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(11.1, '1' 11M 1.1'1'1'3‘,"','1,'#: 141,11" "1" , " '1'; 1'" 1'1.-.1'111‘111"" 121.131 '1, ,‘13", 1,1,1 11, -.a‘ ,11611 ,','1,11'b"1' " '3." 11111111111 0.11111113211111, 1'" "' '1,- 1' 1"111,~.1 'u '1111 ‘1 11'11'11'1311' 1,, 11' ._,, 13:1 -i 1 11,011., “111.11 '"113111111111{”\"““'!1,'111,“:1'1‘.Y",,,n1'1' , '1" 321:: v: ,._ 7- ~ . "'1 . 5‘1“]! ," 1.51! ,1!) 1,4,: ,,,",101.-1"1111.'J,"';7;J, 1 fi' 11 “1111111111: «1111111111111111311111....11'11111311111' 1'b1'1i1' 11.1111-“1'11'11ea “11111111111 11'1311‘11K‘11‘ '11 $134111“ .1151 5'21“}.11‘1 111111111111111111111111 1 1 W1 3 1293 00083 392 E " '- u 5.1.2: If: :3 f: ":11- m Us:3*2:2:-1;! This is to certify that the dissertation entitled BANK ACQUISITIONS AND STOCKHOLDER WEALTH presented by Raymond Anthony King Cox has been accepted towards fulfillment of the requirements for Ph . 1) . degree in Business Adm. M jor professor Date October 13, 1986 MS U is an Affirmative Action/Equal Opportunity Institution 0-12771 MSU I LIBRARIES 4523—. V RETURNING MATERIALS: Place in book drop to remove this checkout from your records FINES will be charged if book is returned after the date stamped below. “C’s-7a _ 1X 5252 Edit—44499222 .1 NLC I" ’1’. " W214 .1 :3. 5 U r f‘ 1... Oak 29 {who 3 L; i, 1 BANK ACQUISITIONS AND STOCKHOLDER WEALTH BY Raymond Anthony King Cox A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Finance and Insurance 1986 ”125-. 3.132. © Copyright by RAYMOND ANTHONY KING COX 1986 ABSTRACT BANK ACQUISITIONS AND STOCKHOLDER WEALTH BY Raymond Anthony King Cox This dissertation examines the hypothesis that bank holding companies acquire other banks, in order to increase shareholder's wealth. Bank mergers were identified from the Federal Register, Federal Reserve Bulletin and the Mergers and Acquisitions Journal. Monthly stock return data was gathered from several sources including the Bank and Quotation Record; Moody's Dividend Record; Standard and Poor's Dividend Record; CRSP Tapes; and Compustat Tapes. A three-factor market model, adjusting for general stock market risk and industry risk, is employed. The three—factor market model parameters are estimated for acquirer banks during a pre-merger period. Then the estimated pre-merger parameters were extrapolated to a post- merger period. Deviations of the actual post-merger returns from the expected returns are abnormal returns attributed to the merger. Statistical tests were conducted to assess the significance of the impact of bank mergers on average abnormal returns. In addition, other tests on the sign, sequence and volatility of returns were administered. Commercial bank acquisitions by bank holding companies were found to have a significant effect on stockholder returns. The stock returns were positive for the eight months starting eight months before the Federal Reserve Board merger approval date. DEDICATION To the honor and glory of almighty God in loving memory of my mother. iii ACKNOWLEDGMENTS I wish to express my appreciation to the members of my dissertation committee, Dr. Alan E. Grunewald (Chairman), Dr. Kwang W. Jun, and Dr. James Marshall, for their guidance, encouragement, and aid in completing this dissertation. To Dr. Myles S. Delano, I express my gratitude for his advice and understanding during the period of my doctoral program. Thanks are also extended to Dr. R. Gene Stout of Central Michigan University for his help in operating the computer programs used in this dissertation. Finally, to my wife Ellen and my children, Natalie, Travis, Garrett and Chelsea, I express my appreciation for their support, understanding, and patience. iv TABLE OF CONTENTS Page LiSt Of Tables...OOOOOOOOOOOOOOOOOOOOOO0.00.00... ix List Of FigureSOOIOOOOIOOOIOOOOO... ..... 0.0.0.... xii CHAPTER 1 THE PROBLEM............................ Introduction......................... Objectives of the Study.............. Importance of the Study.............. 2 THEORETICAL CONSIDERATIONS............. Differential Efficiency.............. Inefficient Management............... The Agency Problem................... Managerialism........................ Operating Synergy.................... Financial Synergy.................... Undervaluation....................... Market Power......................... Strategic Planning................... Tax Factors.......................... Accounting Rules and the Price-Earnings Ratio............... Conclusions.......................... \DQQQGO‘UTUIU‘I-bb NNl-‘H hna unu 0-0 up 3 LITERATURE REVIEW...................... Mergers and Profitability............ Returns on Stock..................... Risk Performance..................... Characteristics of the Acquired Firms.............................. Tender Offers........................ Market Power......................... ldF‘H DHF‘H WW40| CHAPTER PAC 8 3 (continued) Agency Problems and Managerialism.... 20 Terms of Mergers..................... 21 Bank Studies Affecting Mergers....... 21 Conclusions.......................... 26 4 LAW REVIEW............................. 27 Introduction......................... 27 History of Mergers................... 28 Overview of the Regulators........... -29 Office of the Comptroller of the Currency........................... 29 Federal Reserve Board................ 30 Federal Deposit Insurance Corporation........................ 33 Securities Exchange Commission....... 35 Federal Statutes Governing Acquisitions of Commercial Banks... 35 The Clayton Act...................... 35 The McFadden Act..................... 39 The Securities Act................... 39 The Securities Exchange Act.......... 40 The Bank Holding Company Act......... 41 The Bank Merger Act.................. 44 The Change in Bank Control Act....... 45 The National Bank Act................ 47 Scope of State Legal and Regulatory Framework.......................... 49 Application of the Law--Some Case Histories.......................... 60 Conclusions.......................... 67 5 RESEARCH DESIGN AND HYPOTHESIS......... 69 Sample and Data...................... 69 Methodology and Hypothesis........... 74 Statistical Tests of Bypothesis...... 80 Average Abnormal Return Test by Bank............................... 80 Positive Abnormal Returns by Bank Test............................... 81 Average Abnormal Return by Time Test............................... 81 Standardized Average Abnormal Return by Time Test................ 81 Percent Positive of Abnormal Returns by Time Test............... 82 vi CHAPTER PAGE: 5 (continued) Percent Positive Test................ 82 Percent Significant Test............. 83 Nonparametric Runs Test on the Standardized Average Abnormal Return............................. 83 Nonparametric Runs Test on the Average Abnormal Return............ 84 Volatility of Returns by Bank........ 87 6 RESULTS AND INTERPRETATION............. 90 Average Abnormal Return Test by Bank............................... 90 Positive Abnormal Returns by Bank Test.......................... 96 Compounded Abnormal Return by Bank... 96 Average Abnormal Return by Time Test............................... 104 Standardized Average Abnormal Return by Time Test................ 107 Abnormal Returns by Time............. 110 Cumulative Average Residual.......... lll Standardized Cumulative Average Residual........................... lll Compounded Abnormal Return........... 115 Geometric Average Abnormal Return.... 115 Sum of Abnormal Return............... 120 Cumulative Sum of Abnormal Returns... 122 Percent Positive of Abnormal Returns by Time Test............... 122 Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank..................... 125 Percent Significant Test............. 127 Runs Test............................ 127 Focus on Subperiod Results........... 130 Subperiod Average Abnormal Return Test by Bank................ 131 Subperiod Positive Abnormal Returns by Bank.................... 136 Subperiod Compounded Abnormal Return by Bank..................... 136 Subperiod Average Abnormal Return by Time..................... 136 Subperiod Standardized Average Abnormal Return by Time Test....... 146 Subperiod Abnormal Returns by Time............................ 149 v1i CHAPTER PAG E 6 (continued) Subperiod Cumulative Average Residual...........................:149 Subperiod Standardized Cumulative Average Residual................... 149 Subperiod Compounded Abnormal Return............................. 149 Subperiod Geometric Average Abnormal Return.................... 155 Subperiod Percent Positive of Abnormal Returns by Time Test...... 155 Subperiod Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank.... 155 Subperiod Percent Significant Test............................... 160 Subperiod Runs Test.................. 160 Mergers by Year...................... 163 Volatility of Returns by Bank........ 165 Regression Statistics................ 171 7 SUMMARY AND CONCLUSIONS................ 173 Test Period Returns.................. 174 Subperiod Returns.................... 175 Changes in Volatility................ 178 Impact of Merger on Stockholder Wealth............................. 180 Suggestions for Further Research..... 180 APPENDIX AOOOCOOOOOOOOOOOOO0......O... 00000000000 182 BIBLIOGRAPHY.... ................................. 190 viii 10. 11. 12. 13. 14. LIST OF TABLES Regulatory Agency Action on Bank Mergers: Approvals, Denials and Litigation Rates.IOOOOOOOOOOOOOOO0.00.0.000000000050 Federal Reserve Board Decisions on Bank Holding Companies Formations.OOOIOOOOOOOIOOOOOOOOO0.0.0.000... ..... .55 Federal Reserve Board Decisions on Bank Holding Companies AchiSitionS.COCOOOOOOOOOOC0.. ..... 0.0.0.00000000057 Commercial Bank Mergers Attached by Justice Department After Regu1atory ApprovaIOOOOOOOOOOOOOOOO0..0.0.0.00000064 NASDAQ BankS&TrUSt COS.O0.00.0.0.00.0000000000000073 DiVidendS.0..OOOOOOOOOOOOOOOOOOIOO0.00.00.00.000000075 Average Abnormal Returns by Bank....................91 Positive Abnormal Returns by Bank...................97 Compounded Abnormal Returns by BanKOOCCOO0.000.000.0000...00......0.0.0.00000000100 Average Abnormal Return by Time....................105 Standardized Average Abnormal Return by TimeOOOOOOI.00.00.000.000..0...00.0.000108 Cumulative Average Abnormal Raturn by TimeOOOOOOIOOOOOOOOOO. ...... 0.0.0.0....112 Compounded Abnormal Return by Time-0......O00......O...0......00.0.000000000000116 Geometric Average Return at Time t.OOIIOOOOOOOOOOOOOOIOOO0..00.00000000000000118 ix 15. Sum of Abnormal Returns by Time. ........... .........12]_ 16. Cumulative Sum of Abnormal Returns by TimeOOOOIOOOOOOOOOOOOOOO0.00.0.0...C0.123 17. Percent Positive of Abnormal Returns by Time.OOOOOOOOOOOOOOOOO0.00.00.00.00000124 18. Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank... ...... .............126 19. Percent Significant Test of Average Abnormal Returns for Complete Sample by Bank..........................128 20. Nonparametric Runs Test....... ..... ................129 21. Subperiod Average Abnormal Returns by Bank..................................132 22. Subperiod Positive Abnormal Returns by BaDROOOOOOOOOOIOOOO... ..... 0.0.0.00000137 23. Subperiod Compounded Abnormal Returns by Bank...OOOOOOOOOOOOOOOOOO...0.0.00.000140 24. Subperiod Average Abnormal Return by Time............. ............ ..... ..... 143 25. Subperiod Standardized Average Abnormal Return by Time.0....0.0.0.00000000000000147 26. Subperiod Cumulative Average Abnormal Return by Time..... ..... . ....... ........153 27. Subperiod Compounded Abnormal Return by Time............................ ...... .154 28. Subperiod Geometric Average Return at Time t............ .............. . ...... 157 29. Subperiod Percent Positive of Abnormal Returns by Time.........................158 30. Subperiod Percent Positive Test of Average Abnormal Returns for the complete sample by BaDKOOOOOOO00.000.000.00000159 31. Subperiod Percent Significant Test of Average Abnormal Returns for Complete Sample by Bank..........................161 32. 33. 34. 35. 36. 37. Subperiod Nonparametric Runs Test ...... . ......... . .162 Mergers by Year...................................L164 Volatility of Returns by Bank... ...... .............166 Regression Equations...............................l72 Summary of Results, Test Period............ ..... ...l76 Summary of Results, Subperiod......................l79 xi 2. 3. 10. 11. 12. 13. 14. 15. LIST OF FIGURES Permissable Nonbank Activities for Bank Holding Companies ~- Under Section 4 (c) 8 of Regulation Y......................................34 Regulatory Powers.0.000.000.0000.0.00.00.00.0000000036 First Wisconsin Corporation, Milwaukee, Wisconsin Order Approving Acquisition of Bank...........................................7l Average Abnormal Return Test by Bank....IOIOOOOOOOOGOO...00.0.0000000000000000094 Compounded Abnormal Return by BankOO...OOOOIOOOCOOOOOOOO0.0.00.0000000000000103 Average Abnormal Return by TimeOOOOOOOOOOOOIOOOOOOOO...0.00.00.00.0000000000106 Standardardized Average Abnormal Returns by Time.........................109 Cumulative Average Abnormal Return by Time-O...0.0...O0.0...00.000.000.000000113 Standardized Cumulative Average Abnormal Return by TimeOOOOOOOOOOOIOOOOOOOOOO00.0.000000000000000114 Compounded Average Abnormal Return by TimeIOIOI0.0.0.0....0.00.00.00.00000000117 Geometric Average Returns % at Time tOOOOOOOOOOOOOOOOIOOOOOOOOOOOO...0.00.00.119 Subperiod Average Abnormal Return TeSt by Bank...000.000.000.00...0.0.0.0000.0.0.00135 Subperiod Compounded Abnormal Return by Bank.I...0......IOOOOOOOOOOOOOOOOI0.0.0144 Subperiod Average Abnormal Return by TimeOOOOOOCOOOOOOO0.0.0.0.....0000000000000000145 Subperiod Standardized Average Abnormal Returns by TimeOOOOIOOOOO0.00.00.00.0000148 xii 16. 