Indiana, Inc.

Read: We needed greater scale to offer the products and services demanded by customers.

"Our combination... will provide greater capital resources and operational scale that will allow us to grow as part of a larger community bank."

- Loralee Hutchinson, President of Alarion Financial Services, Inc. of Ocala, Florida on the bank's sale to Heritage Financial Group, Inc.

Read: We need to be bigger and have more capital to keep up with regulation and the industry.

"[North Akron Savings Bank customers will gain] access to a broader choice of financial products and services comparable to those offered by the large banks operating in the region."

- Steve Hailer, President and CEO of North Akron Savings Bank on the bank's sale to Peoples Bancorp, Inc.

Read: There's no way we can keep up with the product and distribution channel changes coming down the pike. And what is social media?

"Customers will gain access to many new products and services, including insurance, trust, and investments, plus a full suite of contemporary electronic services.  At the same time, our legal lending limit will be much larger, which will help us to make larger investments in the local communities."

- Dick Baker, Chairman of Ohio Heritage Bancorp of Coshocton on the bank's sale to Peoples Bancorp, Inc.

Read: You have to make lots and lots of little loans when you only have $25 million in capital.

“I am excited about our increased capacity to lend, which will have an impact on the communities we serve."

- Mark Candido, President and Chief Executive Officer of Quinnipiac Bank and Trust Company in Connecticut on his bank's sale to Bankwell Financial Group.

Read: We only have $10 million in capital and can't get more on our own. Oh, and the fact that the CEO is 65 is a mere coincidence.

Am I reading it right?

~ Jeff