FDIC: Lower Profitability, Higher Asset Quality Characterize Acquisition Targets

Community banks that were acquired between 2010 and 2016 lagged their peers in key profitability measures but outpaced them in terms of asset quality and stable funding sources, according to a study published in the FDIC Quarterly today. Acquired banks’ median pretax return on assets was 30 basis points lower than their peers’, the researchers found. Lower profitability at acquired banks was driven both by higher expenses and lower net operating revenue.

While lower profitability figures — and the efficiencies to be gained through a merger — made these banks better acquisition targets, they also had lower charge-off and nonperforming asset ratios. The median net charge-off ratio at acquired banks was nearly one-third lower than at peer banks.

Acquired banks also had higher ratios of core deposits — about two percentage points on average — as a percentage of average assets, which “may indicate stronger relationships with the local community,” the researchers said. Acquired banks also had lower capital ratios than their peers, which made them especially attractive for acquisitions since mergers are often priced as a multiple of equity acquired.