17. 18. 19. 20. 21. Subperiod Cumulative Average Abnormal Return by Time..........................150 Subperiod Standardized Cumulative Average Abnormal Return by Time..................151 Subperiod Compounded Abnormal Return by Time...................................152 Subperiod Geometric Average Returns%at Time tOOOOOOOOOOOOOOOO00.00000000000156 Variance of Abnormal Returns by Bank, Estimation PeriOd.IO...0.0.0.00000000000169 Variance of Abnormal Returns by Bank, Test PeriOdOOOOOOOOOOO00.0.0000000000000170 xiii CHAPTER ONE THE PROBLEM I-Infrgiugtign Mergers and acquisitions have been a part of the corporate scene in the U. S. for a long time. Why firms decide to grow through external means instead of internally has been debated for an equal length of time. A number of causes have been suggested for the phenomena of mergers and acquisitions, including tax factors; differential efficiency; inefficient management; operating synergy; financial synergy; undervaluation; strategic planning; agency problems; managerialism; market power; accounting rules; and price-earnings ratio. Most studies to date have reviewed the conglomerate merger, and the returns of such a merger, as opposed to horizontal and vertical mergers. The fact that the latter forms of merger are less abundant, possibly because of antitrust laws, is one reason for the skewed sample selection of such studies. There has been a dearth of research exploring the returns to the stockholders of banks and bank holding companies acquiring other banks. II. Wand}; This research examines the returns to the stockholders of the acquiring bank holding company, adjusted for market risk and industry risk, accruing from the acquisition of other banks. The hypothesis that bank holding companies acquire other banks in order to maximize shareholder wealth is tested. In addition, the volatility of the acquirer's returns is investigated before and after the merger. III. W The importance of the study stems from the substantial increase in bank acquisitions in the U. S. in recent years. Also, state banking laws are beginning to be reviewed with an aim of liberalizing branching and ownership provisions allowing for interstate banking. Before present state banking laws, many of which have been in existence since the 1930s Depression, are amended, it would be prudent for legislators to become knowledgeable about some of the underlying forces driving banks to acquire other banks. Finally, this study will 'fill in a gap' in the merger literature dealing with stockholder returns when the acquiring firms are in the bank industry. In Chapter Two the theoretical considerations propelling merger activity are examined; Chapter Three is a review of the literature on mergers; Chapter Four is a review of the laws and regulatory system governing bank merger activity; Chapter Five describes the research design and hypothesis and limns the statistical tests used to evaluate the impact of bank mergers on stockholder wealth; Chapter Six presents the empirical results and interpretation; and finally Chapter Seven summarizes the conclusions and provides suggestions for further research. CHAPTER TWO THEORETICAL CONSIDERATION Why merge? The following eleven types of theories have been proposed as a basis for mergers: (l) Differ- ential Efficiency, (2) Inefficient Management, (3) The Agency Problem, (4) Managerialism, (5) Operating Synergy, (6) Financial Synergy, (7) Undervaluation, (8) Market Power, (9) Strategic Planning, (10) Tax Factors, and (11) Accounting Rules and the Price-Earnings Ratio. 1. D'EE II 1 EEE' . This theory states that if the management of Firm One is more efficient than the efficiency of Firm Two and if after Firm One acquires Firm Two, the level of efficiency of Firm Two is raised to the level of efficiency of Firm One, efficiency is increased by merger. This provides the potential for gain. Unfortunately, the acquiring firm may not be able to raise the acquired firm's level of efficiency high enough to justify the price paid for the purchase. And, many participants in the acquisition market may bid up the prices of potential 'acquiree' firms eliminating the opportunity to profit from the gain. 11. Wt This theory is a variation of the Differential Effi- ciency Theory. Here the inefficient management is either not realizing its potential or just plain inept. The potential acquiring firm is not necessarily a superior management in the particular line of business. The inefficient management theory is thought to explain unre- lated (conglomerate) mergers whereas the differential efficiency theory is the basis for horizontal mergers. III. W The agency problem (Jensen and Meckling [1976]) arises when managers own only a small (or none) proportion of the shares of the firm. This causes the managers to behave con- trary to the majority stockholders' interest. Management may work less vigorously, allot higher salaries and perqui— sites to themselves to the detriment of the majority snare- holders. With widely dispersed ownership, individual share- holders do not have an incentive to expend the substantial resources to monitor the behavior of managers. Iv. Managerialism This theory is a variant of the agency problem. The managerialism explanation states that managers have an in- centive to increase the size of the firm because their com- pensation is positively related to the Size of the firm. This theory's premise was criticized by Lewellan and Huntsman (1970) who found that manager's compensation is significantly correlated with the firm's profit rate, not the asset size or its level of sales. “Wm Synergy is the cooperative action of two firms formed into one combination. If this occurs, the value of the combined firm is greater than the sum of its parts. Opera- ting synergy may arise due to economies of scale. This may arise from indivisibilities of such things as machines and management, etc. If economies of scale do exist in an industry, there is no reason why mergers are the only way to achieve economies of scale (versus internal growth). Not only can there be economies of scale, and scope, in hori- zontal integration, but also in vertical integration. Operative economies in vertical integration can be achieved through reduced costs of communication and various forms of bargaining (Williamson, 1971). v1. W Financial Synergy is where the financial costs and/or financial risk of the combined firm is lower than the weighted average of the separate firms. Financial synergy is possible by evidence of reduced flotation costs as a per- centage of size of issue. Larger firms can issue larger sized security offerings. If two firms merge where their respective cash flow streams are not perfectly positive correlated, there is a reduced probability of bankruptcy. Because of the decrease in the likelihood of bankruptcy, the expected bankruptcy costs would decline. This should increase the value of the firm. VII- QnQQLXQlQéLiQn Some firms are acquired because the bidder believes the target's purchase price is a bargain. Gort (1969) views the merger-acquisition decision as a straight-forward capital budgeting problem in which a firm should be acquired if the present value of the income from the firm exceeds its acqui— sition price. Reasons for the undervaluation may include inefficient management (the Inefficient Management Theory was mentioned previously) or asymetric information possessed by the potential acquirer on the worth of the firm that the general market does not have. Another aspect of undervaluation is the q-ratio. The q-ratio is the ratio of the market value of the firm's shares in relation to the replacement costs of the assets represented by these shares. Merger waves often occur when the q-ratio is substantially less than one. A bank may acquire an established bank in a market, instead of entering d: DQZQ, because it is cheaper to do so. VIII. Maw; When a firm has market power it is able to unduly influence the price of goods (services) in the market. Market power arises when firms in the same market merge resulting in an increased market share of the combination. This may lead to economies of scale and/or scope. If so, then this theory is part of the Operational Synergy Theory. If the merger is between firms in different markets then there may be a diversification effect. The diversification effect desired by management may involve the Agency Problem Theory and/or the Managerialism Theory. In the United States, firms with a high degree of mar- ket power would be subject to anti-trust litigation by the Department of Justice and/or competitors. In the banking industry, particularly because of the numerous fragmented markets, monopoly (or oligopoly) considerations play a large role in mergers and acquisitions. 1x. mm Some firms merge because management has developed a strategy requiring acquisition of presently operating firms. Merger takes place instead of fig nggg entry into a field. There are numerous strategies that management may adOpt, some requiring mergers or acquisition. For example, the acquirer may seek through acquisition management exper- tise, specific asset portfolios, distribution network, reputable name, financial diversification, research and mar- keting capabilities. Why a firm would merge to achieve their strategic plan instead of through internal development is a question unanswered. Reasons to explain this may be that mergers/acquisitions are less risky and/or provide Opportunity to accomplish the goal in less time. X. TQE_E§££Q£§ If a combined company can make more profitable use of the tax laws than the separate companies or than their stockholders, then there is a tax incentive to merge. The tax advantage could be considered a synergy. There are numerous tax advantages; a few will be mentioned. Suppose the stockholders of Firm One wish to invest in Firm Two. They could do this by: l) 2) 3) Firm One pays out cash dividend to their stockholders who incur personal income tax. The stockholders who subsequently purchase stock in Firm Two are subject to capital gains taxation upon disposition. The stockholders of Firm One could sell some of their shares to raise cash to invest in stock of Firm Two. The sale of stock is subject to personal tax on any realized capital gains. The sellers of Firm Two's stock may also incur capital gains tax. The company of Firm One may acquire Firm Two. This merger may, or may not, be taxed depending upon the form of acquisition. 10 As indicated by the above, there is an incentive for company reinvestment versus individual stockholder reinvest- ment, i.e. Number 3 is a method of acquisition which reduces and/or delays the payment of taxes for the individual. Other tax incentives are unutilized tax-loss carry- overs. Profit-earning firms with high tax liabilities may be interested in acquiring firms with accumulated tax- 1osses, especially if they are about to expire (Internal Revenue Code, Section 381). The Economic Recovery Act of 1981, for a short period, provided a vehicle (through a sale-leaseback agreement) to sell tax benefits arising from the investment tax credit and depreciation schedule. This opportunity was subsequently closed by threatened amendment effective retroactively. Thus, mergers and acquisitions are the only methods available to utilize these tax benefits. Another tax incentive is to substitute capital gains taxes for ordinary income taxes by acquiring a high growth firm with a low dividend payout and then disposing of it to realize capital gains. For private firms, unjustified earnings retention may be taxed by the Internal Revenue Service. This provides an incentive to sell to another firm. A closely held firm whose owner may soon be concerned with inheritance taxes may sell because of the uncertainty of the value that the IRS may place on the firm. Also, the 11 sale of the firm would provide liquidity for the payment of estate taxes. The form of acquisition has an impact on tax liability (Internal Revenue Code, Section 368) and may explain the motivation to acquire. A stock for stock swap where Firm One exchanges its stock to the stockholders of Firm Two results in no immediate tax liability for either party. When the stockholders of Firm Two liquidate the Firm One stock acquired through the merger, then they are subject to tax on any realized capital gains. The use of convertible debentures to acquire a company has two important tax features. The interest payments by the new company on the debentures are deductible from current taxable income, and the capital gains to the seller can be deferred until the debentures are sold or converted. Deferment of payment of capital gains taxes in effect lowers the effective rate of capital gains tax (which is already substantially lower than ordinary income tax). This form of exchange has another advantage that the tax basis of the acquisition to the acquirer is the market value of the convertible debentures, not the 'old' basis (book value) of the acquired firm. Of course, if the acquisition price was less than book value, this is not an advantage. The Tax Reform Act of 1969, among other things, amended the Internal Revenue Code to reduce the advantages of using the convert- ible debenture exchange in mergers. I'Roughly, if interest 12 is paid in the amount of $5 million or more on convertible bonds, the interest is not deductible.‘ (Steiner (1975), p. 87). XI. W The choice of method of accounting (financial statements) for mergers may provide an artificial incentive where no economic incentive exists. Incentive to merge because of accounting rules and the relationship between the price of common stock and its earnings per share (PE Ratio) may arise under the following circumstances: 1) The PE ratio of a particular firm is a stable variable that is slow to change over time. Therefore, changes in earnings per share (some- what under the control of the firm's management) affect the price of the stock. 2) PE ratios are related to growth in earnings per share (EPS). As the EPS growth rate increases so does the PE ratio. 3) When Firm One, possessing a relatively high PE ratio, acquires Firm Two, after the acquisition the market values the combination at the acquirer PE ratio. The above circumstances were considered the major cause for a substantial proportion of mergers in the 0.8. in the 1960s. 13 Accounting Principle Board Opinion Number 16 and 17 reduced the potential abuses of firms choosing a pooling of interest method to account for a merger versus the pur- chasing method. Still, a merger consummated by a common stock for common stock swap, accounted for by the pooling of interest method, for publicly traded firms may be motivated by the accounting rules and the PB Ratio Relationship. XII. Conclusions Most of the theories indicate that a financial benefit, not obtainable from internal expansion or de ngyg entry into other markets, may be realized from a merger. This is in accordance with financial theory which would suggest that management interest in pursuing the merger should be guided by consideration for shareholder wealth. To an investor observing the stock return data of a public firm, the cause or causes of the financial benefit is not clear. That is, for a specific merger, one theory or a multitude of theories may explain the source of the financial benefit which should ultimately be reflected in acquirer shareholder wealth. The change in the total value of the firm is a measure of the value of the merger which is realized by shareholders and bondholders. Other merger participants (acquired stockholders, creditors, management) may capture some merger value as well. CHAPTER THREE LITERATURE REVIEW Most studies of mergers and acquisitions use samples of non-bank firms. Many of the issues that apply to non-bank firms apply to banks and bank holding companies as well. LaergerLaanutabilm A number of researchers have studied both the bidders and targets of mergers with respect to their financial profitability performance. Studies by Weston and Mansinghka (1971), Melicher and Rush (1974), Boyle (1970), and Conn (1976) indicated that conglomerates perform as well, with respect to profitability, as non-conglomerates. Weston and Mansinghka (1971) suggested a diversification explanation so the conglomerates would avoid sales and profit instability, declining growth, heightened competitive environment, lagging research success in technology, and increasing risk developments in their industries. Reid (1971) extended the time period of the Weston-Mansinghka article into a bear stock market and showed the greater price decline of the conglomerates versus the industrials. Melicher and Rush (1974) found evidence that conglo- merate acquirers acquired firms with high profitability and 14 15 low leverage contrasted with non-conglomerate acquirers acquiring firms with comparable profitability and leverage. These conclusions were supported by Boyle's (1970) evidence. 11- BELHIDE_QD_ELQ£K If the reason for merger is a tax benefit, operational or financial synergy, or undervaluation then the acquiring firm's stock should reflect gains from the successful merger unless the market was able to fully anticipate the merger before it occurred. Bogarty (1970) found that merging firms did not outper- form or underperform the industry average for his sample. Weston, Smith and Shrieves (1972) found that conglo- merates outperformed mutual funds, on a risk-adjusted basis, for their sample during the 1960-69 period, Melicher and Rush (1973) compared the performance of conglomerates to non-conglomerates during the period 1966-71 and found no statistically significant differences (on a risk—adjusted basis). Halpern (1973), discovered that merger information is available, on average, for seven months before the announcement date. The cumulative average residuals (CARs) increased from the seventh month onward. Mandelker's (1974) findings indicated that acquirers do not lose nor gain from umrgers but pay a fair price for the acquired firm in a competitive market for acquisitions. Bllert (1976) found similar results; acquiring firms did have positive CARs Aal 16 before the merger announcement, but both the acquirer and acquired's deviation of return was not statistically significant. Langetieg's (1978) findings supported Mandelker (1974). Langetieg's contribution was in the use of a variety of performance indexes and matched comparisons between a control group and matched pairs. Dodd (1980), Asquith (1983) and Asquith, Bruner and Mullins (1983) showed evidence that the acquired firm is the one that benefits (statistically significant) from mergers with positive CARs and not the acquirer firm. 111. W The empirical research literature is in agreement that mergers are not an efficient method for reducing risk. Levy and Sarnat (1970) suggested that, in theory, merger was a method to reduce risk. Evans and Archer (1960), Weston, Smith, Shrieves (1972), Melicher and Rush (1973), and Lev and Mandelker (1972) support the conclusion that mergers are not an efficient method to reduce risk. IV. CW Regardless of the form of merger, time period, and compensation package the shareholders of the acquired firm accepted in the sale of their shares to the acquirer, the acquired shareholders earned a significant high rate of return (Gort and Hogarty (1970), Lorie and Halpern (1970), ‘4 l 17 Baugen and Udell (1972), and Halpern (1973)). The reason for the above is obvious; the bidder firm pays a substantial premium to acquire the target firm (Hayes and Taussig (1967), Gort (1969), and Piper and Weiss (1974)). The premium paid has a wide range, but the minimum average is about fifteen percent. There is a diversity of evidence regarding the profitability of acquired firms. Mandelker (1974) and Smiley (1976) found low rates of return, based on market value, versus Boyle (1970), Melicher and Rush (1974), Conn (1976) and Stevens (1973) showing average profitability, based on accounting data. Stevens (1973) used a multivariate discriminant analysis of financial information. He found that six factors explained whether a firm was acquired or not. These factors were: (1) leverage, (2) profitability, (3) activity, (4) liquidity, (5) dividend policy, and (6) price earnings (Stevens, p. 152). Evidence of PE ratio reasons for acquiring firms was found by Conn (1973) and Mead (1969). “W A tender offer is a cash and/or security (common stock, preferred stock, debt and/or other type) bid by a firm to acquire ownership in another. A legal merger follows two— thirds of successful tender offers. Dodd and Ruback (1977) analyzed a sample of unsuccessful tender offers. The market power (monopoly) theory implies that both acquirer and l8 acquired firms would lose (in an unsuccessful merger) because of the lost ability to gain from the monopoly that did not occur. The undervaluation theory implies that neither the acquired or acquirer firms would be affected due to unsuccessful tender offers. The managerialism theory would imply that both the acquirer and acquired firm shareholders would benefit from unsuccessful tender offers. The CARs of both the acquirer and acquired firms following the unsuccessful tender offers were zero supporting the undervaluation theory. Kummer and Hoffmeister (1978) provided evidence that acquired firms had negative CARs up to four months before the merger offer (subsequently successful) and then the CARs turned positive. For the acquirer firms, the time period before and one month after the successful merger offer the CARs were positive. Firth (1979) used a sample from the United Kingdom during 1972-74 and reported that acquired firms had substantial gains whereas the acquirers had no gain. Bradley's (1980) study, for the period 1962-77, in- dicated a mean premium of forty-nine percent for successful tender offers, and the acquirer stockholders enjoyed a four percent excess capital gain within five trading days of the merger. For the unsuccessful tender offers, the post merger offer price of the target firm was sixty-seven percent (on 19 average) higher than the premerger offer price. This price level was fifteen percent (on average) higher than the rejected merger offer price. The bidder firm's post reject- ed offer market price was four percent less than before the merger offer stock price. VI- HELK££_EC!§L The antitrust legal challenges of mergers having significant power in their markets has been examined. McGowan (1965) found that mergers accounted for almost two- thirds of the increase in the five-hundred firm concentration ratio between 1950 and 1960, and almost three-quarters the increase in the one-hundred firm concentration ratio (p. 455- 456). Stillman (1982) found that from a sample of challenged horizontal mergers the effect on the CARs of rivals was not statistically significant. The market power theory, with this merger creating an oligopoly leading to collusion, would argue that during the merger process there would be positive CARs and when the merger was challenged negative CARs. Eckbo (1983) used a larger sample than Stillman (1983) and found positive CARs for the rivals and participants. Once the merger was challenged, the CARs did not change. This would support the market power-collusion theory. 20 VII. Asensumblemunmagerialism Agency problems and managerialism studies emphasize the role mergers and takeovers have on firms that have agency problems. Standstill agreements limit a significant shareholder from acquiring control for an extended period of time. A negotiated premium buyback is the repurchase of a significant shareholder's ownership at a premium. Both standstill agreements and negotiated premium buybacks may be part of the same agreement. These arrangements reduce the competition for acquiring firms. The motivation for such agreements is considered to be derived from management and is an agency problem and/or inhibits efficient management. Dann and DeAngelo (1983) studied the reaction of the stock price when a standstill agreement or negotiated buyback is announced. Dann and DeAngelo's results were significant negative stock price effect for standstill agreements, combination of both, and a negative (but not significant) price effect for negotiated buybacks. This .study provides support for the agency problem and managerialism theory where management serves its own best interest, not the shareholder's interests. Bradley and Wakeman (1983) extend the Dann-DeAngelo study researching repurchases of stock acquired by a bidder seeking a consummated merger. Their goal was to separate 21 the wealth transfer effect from the information effect. The information effect is negative for both the repellant firm and the bidder. VIII. W Some studies have developed a relationship between the price of acquisition and the accounting earnings of the target firm. Larson and Gonedes (1969) developed an exchange-ratio model between the acquirer and acquired firm's common stock. The PE ratio of the combined firm will be a weighted average of the PE ratios of the acquirer and acquired when the growth rate of the combination is a weighted average of the acquirer and acquired's growth rates, and the risk of the combination's earnings is a weighted average of the earnings of the acquirer and acquired. Conn and Nielsen (1977) provided empirical support to the Larson-Gonedes Exchange Ratio Model. Ix. Wu The above studies primarily used samples of non—bank firms. Research on mergers using samples of banks and/or bank holding companies is not abundant. The relevant studies are discussed in the following. Johnson and Meinster (1973) (P. 61) stated that there were 'three shortcomings of previously published studies of the performance of bank holding company acquisitions: 22 (l) sampling procedures, (2) exclusive reliance on a univariate analysis, and (3) the specification of measures of performance." Johnson and Meinster (1975) found evidence that holding company acquisitions of banks had favorable performance for at least four years (after acquisition) using balance-sheet ratios. Martin and Keown (1981) studied the returns of stocks formed by the incorporation of one-bank holding companies (OBHC). The formation of the OBHC does not have a significant effect on the returns of the underlying stock of the affected bank. Piper and Weiss (1974) found that the acquisitions by the multibank holding companies were breakeven investments that did not increase their earnings per share in the year 1967. Mingo (1976) found that the only difference between multibank holding companies' asset management policies and nonholding company banks was that the former had significantly riskier assets. The theory explanation for these findings rests in the managerialism theory and agency problems. Curry (1981) found from a sample of 1,156 holding company banks during 1969-72 that those acquired banks were typical of commercial banks, i.e. no atypical pre- .acquisition characteristics. 23 The ubiquitous of multibank holding companies (MBBC) is evidenced by Rose and Savage (1981) who state from 1968-77 that MBHCs increased from 4.6 percent to 15.6 percent of all 0.8. banks, and the increase in bank deposits in these MBHCs was from 13.2 percent to 34.6 percent. This increase was primarily (81 percent) accomplished by acquisition of existing banks rather than fie ngyg entry. Evidence on economies of scale suggests that bank average cost curves are U-shaped with an Optimum size bank around $75 million (see Benston et a1 (1981) and Clark (1984)). Heggestad and Mingo (1977) found that a statistically significant relation exists between market concentration and prices or services in commercial banking. Second, with respect to some specific prices and services, and in the aggregate, the concentration-performance relation is curvilinear. Specifically, a given increase in concentra— tion will have a greater impact on prices (services), the less concentrated is the market initially. Brown (1982) finds a positive, statistically significant relationship between market concentration and the difference between profit rates of the relatively large and the smaller banks in the same market areas. He also finds a positive, statis— tically significant relationship between profit rates and market concentration for the relatively large banks in market areas, but no concentration-profits relationship for 24 the smaller banks. Smirlock (1983) finds that the market share of a bank dominates the concentration ratio of its market area as a determinant of the bank's profit rate. A consideration with all bank mergers are the applic- able regulations and approval by the agencies. Fleisher (1983) states that the impact of the above on the prospec- tive bidder depends upon (p. 50): '(1) its prospects of obtaining approval from the agency, (2) the time when approval must be obtained, (3) its ability to avoid the regulatory problem, and (4) the impact of added costs and delay on its willingness to proceed.“ There has been a scarcity of event studies in the Bank Holding Company (BHC) literature on stockholder returns from mergers as evidenced by Frieder and Apilano (1982) in their BBC literature review. Lobue (1984) used the standard methodology (a Capital Asset Pricing market model is estimated and extrapolated to the merger period, deviations between predicted and actual returns are the residuals which are averaged across firms and summed over time (Cumulative Average Residual)) developed by Balpern (1973) and Mandelker (1974) in analyzing a sample of 37 banks acquired by other banks. Deficiencies in the implementation of the market model to evaluate stockholder returns was the choice of the market return and banking industry return. Both measures did not include dividend returns, only price indexes. That and the sample size of 37 seems inadequate. Lobue's tainted 25 results indicated positive cumulative average residuals (CARs) rising prior to the merger effective date peaking 14 months thereafter with an average rise of 35.6% in the returns to the bank holding company. Lobue also found a significant shift in the beta and did not take this into account in calculating the CARs. Desai and Stover (1985) examined bank holding company mergers using the Compustat tapes with a small sample size of 18. Their market model only took into account the general market and did not include the bank industry effect. Their results indicated significant positive CARs. Swary (1981) examined bank acquisitions of mortgage firms, sample size of 18 during the 1971-1976 time period, using a market model not taking into account the industry effect. He found that there was no significant difference in the CARs of the acquiring bank surrounding the announcement date of the successful mergers. Surprisingly, the results of his study on the unsuccessful merger bids, sample size of 7, were significant negative CARs to the acquiring bank. Pettway and Trifts (1985) examined the stockholder returns of bank holding companies when acquiring failed banks. The market model used included an appropriate measure of the market return and banking industry (both included the dividend return). Instead of the traditional CAR method to measure specific-company effects they chose to 26 use what they call 'average geometric residual return" or AGRR. AGRR takes each individual bank residual and converts it into a price relative for each time period. A geometric return series for each bank was created by multiplying successive price relatives over the test period. The results indicated negative AGRRs for the acquiring bank holding companies. This would indicate that the merger market for failed banks is very competitive. The deficiency of this study is the small sample size of 11. Also, the group is of failed banks and the conclusions may not be generalized. kCenclusiena The conclusions from the review of the literature are primarily two fold. First, for industrials the benefits from merger usually accrue to the acquired firm as opposed to the acquiring firm. This result may be due to the premiums offered by the bidder to induce the target firm's stockholders to sell their stock, i.e., too high of an acquired firm stock price is set. This premium bid eliminates, or at least greatly reduces, the financial benefits of the merger to the acquirer. Second, merger studies in the bank industry are scarce. The few studies that have been published have used very small sample sizes and some have methodological flaws which make their results and conclusions suspect. CHAPTER FOUR LAW REVIEW Llatmduetien Mergers and acquisitions of banks require compliance with a multitude of state and federal laws, including corporate, securities, and banking regulations. At the federal level the three regulatory bodies involved in bank's merging with another or acquiring other banks are: 1) Office of the Comptroller of the Currency, 2) Federal Reserve Board, and 3) Federal Deposit Insurance Corporation. If either of the banks is a public corporation, the Securities Exchange Commission would be involved. When acquisitions involve a nonbank financial institution, depending on the type of institution, other regulatory bodies may be involved such as the Federal Home Loan Bank Board, Federal Savings and Loan Insurance Corporation, National Credit Union Administration and the Federal Credit Union Share Insurance Fund. The federal statues and their amendments governing mergers and acquisitions of commercial banks include: 1) The Clayton Act (1914), 2) The McFadden Act (1927), 3) The Securities Act (1933), 27 28 4) The Securities Exchange Act (1934), 5) The Bank Holding Company Act (1956), 6) The Bank Merger Act (1966), 7) The Change in Bank Control Act (1978), and 8) The National Bank Act (1982). Accompanying the federal laws are the appropriate state laws and regulatory commissions. II. HEW The Sherman Act of 1890 was passed in response to predatory practices employed by businesses to reduce competition. The objective of the Sherman Act was to eliminate contracts, combinations or conspiracies in restraint of trade among the several states or foreign nations.1 In 1904, the Supreme Court in the Northern Securities case, expanded the Sherman Act to encompass the holding company device as well as business trusts.2 Often, the remedy was divestiture. Monopolization, or attempting to monopolize, was so high that much conduct unbecoming to business practice was not covered by the Sherman Act. 3 Therefore, the remedial Clayton Act was passed in 1914. 1 Austin, D.V., The Evolution of Commercial Bank Merger Antitrust Law, Business Lawyer, Vol. 36, January 1981, p. 297. 2 Ibid., p. 298. 3 Ibid. 29 III. Q1erxiew_9f_the_3esulaters The merger of two of more banks requires the approval of one of the federal banking agencies. The Federal Reserve System has the responsibility for acting on the merger application if the bank resulting from the merger is to be a state member bank. If the resulting bank is to be a national bank, the Comptroller of the Currency has the responsibility, and if the resulting bank is to be an insured state nonmember bank, the Federal Deposit Insurance Corporation is the decision-making agency. In all cases, the responsible agency has a statutory obligation to seek reports on the competitive implications of the proposed merger from the other two agencies and from the Department 4 of Justice. 1v. Qffise_2f_ths_CQmstrollsr_2f_the_Currensx The Office of the Comptroller of the Currency (OCC) performs two regulatory functions: (1) entry-and-exit regulation and (2) examination. 4 Coldwell, P.E., Regulations on Competition and Structure--Federal Reserve System, in The Beakeeel fiendheek, Baughn, W.H. and C.E. Walkers, (eds.), Bomewood, Illinois, Dow Jones-Irwin, 1978, p. 1069. 5 Sinkey, Jr. J.P., Commercial.Bank.£inancial Menegement, New York, New York, MacMillian Publishing Company, 1983, p. 140. 30 As mentioned previously, the OCC is responsible for national bank mergers and plays a part in all mergers with respect to competitive implications. Here, mergers are treated the same as acquisitions. The OCC responsibility for bank mergers of national banks does not involve bank holding company mergers. The OCC will judge merger proposals using five criteria. These criteria are: (1) the adequacy of capital, which is generally a subjective determination; (2) the capability of the proposed management; (3) the character and standing of the applicants themselves and their ability to guide the bank in a safe and sound manner; (4) the convenience and needs of the community (including the competitive environment); (5) a judgment whether the degree of need and support will be sufficient to permit the bank to operate 6 at profitable levels. WW As mentioned previously, the Federal Reserve System is responsible for merger applications for state member 6 Doman, M., "The Nature and Purpose of Supervisory Examinations,“ in The Bankers; fiendbeek, Baughn, W.B. and C.E. Walkers, (eds.), Bomewood, Illinois, Dow Jones-Irwin, 1978, p. 1101. 31 banks. Bank holding companies are regulated by the Federal Reserve System. This regulation affects a substantial portion of the bank market. By 1980, multibank holding companies controlled 35 percent of deposits and one-bank holding companies controlled 41 percent.7 A bank holding company is defined as a company owning (or otherwise controlling) 25 percent or more of any class of voting stock of a bank. The Board analyzes the degree of anticompetitive impact against the public benefits expected to follow from approval of the acquisition. In general, the Board has been willing to approve acquisitions in markets in which the holding company was not already represented. However, the Board has looked with some disfavor upon the acquisition of the largest banks in a major market by large bank holding companies headquartered elsewhere if these acquisitions would tend to diminish competition in the state, to raise the level of concentration to an excessive degree, or to eliminate an independent bank which could otherwise form a competing holding company. The Board has also been careful in approving acquisitions for large bank holding companies when the bank to be acquired could be the 7 Watkins, T.G., and R.C. West, Bank Holding Companies: Development and Regulation, Beehemie,3eyiew, Federal Reserve Bank of Kansas City, June 1982, p. 8. 8 Coldwell, P. E. Regulations on Competition and Structure--Federal Reserve System, in The Behhere_ Handheek, Baughn, W.H. and C. E. Walkers, (eds. ), p. 1070. 32 vehicle for market entrance by a small bank holding company especially in states dominated by a few large banking organizations.9 Another policy of the Federal Reserve Board concerning holding company acquisitions has been its insistence that some degree of strength be imparted by the holding company to its banking subsidiaries. In a number of instances, the above policy has caused the Board to deny acquisition because the burdensome debt position of the holding company would require excessive dividends or upstream payments to service the debt. In situations where the holding company is already overextended, acquisitions have been denied because the strength of the entire organization must come from the subsidiary banks to the holding company rather than any contribution of the holding company to the banks.10 Similarly, the Federal Reserve Board has denied acquisitions where the lead bank or a significant unit within the organization has been in financial difficulty at the time of the proposed acquisition.11 Another concern of the Federal Reserve has been the development of commonly owned chains of one bank holding companies. The substitution of a chain of one bank holding 9 Ibid. 10 Ibid., p. 1071. 11 Ibid. 33 companies for a single multibank holding company has the same potential anticompetitve effect found in the acquisition of single banks by the multibank companies. Similarly, the Board has become concerned about the basically unrestrained acquisition of banks and their subsequent formation into one bank holding companies by individuals who already own banks in the same banking markets. See Figure 1 for a list of permissable nonbanking activities for bank holding companies. VI. Eederal_De2eeit_lnsurenee_Cereeretien As mentioned previously, the Federal Deposit Insurance Corporation (FDIC) is the decision-making agency for mergers where the resulting bank is to be an insured state nonmember bank. The FDIC also plays a part in all mergers with respect to competitive implications. The FDIC performs four regulatory functions: (1) entry regulation, (2) examina- tions, (3) regulation of deposit rates, and (4) disposition of failed and failing banks.13 Although the FDIC does not have the de juge power to stop a merger (or acquisition) of noninsured state nonmember banks, the FDIC has the de £§CCC power to prevent merger by denying, or withdrawing, a bank's deposit insurance. 12 Ibid., p. 1072. 13 Sinkey, Jr., J.F., Commercial Bank Einaneial Management, 9- 134- PERHXSSABLI NOHIAHKING ACTIVITIES POI BAH! BOLDlNG COMPANIES-0NDZR SECTION CiC). OP REGULATION 2 Activities Permitted by Regulation 34 PIGURE A ‘HI’ 1. 1"2’ Activities Permitted by Order Activities Denied by the board 1. Extension of credita l. issuance and salg of 1. insurance premium funding Mortgage banking travelers checks 0. (combined sales of mutual Finance companies, 1. buying and selling gold funds and insurance) consumer sales and and silver bullion and l. Underwriting life commercisl' silver coin’o‘ insurance not related to Credit cards 1. issuing money orders and credit extension Factoring general purpose variable 3. Real estate brokerage: 1. Industrial bank, Morris dominated payment instru- 4. Land development Plan Dank industrial ments 0 -‘ 5. Real estate syndication loan company 4. futures commission mer- 6. General management 1. Serving loans and other chant to cover gold and consulting extensions of credit silver bullion and coins‘°’ ‘7. Property management 4. Trust company S. Underwriting certain 0. Computer output . investment and financial federal, state, and microfilm service advising municipal securities!" 9. Underwriting mortgfgs 4. Full-payout leasing of 6. Check verification'03' guaranty insurance personal or real property2 7. Financial a vice to 10. Operating a savigg’ and 1. investment in copnunity consumers 0 loan association ' welfare projects I. issuance of small 11. Operating a travel agency‘ 2 0. Providing bookkeeping or denominatio‘ debt 12. Underwriting property and data processing services instrusents casualty insurance 9. Acting as insurance agent 9. Arranging for equity ll. Underwriting home loan 1 or broker primarily in , financing of real life mortgage insurance connection with credit estate 14. Orbancor investment note extensions 10. Acting as a futures issue with tranoaziional lo. Underwriting credit life, commissions merchant characteristics accident, and health. ll. Discount brokerage 15. Real estate advisory insurance 11. Operating a distressed services 11. Providing courier services‘ savings and loan ll. Management consulting association for unaffiliated banks'-' 13. Operating an Article :11 13. Sale at retail of money investment company orders with a face value 14. Executing foreign banking p of not more than 81,000 unsolicited purchases and travelers chefkf and sales of securities savings bonds ' 15. Engaging in commercial 14. Performing appraisals banking activities abroad of real estate through a limited purpose 15. Audit services for Delaware bank unaffiliated banks 1‘. Performing appraisal of 16. issuance and sale of real estate and real travelers checks estate advisor and real 17. Management consulting estate brokerage on to nonbanking deposi- nonresidential properties tory institutions 11. Operating a Pool Reserve Plan for loss reserves of banks for loans to small businesses ll. Operating a thrift institution in anode-island 1!. Operating a guarantee savings bank in New Hampshire 20. fiering inforsational advice and transactional services for foreign exchange services Sources zsnnnai: 3:1111, federal Reserve bank of Atlanta, April 1983. has“ to list since January 1, ins. aActivities permissable to national banks. JBoard orders found these activities closely related to banking and denied proposed acquisitions as part of its 'go slow' policy. ‘To be decided on a case-by-case basis. 3Operating a thrift institution has been-permitted by order in Rhode island, California, and New Uaapshire only. ‘Subseguently permitted by regulation. 35 VII. Seeurities_Exehense_Cemmiesien Banks are exempt from filing requirements with the Securities Exchange Commission (SEC). Bank holding companies which are public companies (more than $1 million in common stock and have more than five hundred stockholders) or listed on a national exchange must file with the SEC. Numerous filing requirements exist, such as the lO-K, lO-Q, etc.; but the form to be filed to disclose a merger or acquisition would be the 8-K. The 8-K is a current report required to be filed within 15 days after the occurrence of a "material" event.15 The SEC regulations cannot prevent a merger or acquisition. The SEC are concerned with 'full disclosure" so that investors can make informed decisions. Figure 2 illustrates the division of regulatory powers. VIII. Eederal_Statutes_Cexernins_Aesuinitiens_ef_Cemnereial Banks A. The_Clexten_Aef_llalil The Clayton Act, passed in 1914, was designed to prohibit abuses outside the scope of the Sherman Act by preventing conspiracies and monopolies before they exist, l4 Skousen, K-F., An.Intreduetien Le the SEC, Cincinnati, Ohio, South-Western Publishing Co., 1983, p. 20. 15 Ibid., p. 60. 36 Nanonsl banks Comptroller or the Currency Saturn-es and Exchange Communal Slale Member banks final“ I. recurred Dy DIIMHII combamu Federal Reserve 50 Stale flanking COMMIHIOM bv ltDOV“ 'rOuIred DV to oi branches Federal Deoom Insurance Comoranon Non-mute: 9' UV resorts to recurred by Sumac: lo commune: FIGURE 2 -- REGULATORY POWERS Hearings on Financial Structure and Regulation before the Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing, and Urban Affairs, 93rd Congress, lst Session, 1973. Source: 37 16 thus averting their harmful effect on competition. Section 7 of the Clayton Act gives the government the power to attack the three basic types of anticompetitive mergers: horizontal mergers, vertical mergers and conglomerate mergers.17 A plaintiff challenging the property of a merger under the antitrust laws bears the burden of proving that the challenged merger will substantially lessen competition in a clearly defined line of commerce within a specific section of the country. Thus, in order to decide whether a proposed merger violates the Clayton Act, one must identify both the relevant product market and the relevant geographic market.18 Generally, the relevant product market includes those products that are close substitutes for the product in question, and may be deemed to be a unique cluster of products and services. The underlying rationale has been that the range of products and services provided by commercial banks made them unique relative to other types of 16 Mitchell, T.E., Antitrust-Bank Mergers-Section 7 of the Clayton Act Applies to Banks and Bank Holding Company Mergers, 5.1;. Harris Len leurnal, 1982, p. 1014. 17 Ibid., p. 1015. 18 David, L.B., Banking-Mergers-Is Commercial Banking Still a Distinct Line of Commerce, Thlehe Leu_3e11en, Vol. 57, June 1983, p. 958. 38 depository institutions. Today, however, that rationale has lost much of its validity.19 The depository institutions industry consists of commercial banks, savings and loan associations, mutual savings banks, credit unions, bank holding companies, and savings and loan holding companies.20 In recent years, there have been significant changes in the competitive relationship between commercial banks and other types of depository institutions. Evolving economic realities in the depository institu— tions industry, combined with recently enacted legislation, have eliminated many of the previous distinctions between commercial banks and thrift institutions. At the retail level, the cluster of products offered by commercial banks is virtually identical to that available today at most thrift institutions. These economic pressures and new in- dustry responses to the market have altered the competitive impact of thrift institutions in the industry. Federal regulatory agencies have increasingly recognized these changes in identifying relevant product markets. Moreover, recent jurisprudence indicates that federal trial courts may be willing to accept the concept of a unified industry-wide product market in analyzing proposed mergers between 19 Ibid., p. 959. 20 Ibid., p. 960. 39 21 commercial banks. The consideration of all depository institutions in analyzing the competitive implications of bank mergers and acquisitions will lead to Section 7 of the Clayton Act being not applicable as a blocking agent in bank mergers and acquisition. B. ThC_MC£§CQCn_AC£_112211 The McFadden Act, passed in 1927, was intended to establish competitive equality between national banks and state banks that were members of the Federal Reserve system by allowing national banks to branch within their municipa- lities to the extent permitted by the state branching laws. Historically, however, state statutes almost universally prohibited out-of-state banks from establishing branches; thus the McFadden Act operated as a bar to most interstate banking.22 C- The_§CCnLiCiCH_ACC_llfilll As mentioned previously, banks are exempt from regis- tering securities under the Securities Act of 1933, but bank holding companies are not exempt if they are a public 21 Ibid., p. 961. 22 Pitts., J.T., and J.J. Cranmore, Federal Banking and Securities Laws with Respect to Bank Mergers or Takeovers, leehema Leu_3eyiey, Vol. 36, Fall 1983, p. 802. 40 company. These requirements of disclosure basically include:23 (1) Audited financial statements, (2) A summary of selected financial data, (3) A meaningful description of an enterprise's business and financial condition. The bank holding company requires the commission to declare the registration statement effective before the issuer and underwriters are free to proceed with the distri— bution and sale of the securities.24 An important feature in the Securities Act of 1933 is the provision for the 20- day waiting period between filing and the date the registra- tion becomes effective.25 On average it takes over 40 days for the review of basic registration filings.26 These delays provide opportunities for other participants to thwart the merger or acquisition. Also, the delay could extend into a period of altered circumstances not favorable to the consummation of the merger or acquisition. D. The_Seenrities_Exehenge_Aet_ilalll As mentioned previously, banks are exempt from disclosure requirements of the Securities Exchange Act of 23 Skousen, K.F., An lntreduetien.te the SEC, p. 41. 24 Ibid., p. 56. 25 Ibid., p. 50. 26 Ibid. 41 1934, but bank holding companies are not exempt if they are a public company. A number of registration and reporting requirements under this act provide information on the financial status of the bank holding companies. Again as previously stated, the Form 8-K would be required to be filed within 15 days after the occurrence of a "material“ event such as a merger. E- The_Eant_Hcldins_Ccmeenx_Act_llaif1 The Bank Holding Company Act (BHCA) of 1956 prohibits interstate bank holding company acquisitions of a bank unless that acquisition is explicitly permitted by the statute of the state.27 By its terms, the BHCA only prohibits bank holding companies from having bank subsidiaries in more than one state (unless specifically authorized by state law) but does not prohibit bank holding companies from having nonbank subsidiaries in multiple states. Therefore, the definition of bank becomes crucial for a bank holding 29 company. Section 3 of the BHCA requires the approval of the Federal Reserve Board before a company becomes a bank holding company, or before an existing bank holding company 27 Pitts, J. T. and J. J. Cranmore, geh_ideretiehs Un_er the federal Banking and Securities Lens Hith Respect tc Hank Herceggcrlakeccers, P- 802. Ibid., p. 803. 29 Ibid. 42 acquires more than five percent of any class of voting securities in another bank or bank holding company.30 A bank holding company or another company that seeks prior approval under the BHCA must file an application in compliance with the procedural requirements of the BHCA and the Federal Reserve Board's Regulation Y.31 The applicant must publish a notice of the proposed acquisition and of the public's opportunity to comment on the acquisition in a newspaper of general circulation in the community in which the main office of the bank to be acquired is located.32 The application is also forwarded to other agencies for review, although they are not required to comment on it.33 These requirements can be time consuming. Despite BHCA's stated deadline of ninety-one days within which the Federal Reserve Board must act, it is not unusual for an approval to take six months or more.34 If the Board fails to act on an application within the ninety-one day period which begins on the date of submission to the Board of the complete record 30 Helfer, M. S. and R. J. Bruemmer, Federal Banking Law Considerations in Unfriendly Takeovers of Depository Institutions, American Ilnixeraitx Lam Heller, Vol.33, Winter 1984, p. 313. 31 Ibid., p. 315. 32 Ibid. 33 Ibid. 34 Ibid. 43 on that application, the application is deemed to have been 35 approved. For the purpose of computing the 91-day period, the 36 record shall be regarded as complete on the latest of: (1) (2) (3) (4) 'The date of receipt by the Board of an application that has been accepted for processing by the Reserve Bank; The last day provided in any notice for receipt of comments and notice for receipt of comments and hearing requests on the application; The date of receipt by the Board of the last relevant material regarding the application that is needed for the Board's decision, if the material is received from a source outside of the Federal Reserve System; or The date of completion of any hearing or other proceeding ordered by the Board.” The Federal Reserve Board reviews the application to determine whether the acquisition violates the BHCA's antitrust, financial and managerial standards. The Federal Reserve Board must reject an application that would create a monopoly, that would further an attempt to monopolize, or ‘that would have other anticompetitive effects. If the 35 Ibid. 36 Ibid. 44 convenience and needs of the communities to be served advanced by the transaction outweigh the anticompetitive effects of the acquisition, however, even a transaction that would have this effect can be approved. The Board also must consider the financial and managerial resources and the future prospects of the company or companies and the banks concerned, in particular the acquirer's resulting capital ratios, the amount of debt the acquirer will incur, and the prospects of the combined organization, in order to ensure that a holding company will serve as a source of strength to its subsidiary banks. KW The provisions of the Banker Merger Act (BMA) of 1966 apply to mergers, consolidations, and acquisitions of assets and assumptions of liabilities of insured commercial banks. The procedural requirements of the BMA are similar to those imposed by the Federal Reserve Board under the BHCA. The substantive standards of the BMA, including the antitrust standards, are identical to the BHCA standards.38 The BMA often is used by bank holding company subsidia- ries to complete friendly acquisitions, not unfriendly acquisitions. The reasons for this will become clear. The Comptroller requires that a merger application under the BMA 37 Ibid. 38 Ibid. 45 include a copy of an executed merger agreement and a certi- ficate from the target bank's corporate secretary that details the resolutions adopted by the target's board of directors. The Federal Reserve Board's application to acquire shares pursuant to the BHCA, in contrast, does not require any documents executed by the target. In unfriendly acquisitions, it is obviously impossible to comply with 39 regulations that require the target bank's cooperation. G, The Change in.E§nL.CCUCLCL.ACC.1121&1 The Change in Bank Control Act (CBCA) of 1978 prohibits the acquisition by any person of control of any federally insured bank, including a bank holding company, without sixty days prior written notice to the appropriate banking agency.40 The CBCA explicitly exempts transactions that are subject to section 3 of the BMCA or section 18 of the Federal Deposit Insurance Act because they are covered by existing regulatory approval procedures.41 Pursuant to the CBCA, a proposed acquisition may pro- ceed if the appropriate regulatory agency does not, within sixty days, either: (1) issue a notice approving the pro- posed acquisition, or (2) extend for up to thirty days the 39 Ibid., p. 317. 40 Pitts, J. T. and J. J. Cranmore, Ceheideretiene Under Ibid., p. 806. 46 period during which the disapproval may be issued. The CBCA requires that notices to the agency contain specific perso- nal and biographical information, detailed five-year finan- cial information, a description of the proposed transaction, information of any structural or managerial changes contem- plated, and any other relevant information required by the agency.42 The CBCA specifies certain bases for disapproval of a proposed acquisition. These factors include: '(1) poten- tial anticompetitive factors that are not clearly outweighed in the public interest by the probable effect of the acquir- sition in meeting the convenience and needs of the community to be served; or (2) the financial condition of the acquir- ing person is such as might jeopardize the financial stabi- lity of the bank or prejudice the interest of the depositors of the bank; or (3) the competence, experience, or integrity of any acquiring person indicates that it would not be in the interest of the public to permit such person to control the bank; or (4) the acquiring person fails to furnish the appropriate federal banking agency with the requisite infor- mation."43 The Comptroller has taken a position that tender-offers subject to the Securities Exchange Act (1934) may proceed 42 Ibid. 43 Ibid. 47 while a CBCA notice is being processed, provided steps are taken to assure that the tendering party does not acquire control of the bank prior to the Comptroller's disposi- tion.44 It is possible that two competing factions could file notices pursuant to the CBCA as part of an attempt to gain control of the same national bank. One would expect that if either party were to have their notice approved prior to the other, they would have a significant advantage in acquiring control of the bank.45 In this regard, the Comptroller has stated that the Office I'would probably attempt to dispose of notices simultaneously."46 Finally, the CBCA provides that any person who willfully violates any provision of the Act or any regulation issued pursuant to the Act may be fined a penalty of not more than $10,0027per day for each day during which such violation continues. H. TheNaticnalBankActilfiEZl One objective of the National Bank Act of 1982 was to provide relief to financially troubled banking institutions 44 Ibid., p. 808. 45 Ibid., p. 809. 46 Report to the Congress on the Change in Bank Control Act of 1978.0fficecftheCcmctrcllercftheCurrcncx, March 9, 1981. 47 48 by facilitating mergers and reorganization of such institu- tions. National banks may consolidate with one or more state or national banks upon approval from the Comptroller, and with the board of directors of each bank and ratifica- tion by at least two-thirds of the shareholders of the outstanding stock of each institution. However, if a state bank is involved and state law requires ratification by greater than two-thirds of the shareholders, then the higher state ratification standard will be required for the state institution.49 The shareholders of any of the banks involved who have voted against such consolidation or who have provided written notice of dissent from the consolidation plan shall be entitled to receive the value of the shares when such consolidation is approved by the Comptroller. The value of the shares of any dissenting shareholders are appraised as of the effective date of the consolidation by a committee of three persons.50 Stock of a consolidated national banking association may be issued as provided by the terms of the consolidation agreement, free from any pre-emptive rights of 48 Norton, J.J., The 1982 Banking Act and the Deregulation Scheme, The Engineee Leuyeg, Vol. 38, August 1983, p. 1630. 49 Pitts, J. T. and J. J. Cranmore, Ceheidexeeiehe ghee; theMeulSenkincancSecuritiesLansmthBescecthank Hercesrgcriakecners, p, 811- Ibid. 49 51 the shareholders of the respective consolidating banks. Similar requirements govern mergers of national banks or state banks into national banks and national banks with a state bank in the same state.52 See Tables 1, 2 and 3 on regulatory agency action on bank mergers and Federal Reserve Board decisions on BHC formations and acquisitions respectively. Ix... SecsecfStcteLecslandBeculatcerrcmexcrk Each state has a state banking department headed by a state bank commissioner or official of comparable title. State banking departments are the primary chartering, exa- ming, and regulatory bodies for state-chartered commercial plus mutual savings banks (similar to OCC).53 Although the primary goal of each state banking depart- ment is directed toward each respective state, state bank commissioners nationwide are organized into a Conference of State Bank Supervisors (CSBS).54 CSBS has two primary goals. The first is to achieve and maintain strong and effective state banking departments nationwide. The second major goal of CSBS is to achieve and 51 Ibid., p. 812. 52 Ibid., p. 813. 53 Krieder, L.B., Regulations on Bank Soundness, Competition, and Structure-State Banking Departments, in The Handheeh, Baughn, W.H. and C.E. Walker, eds., p. 1060. 54 Ibid., p. 1061. 50 15999.1 8399991981 AQENQX AQIIQN QN BANK MERGERS; AEEBQEALSL DENIALS.AND LITIQAIIQN May 1, 1960 - December 31, 1984 Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Litigations 1299 17 .2 20 15.0 FEDERAL DEPOSIT INSURANCE CORPORATION 1299 21 .9 21 0 1299 56 .9 56 0 1299 94 .2 97 3 82199 FEDERAL RESERVE BOARD 1291 1292. 1292 1291 1299. 1299 32 37 31 16 23 .9 .9 .2 .2 .9 37 42 34 18 23 13.5 11.9 8.8 11.1 0 21 .1 22 4.5 1291 1292 1292 1299. 1299 1299 31 44 31 29 47 .9 .9 .2 .9 .9 31 44 33 29 47 0 0 6.1 0 0 COMPTROLLER or THE CURRENCY 1291 1292 1292 1291 1299 72 111 90 91 81 .l ..l .2 .9 .l 73 118 92 91 82 1.4 5.9 2.2 0 1.2 TOTAL FOR ALL AGENCIES 1291 1292 1292. 1291 1299 135 192 152 136 151 ..9 .12 ..1 ..2 ..l 141 204 159 138 152 4 6 4 l 1 37 .9 37 0 1299 85 .2 88 3.4 143 147 Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Litigations 1291 13 .2 15 13.3 FEDERAL DEPOSIT INSURANCE CORPORATION 1291 38 .2 40 5.0 75 76 1.3 126 131 4 51 TABLE 1 -- continued FEDERAL RESERVE BOARD 14 20 29 16 19 .1 .2 .2 .2 .1 15 23 31 18 20 6.7 13.0 6.5 11.1 5.0 1299 1292 1219 1211 1212. 1212 20 .9 20 0 1299 1292 1219 1211 1212 1212 68 79 58 60 85 .2 .1 .A. ..2 .2 71 80 62 64 89 4.2 1.3 6.5 6.3 4.5 COMPTROLLER OF THE CURRENCY 1292 1292 1219 1211 1212 85 88 80 56 61 .9 .9 .9 .9 .9 85 88 80 56 61 0 0 0 0 0 TOTAL FOR ALL AGENCIES 1292. 1292 1219 1211 1212 167 187 167 132 165 ..2 ..2 ..9 ..9 ..9 171 191 173 138 170 2 2 3 4 4 96 .9 96 0 1212 54 .9 54 0 12L2 170 ..9 170 Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Denials Approvals Denials Total % Denials 12 13 7.7 55 56 1.8 42 42 1212 109 ..2 111 52 TABLE 1 —- continued FEDERAL RESERVE BOARD 1219 1219 1211 1219 1212 1299 9 .1 10 10.0 7 4 3 7 .9 .1 .9 .9 7 5 3 7 0 20.0 0 0 c: .5 cu» FEDERAL DEPOSIT INSURANCE CORPORATION 1219. 1219 1211. 1219 1212 1299 41 .2 44 6.8 41 72 65 52 .2 .2 .9 .1 43 76 70 53 4.7 5.3 7.1 1.9 COMPTROLLER OF THE CURRENCY 1219 62 .9 62 0 1219 112 ..2 116 1219 1211 1219 1212 51 67 55 87 .9 .9 .9 .9 51 67 55 87 0 0 0 0 TOTAL FOR ALL AGENCIES 1219 1211 1219 1212 99 143 123 849 ..2 ..9 ..9 ..1 101 148 128 850 2 3 4 1 79 .2 83 4.8 106 106 189 193 2.1 53 TABLE 1 —- continued FEDERAL RESERVE BOARD 1221 1222 1222 1222. T9291 Approvals 11 12 26 19 422 Denials _Q _Q _Q _Q _31 Total 11 12 26 19 455 % Denials 0 0 0 0 7.3 FEDERAL DEPOSIT INSURANCE CORPORATION 1221 1222. 1222 1222 T9291 Approvals 85 133 168 n/a 1587 Denials _l _.2 ..9 n/a ..22 Total 86 135 174 n/a 1636 % Denials 1.2 1.5 3.5 n/a 3.0 COMPTROLLER OF THE CURRENCY 1221 1222 1222 1222 T9991 Approvals n/a n/a n/a n/a 1555 Denials n/a n/a n/a n/a __15 Total n/a n/a n/a n/a 1570 % Denials n/a n/a n/a n/a 1.0 54 TABLE 1 -- continued TOTAL FOR ALL AGENCIES 1221 1222 1222 1222 T9991 Approvals n/a n/a n/a n/a 3564 Denials n/a n/a n/a n/a __91_ Total n/a n/a n/a n/a 3661 % Denials n/a n/a n/a n/a 2.7 Sources: Annual Rgpgnts, Board of Governors of the Federal Reserve System; Annnnl Rengnt of the Federal Deposit Insurance (1984 data not available at time of printing); Annual 3929;; of the Comptroller of the Currency (1981 annual report was discontinued, subsequently data incomplete from Quarterly Journal, Comptroller of the Currency): The Federal Reserve Board figures do not include delegated authority decisions made by the Office of the Secretary and/or the twelve Federal Reserve Banks. 55 22999 2 EEDEBAL.REEEEYE.EQABQ DECISIQNS 9N.EANK HQLDINQ.99MBANIES.EQRMAIIQN9 1956 - 1984 12.5912911292129212991291 Approvals 0 0 1 1 0 2 Denials 9 9 2 9 9 9 Total Action 0 0 4 1 0 2 % Denials 0 0 75.0 0 0 0 129212921299129912911292 Approvals 2 4 2 6 10 9 Denials 1 1 1 2 .1 9 Total Action 3 5 3 8 11 9 % Denials 33.3 20.0 38.3 25.0 9.1 0 121912111212121212141215. Approvals 31 51 68 57 72 50 Denials .9 .2 l1 .1. 19 19 Total Action 31 53 79 58 88 65 % Denials 0 3.8 1.39 1.7 18.2 23.1 4.5 52 64 18.8 Approvals Denials Total Action % Denials Approvals Denials Total Action % Denials 54 70 22.9 1292 69 .2 73 5.5 TABLE 2 —- continued 1219 68 12 82 17.1 906 1043 13.1 56 1212 1299 1291 1292 1292 73 .2 76 3.9 41 .2 50 18.0 41 12 54 24.1 47 .2 50 6.0 69 .9 75 8.0 Source: Annual Rapanta, Board of Governors of the Federal Reserve System. This does not include delegated authority decisions made by the Office of the Secretary and/or the twelve Federal Reserve Banks. 57 mwmwwm WWW Approvals Denials Total Action % Denials Approvals Denials Total Action % Denials Approvals Denials Total Action % Denials Eopppfi u: a: RDUI w \l O 113 122 7.4 129.922 1956 - 1984 1291 1299 12.92 7 4 7 2 1 9 9 5 7 22.2 20.0 0 1292 1.299 1299 6 12 15 9 .2 .2 6 14 17 0 14.3 11.7 1211 1212 1212 143 248 288 .19 .19 .19 158 266 306 9.5 6.8 5.9 13 14 7.1 16 18 11.1 177 191 7.3 12 25.0 33 35 5.7 71 88 19.3 16 19 15.8 66 69 4.3 82 92 10.9 Approvals Denials Total Action % Denials Approvals Denials Total Action % Denials Emmfi 94 ..1 101 6.9 TABLE 3 -- continued 1219 77 .9 83 7.2 1818 2001 9.2 58 1212 1299. 1291 1292. 1292 68 .9 74 8.1 91 12 103 11.7 39 .2 48 18.8 26 .2 30 13.3 90 12 104 13.5 Source: Annual Rapunta, Board of Governors of the Federal Reserve System. This does not include delegated authority decisions made by the Office of the Secretary and/or the twelve Federal Reserve Banks. 59 maintain a banking and bank regulatory structure which has 55 adequate state/federal checks and balances. Various states are amending their banking laws to allow at least some interstate banking. For example, Alaska permits out- 56 of-state bank holding companies to acquire in—state banks. Delaware permits the establishment of limited purpose, wholesale-oriented, single-office banks by out-of-state bank 57 holding companies. Iowa effectively permits certain bank 58 holding companies to engage in interstate activities. Maine permits bank holding company acquisitions on a recip- 59 rocal basis. Massachusetts and Connecticut permit branch banking and bank holding company acquisitions on a recipro- 60 cal basis, but only with New England states. New York permits bank holding company company acquisitions on a recip- 61 rocal basis. South Dakota permits limited-purpose banks 62 to be acquired by out-of—state bank holding companies. On 60 October 1, 1983, Oklahoma permitted commercial banks to establish branches and for multibank holding companies to conduct operations within the state.63 After the Oklahoma law was passed, Kansas became the last unit-banking state in the nation.64 As well as state bank regulation, mergers and acquisitions that involve the issue of securities must abide by the blue sky laws of the state. In Michigan, banks and one bank holding companies are exempt from registration. If a multi-bank holding company or other firm were to acquire a bank compliance with the blue sky laws would be necessary. 2.. mummmm On February 25, 1961, the Antitrust Division of the Department of Justice filed a civil antitrust complaint against the approved merger of the Philadelphia National Bank--Girard Corn Exchange Company. Both were located in Philadelphia, Pennsylvania. This complaint was filed one day after the Comptroller of the Currency had approved the merger, in spite of adverse competitive reports submitted to it by the Justice Department, the FDIC, and the Federal Reserve Board of Governors. This was the first commercial 63 Pringle, L.N., Multibank Holding Company and Branching Law in Perspective in Oklahoma, leahu a Lag Raulau, Vol. 36, Fall 1983, p. 863. 64 Ibid., p. 864. 61 65 bank antitrust suit filed by the Department of Justice. The complaint was filed under Section 7 of the Clayton Act, and trial was set for the District Court Eastern Division in Philadelphia, Pennsylvania.66 After the defendants won at the District Court level the Justice Department immediately appealed to the Supreme Court. On June 17, 1963, on a 6-2 vote, with one abstention, the Supreme Court found in favor of the Antitrust Division; and granted a permanent injunc- tion against the proposed and approved merger. First, the Supreme Court ruled that this acquisition fell within the jurisdiction of Section 7 of the Clayton Act.68 Second, the Supreme Court ruled that all commercial bank mergers were potential targets of Section 7 action under the Celler-Kefauver Amendments, and the Bank Merger Act of 1960 lost its primary exemption status at that point.69 Third, the banks alleged that since the Bank Merger Act of 1960 had been passed, it immunized commercial banks from the antitrust provisions of Sherman Act Sections 1 and 2, and the Clayton Act, Section 7. The Supreme Court 65 Austin. D.V., Th9 299199199 99 C9mmgr9igl,299k.299999 599191999 999, P- 299- 66 Ibid., p. 300. 67 Ibid., p. 301. 68 Ibid. 69 Ibid. 62 rejected that contention, and no expressed immunity is conferred by the Act.70 The two dissenting judges (Harlan and Stewart) disagreed due to their opinion that this judgment would almost completely nullify the Bank Merger Act. If the Attorney General's report to the appropriate banking agency was not acted upon in a satisfactory manner, a Section 7 suit may be commenced immediately.71 Less than one month after the Antitrust Division filed suit against the Philadelphia National Bank--Girard Corn Exchange merger, the Justice Department filed a Section 1 Sherman Act Civil antitrust suit (the merger was in restraint of trade) against the approved and consummated merger between First National Bank and Trust Company and the Security Trust Company, both of Lexington, Kentucky. The combined bank would have had 51.95 percent of the deposits, and 54.2 percent of the loans of the county market.72 The Supreme Court ruled against the merger arguing that the percentage of business controlled would be a restraint on trade. Again, Justice Harlan and Justice Stewart 70 Ibid., p. 302. 71 Ibid., p. 304. 72 Ibid., p. 305. 73 Ibid., p. 306. 63 dissented arguing that the combination's only fault might have been bigness--not badness.74 Post Bank Merger Act of 1966 cases confirmed the two cases previously cited as to the appropriate section of law that bank mergers would be decided on. The main issue was the anticompetitive nature of the combination. The relevant geographical market and relevant line of commerce were the only tools for the merging banks. The goal of the merging banks was to broaden the geographic market and line of commerce in order to dilute concentration ratios that were used to make the decision. Antitrust laws are not the only impediment to mergers. The mere threat of Civil antitrust litigation may deter or determine the fate of commercial bank mergers. Table 4 is a sample of case history indicating the successful use of threatened litigation. Of these sixteen commercial bank mergers, all were abandoned before a court decision was made. During the 19603 the Antitrust Division of the Justice Department attempted to shift some emphasis from horizontal extension mergers to market extension mergers.76 Three major thrusts of the attack upon market extension mergers exist. These three are potential competition, entrenchment, 74 Ibid., p. 307. 75 Ibid., p. 321. 76 Ibid., p. 333. 64 on an o~ an on on a. .COuc .5»... pa .auao. on aduflfl scauauucoocou OIOHU .auu .169». p ..2.22. v on has.” a+n « .~+va «NH o . n« so ~H a an no” a 4 a. «on .9230. v .coao... 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Haco.u-z .ccou .uuoaouvaun .xcon naco«unz usuauuocsou .ccou .ououuuon ..ou n a can Hon oo\a\m gonna a scan uaoduuoccoo .aa 553:3: uo scan ancowunz mac-suns: . .ua .ETODuuuuo: .>cumaou .«aooa. n ..««22. a and an. «oxenxv casts a scan auucocnucou aquacuauau .uomou-aaou .>ucaou unocou uo scan nucuouqaau .ouaqoc-un com .xcun nu sch.n ou\n\v «acoauoz acouuuquauoxoouu .xucaoo. .aunaoo. 4 ..u.».. ‘lfl .-> .nv-ou scum-cu uo xcan Aqua. .a> .xuouuoz aoOOA. « .ounun. a nu «nu au\o~\~ .xcon ~cco«uaz aqcuuuq> .OA .coovcacogm uo scan «acouuaz oncogene: can unad>auuoa ..oo snack a scan n A an ma ow\h\m ~aco«unz caca>nawccom .cm .czouuouaoa .unaua a gene Groanedaon .auu a.sa~aoa~.ga axusn. n ..nqnn. m an hn0.~ nw\o~\n «0 scan unaua eunuuu coacwucou In v canuh .uu .mn .vd .nn .«n .HH .on 66 and reciprocity. The first two have been made applicable to commercial banking, and the third, thus far, has not been assimilated into the commercial bank antitrust law.77 On September 30, 1963, the Comptroller of the Currency approved the merger of the Crocker-Anglo National Bank, San Francisco, California, with the Citizens National Bank, Los Angeles, California.78 Neither bank competed in the same geographical service area of each other but the Justice Department litigated arguing that each bank was a potential competitor. The case was decided at the District Court level in favor of the merger and was not appealed to the Supreme Court.79 In five subsequent cases where the Justice Department argued on the grounds of potential competition, First National Bank of Jackson, Mississippi and Bank of Greenwood, Greenwood, Mississippi,80 First National Bank of Maryland and First National Bank of Hartford County, Bellaire, Maryland,81 First National Bank of Boise, Idaho, and the 82 Fidelity National Bank of Twin Falls, Idaho, and, First 77 Ibid. 78 Ibid., p. 339. 79 Ibid., p. 340. 80 Ibid. 81 Ibid., p. 341. 02 Ibid., p. 342. 67 National Bank of Greeley and First National Bancorpora- tion,83 the merging banks won in court. These five defeats in addition to some other Justice Department losses, using the potential competition argument, closed the doors on this issue being used to fight bank mergers. In conclusion, case law shows that mergers between banks directly competing with each other, in markets where concentration is high and the market can be considered oligopolistic, are unrealistic.84 The Justice Department has never lost such a case which reached final adjudica- tion.85 Since the Justice Department has never won a potential competition market extension merger case, banks and bank holding companies are simply changing their acquisition and consolidation efforts to comply with the 86 antitrust standards as formulated by the Supreme Court. XI. 99991991999 The preceding discourse is relevant to the analysis of stockholder returns in bank acquisitions. 83 Ibid., p. 343. 84 Ibid., p. 363. 85 Ibid. 86 Ibid., p. 364. 68 Applications, to acquire other banks, submitted to the Federal Reserve Board will experience time delays (in the processing of the application) and possess uncertainty as to the outcome (approval or denial). The time delay between the merger announcement data and merger approval date is between five to six months. The BHCA (1956) requiring the Federal Reserve Board to make a decision within ninety-one days is usually extended beyond this date because of deficiencies in the completion of Form Y-2. As it takes time to prepare the Form Y-2 for submission, information about the impending merger application may I'leak out'I to the public before the merger announcement date. The merger does not take place when the merger is approved by the appropriate regulatory agencies. The Federal Reserve Board grants a ninety day period, immediately following the merger approval date, for the acquirer to consummate the merger. Occassionally, this ninety day period is extended upon request. There is uncertainty at the merger announcement date as approximately ten percent of formal applications (at the Federal Reserve Board level) were denied during the time period of this study. CHAPTER FIVE RESEARCH DESIGN AND BYPOTBESIS I . W The time period Chosen to study the effects of mergers on bank holding companies was the sixteen-year period from January 1968 through December 1983. To be included in the sample, a bank holding company had to acquire another bank (only one) in isolation, i.e., without acquiring other firms two years before and eighteen months after the bank acquisition. The definition of ''Bank" is that given by the Bank Holding Company Act (Section 3) and Bank Merger Act (Section 3). Thus, no confounding of effects would be arising from other acquisitions taking place. This isolation criterion reduces the sample substantially as bank holding companies were very active in the merger/acquisition market during this time period. The merger/acquisition record was obtained from the Eadaral Ragistgr. Eadaral Basarya Eullatin and Margars and E . 'l' I J. The 9292921.32912999 is a weekly publication of the U. S. Government. All bank acquisition applications must be published in this source for the public record. The Federal Reserve Board of Governors or Federal Reserve Bank reviews applications, on the Form Y—2, for approval. This 69 70 review period is on average approximately five months. The £999991_E999999.29119919 is a monthly publication of the Federal Reserve Board. All approved and denied bank acquisition applications are published in this bulletin. The successful Bank/BHC applicant has ninety days after the approval date to consummate the merger/acquisition. The 9999992 999.299912191992.9999991 is a private publication of successful mergers and acquisitions reporting after the deal is completed. See Figure 3 for a typical example of a Fed- eral Reserve Board merger approval order. The BHC had to be a publicly traded stock with price data obtained from the BanL_and_Quatatlun_Rauand. Presently there are over one thousand bank stocks trading. The 299k.999.999999i99_899999 data base published by the Elnanulal_ghxanlala changed throughout the time period of the study. In the earlier time periods monthly closing prices for bank stocks, among others, were provided. If a monthly closing price was not available the bid price was used. This is a more conservative figure than the ask price or average of the bid and ask price. See Table 5 for an example of bank stock price listings. Dividend information, including cash dividends, stock dividends and splits, and rights offerings were obtained from W and MW: 299291.91219299.899999- Monthly holding period returns were calculated using the information collected from these 71 FIGURE 3 FIRST WISCONSIN CORPORATION, MILWAUKEE, WISCONSIN Order Approving Acquisition of Bank First Wisconsin Corporation, Milwaukee, Wisconsin, a bank holding company within the meaning of the Bank Holding Company Act, has applied for the Board's approval under section 3(a)(3) of the Act (12 U.S.C. § 1842(a)(3)) to acquire 100 percent of the voting shares of Bank of Two Rivers, Two Rivers, Wisconsin ('Bank'). Notice of the application, affording an opportunity for interested persons to submit comments and views, has been given in accordance with section 3(b) of the Act. The time for filing comments and views has expired and the Board has considered the application and all comments received in light of the factors set forth in section 3(c) of the Act (12 U.S.C. § 1842(c)). Applicant, the largest banking organization in Wisconsin, controls 19 banks with aggregate deposits of $3.05 billion, representing approximately 13.6 percent of total deposits in commercial banks in the state.1 Bank, with deposits of $40.8 million, is the 135th largest bank in Wisconsin, holding 0.18 percent of total deposits in commercial banks in the state. Acquisition of Bank would have no appreciable effect upon the concentration of banking resources in Wisconsin. Bank is the fifth largest of 13 banks in the relevant banking market, and holds 10.3 percent of deposits in commercial banks in the market. Because none of Applicant's subsidiaries operate in this market, consummation of the prOposed transaction will not eliminate any existing competition. The Board concludes that consummation of the proposal would not eliminate substantial probable future competition in the market because the market's three-firm concentration ratio is 60.3 percent, and therefore, the market is not highly concentrated under the Board's proposed guidelines.3 Accordingly, the Board has determined that competitive considerations are consistent with approval of the application. 1 All banking data are as of June 30, 1982. 2 The relevant banking market is approximated by all of Manitowoc County except the towns of Schleswig and Eaton. 3 Proposed “Policy Statement for Assessing Competitive Factors under the Bank Merger Act and The Bank Holding Com- pany Act,“ 45 2292991.82912921 9017 (March 1982). 72 FIGURE 3 -- Continued The financial and managerial resources and future prospects of Applicant, its subsidiaries and Bank are regarded as consistent with approval. Thus considerations relating to banking factors are consistent with approval of the application. Considerations relating to the convenience and needs of the community to be served also are consistent with approval. Accordingly, it is the Board's judgment that consummation of the proposal to acquire Bank would be consistent with the public interest and that the application should be approved. On the basis of the record, the application is approved for the reasons summarized above. The acquisition of shares of Bank shall not be made before the thirtieth calendar day following the effective date of this Order or later than three months after that date, unless such period is extended for good cause by the Board of Governors or by the Federal Reserve Bank of Chicago, pursuant to delegated authority. By order of the Board of Governors, effective June 14, 1983. Voting for this action: Chairman Volcker and Governors Martin, Partee, Rice, and Gramley. Absent and not voting: Governors Wallich and Teeters. James McAfee, [SEAL] Associate Secretary of the Board I‘ll! (IIVI (VIII (I(II (IILI (VIII 8!!!! (VIII (V10! (IVII (VIII (IISI (VIII (IVII (IIUV (VIII (IIIV (VIII (VIVI (I’II ‘IllV (VIII (VIII VIIIV (VI(V (VIII ‘UI" (3:0! (IVI (VIII (VIII (IVIV (VIII (VIII (VIII (IIII (VILI (VIII (VIII (IIIV (IIIV (VIII (VIII (VIII (III (III! (VIII (VIII (VIII (III! (VIII (VIII (VIII (VIII (VIII (VIII (IVII (LIIV (LIII (LIVI (208 CLICI {L950 (9!. (I!!! (L13? (L11! (LII! (LIL! ILIRI (lllt ‘82LI ILIII 2'73 III'I. (:LII (IIIV (LIIV (I!!! (III (LIIV (LIIV (LIIV (LII! (LIVI (LIII (LIIV (LIII (LI(V (IIII PE 89) (IIII IIVI II III: IIVII .. :2 (IVIIIII II'L II IIILIII V II (VIII I I (IzIIVIII IIII .. II (IVIIVII II'L II (IIIIII .. '4 (VIII I I (III-(VII (I -- 2: (VIII I I IIIIIIII (V .. VI (VIII IIVL II IIIIVII 1g .. I) (VIII IIVI II IIIIIII (I .. I (VIII I I (VIII (III II .. VI VII (IVIIIII IIVL II IIII8V\ V II (VIII I I VLIIIIII VIII —- (I (IVIIIII IIVI II VIIIIVL -- I! (VIII I I III-III I V .. .3 (VIII III; II III: III. - IV (VIII I I (IIIIIII VLI - VV (VIII IIVI II ‘ILIII I I .. IV (VIII I I IIIVIIIIIII I .. IV (VIII I I It (II-ILIIILI - ' (VIII I I IIVIIIIILI II .. VI: (IVIIIII IIVL II III (II .. (I (VIII IIIL II UOIIILQ II - (I (VIII IIVL II IIIII (LI 0' VII (VIII IIVI II IIIIII (II .. II (IIIIIII I I IIIVIIIVII .. VII (VIII I I IIIVIIIIVI III .. II (VIII IIVI II II(V ((I - IV (VIII I I IIIVLIV (IVI ( - (I (IIIIIII IIVI II IIIIIII - (2 (VIII III! I (I VII III! I II (VIII III: III IIIIIILLI .. I (IIIIIII (III III (I III '0' ' (IVIIIII IIII II (IIVII - SI (VIII (III II IIIVIII VI 1! IV (VIII IV II IIIVVIII (VI .. II (VIII II II IIIIIIII VII .. VI (VIII II II III ILI IIII -. II (VIII (V II IVI(I:VL( (I .. IV (VIII II II IIIIIIIII IV 00 3) (VIII II II III-II (III! 00 34 (IVIIIII VIIIVII II II I - VI (IIIIVII II III; II I II -. 39 (VII IIIVI II’IIIIILII I - II (III II I II IILII IILI .. II (III II IV LIIII II —- IV- (IVV IIIIIVIII (I III II 3 VIII III (IV '- - 3.0!? (III III. II I II (LIVII .. II III (III III. III IIIIII (It 00 II (III IIVL III IIIIII III -- III (III IIVL II (IIILIIVI I .. III (III IIIL II (III I I (III III; II VIIIIIIV I -. V? VI! (III IIVL II IUIVVIIIIII -- IV: (III III; II PIVIIIIII I 00 II III (III! ILIII I I (III (VI 1 II (LIIIIIIV IIIL II I I .. VI (IIVI (III II II IIIVIII .. I! (LIIIVIILI II I VI II VI -- IV (LIIIIIVII IIIII II VLI -0 It . (LIVILIII II II IIII .. II VI! (IVII IIII II IIII - .. I: (VIII IIII I LI IIII LI .. II (IzazaV IIIII II IIIII V -- IV COLD-(AL IIIIIIIIV III ~ (I I (V - I IV (ILIIIIL IIIIIIV III I II (ILIIIIL III(IIV III II .. II (IIIIIII II I II (IIIIIV -. VI (ILVIIIL II (III-VIII! V .. VI (ILIIIIL II III IILVIII ... V VII (OIIIIIL IIVI II IIIVIII .. I (VLIIIIL I I IILIIIIVII .. II (ILIIIII II I II LI IIIV -- II (IIIIIII IVIIIII IIVL II .. II (IIIIIII (III VIIII II I .. II (ILIIIII VIIIV VII IVII .. I! III (III‘III III; II (IIIIII 0- (I ~ (IIIIIII IIII I II (III . II IIIIIV) . 0- I! (ILIIIII II IIII I II (I -0 II COIJIIUI VI IIIIIII I I .. IV (II-(It! (III. (II .0 VI- (IIIIICII'IIIII (III ((0 ‘2 (0"1 I VIII II ILLIIIVV .. IV (VIII I (III II III III .. (I III (III; I (III II IILLIIII .. VII (VIII I (III II II (LIVI - II ' (I-IIIIIII IIIIIIV IIIII I 7.114 (IIIL IIIIIII VIIVIIII I .. I! - (OIQL II I II IIIIV VII ‘--—II (VIII II I VI IIIIIIII I - II (VIII II I II VIIII VIII .. I: (III. II I II III-IIIVI .. - I III 713 TABLE 5 ‘NASDAO Banks & Trust Cos. ASK . I‘- II! II! II! II! III (($91 (IIJV (VIII (IVII (IIII (III! (III (00(V (IIIV (IIVV (IISV (IIII (VIII (VIII 283‘! (IILI £030! (IIIV (II'V IIIII I‘ll! II((V IIIVI IIIIV IIIIV IIIIV (VIII II!!! IIIIV IIILV IIIIV IIII IIIII III( IIVIV IIIIV I(I(V ..(A' IIV(I III(V (IVIV IIVLI IIIIV 2‘21. .83., O!" III?! ll!!! 30"! .I'SV DIVII .1! II ’8"' .UQA' Clit‘ 2I3I 199:? '312' (IS)! IVIAI I920! 2'98? [7'87 ILIIV [LICY 6...? IVVVI (5". .IOIII (IVII (IVVV (VIII (VIII (VVLI (VIII IVVIV (VVIV (VIII (VIII (VIII IVVVV VIIII VIIIV 'Ql'l VIII! 'IIL' (IIVIIIIVIL (IIIIIIIIII (IIIIIIIVI; I-V IILI LII II IIIIII (I II VIIIIII I (IIIIIIIVIL (III (III II (IIIIV IIIL II I ( (IIIIVIVII VIII (III IV. ((I I ' ' (IIIIIIVIII VIII (III (IIVLIII (III I III (I I (IIIIVIIIIII I I (IIIIII (IIIVII (III II (II: (VI (IIIVV II (IIVIIIII I ( (IIIVI II'L II IO‘VI)'! (IIIVV II (I IIIIIIIV II (IIIIIVII II I II: (9 IV (II-VIII (III I I II('II (III-II (IIIIVII II VIII (IIIIIIILLV II IIII (VIII (III ‘I IVIIV III (IIIIIIIILLI II I! 'I I ( IIIL IIIIII' (It IIIIVIIII II II IIIIIIDI IILI III; II IIIIIVIII I IIILII (III II III IIIVIIIVI IIVI II IIIII( .IJPIII .591 II In IAIIIVIIV \I I II (I (II IIIII II (I (III-I I II IILIIIII III; II IILII I IILIIIII VI (I IIL'IIIVI IILVI IIIVI (I (I IVIIII III; II II IIVIIIVOII III! (I IIVIIIVIII II (I IIIVIII (III! (III II (III IIVII III VIIIIII IIVL II ILL IIIIIII IIIIII III _ IIJIIIII II I I . III IIIIIIIIIII VIII (III (I I IIIVIICI IIVI II (II(IIO IIIII I I III( (III III. (III. IIII II (It IILLII (III II (I IILII IIIIIIII IIIIIIIIII (III VVI III I (III II.II II'IIIII VII (IL IIII II IIJILII (III IIIII III-I OOJIIQS :IIII IIVL II II IIIIIL'IIIL I( (II(III I IIIIIII IIIIIIIIII (III IIIIIII II II III IV IL II III! II (I (LII (LIII (I 39315 IIIL II III IIIIIII II I VI (0 (III IUIIII IIIVI (I IILI (III (I! (ISIILI III. 7' (III IIVIIJVI IIII II IAIVIII IIVL II (IIIIIII (IIIIIVII III: (III IDIIIOSVILLI IIVL IIIII (VIIIIIII II II (IL ' (III- IIII II (LL (IIIIIGI IIIL II 9. (LLIIIILLI IIVL II I I (1810. III (IIIVIIIIVIL! IIIIIIII IIVL II VI (IOIII IIIIIIV . (I'III IIIL II (LIIIIII (htl‘! (VI GLOSS (I. III ‘ 4 IVIIIVI IIVI II VI (IJIVII 'I‘L (VIII II( II VIIVIIII , (III VIIItV LIVI III (I (IIII (III (IIQ'LIII II (IIIII II (IIVII (I (VIII IIVI II IIIILI I I (I(I II I II (I IIIIIO I (((III6( II (VISIVIII I (IIIIIII II LU(I(V III. (((IIIBI II '(IL(I((V(LI III-IIII II IIIVI VIII ( (III IIVL III III'III II [((III(( IIVL It IIIII O VII IIIIIII . V I I VIII II(I (II? III VII VIII (III - II SIIIQIVVIO VII IIIIIIV III II V I I ( LI IIIIII III II I II :I I I , 0'. O. O 19 38 III III III I lit I12 2 1’8 1’! BE) ASK 17 III II II! II! (138.! .392 '.::I 0 1" III .15: I (I! 45 74 sources. See Table 6 for an example of the dividend infor- mation provided by this source. When a BBC was listed on the WWW and/or SW5 the monthly holding period return data from those sources were used. When considering the estimation period and analysis of the post-merger period the time period for data collection spanned from January 1962 through June 1985. This criteria resulted in a sample size of one hundred-twelve. See Appendix A for a listing of acquirer banks and the acquired banks and merger approval dates. The preceding data collection process was very laborious. Thousands of acquisitions were checked for the isolation criterion on the computer using the Lotus software package. Then, thousands of bank stocks (having passed the isolation criterion) were manually searched for seven years of stock price data on the aank_an§_gngtatign_agggrd micro- film and then for seven years of dividend, rights and splits data. II. MW Motivation to acquire another bank could be to maximize shareholder wealth. In capital budgeting the decision criterion is to accept all those investments with a Net Present Value (NPV) greater than zero. This positive NPV may arise due to synergies, market power, undervaluation, and/or unused tax factors. Investment decisions of 75 TABLE 6 211121319; 999' nun-.9 9.4.1. 911111..“ Mon F1191 N911 51 59999119 M9)- Cao 955 OTC 11919- 0.330 P5'53- 2.12 5 01k ’52- 2.” .33 .1911 10 F95 0 F95 15 M91 10 '1019 515 A9110 A9121 A915 A9120 0.33 A91 10 M9y 23 May 27 .1119 10 0.33 .1111 10 A119 10 Aug 15 599 0 0.33 091 10 Nov 7 Nov 15 099 0 0.00 E91 01:1 10 Nov 7 Nov 15 099 0 'F19c11o99 '19 9999 9152.70 9 911 ' F1191 N 5 Kokono 1911- 09111 951 OTC 11919- N999 "'53- 1.45 '52- 0.50 0.50 091.: 15 .199 5 09¢ 15 .199 4 0.25 M91 0 A91 4 M91 0 A91 1 0.30 .1115 21 .1111 5 .1011 21 Jul 1 0.40 590 20 051 3 590 20 599 30 F1191 N911 Bk L919y9119 L9- 099 9510 OTC 11919- N999 "'53- 21.00 '52- 13.00 10.00 099 0 .199 3 099 0 .199 1 11.00 .1119 0 .1111 1 .1119 0 .1119 30 F091 N911 50 L919 Fo1991- C99 9510 OTC 11919- 0.300 F11‘53- 1.25 '52- 1.20 0.” F99 25 M91 7 M91 10 M91 15 0.30 May 23 .1119 0 Jpn 10 .1119 15 0.31 A119 22 599 2 599 10 599 15 0.30 Nov 25 099 7 09¢ 10 099 15 0.05 591 Nov 20 099 7 09: 10 099 15 F1191 N9115I 1.99999191 091y- C99 0510.00 OTC 11919- 0.440 "'53- 1.71 0 9111 '52- 1.10 0 911 0.42 091: 14 091: 17 091: 23 .1911 3 0.42 1491 0 M91 17 M91 23 A91 1 0.43 May 31 .1119 0 .1119 15 .1111 1 0 44 Aug 23 599 0 599 15 0:1 3 '511 811 599 13 01:1 3 091 7 Nov 7 0.44 Nov 22 099 15 099 21 099404 ’F199119119 111 1:999 91 532.55 9 911. F1191 N911 51 14199999911 195- 099 955 OTC 11919- N999 ”'53- 1.05 '52- 1.50 5 911 0.15 £91 099 20 099 27 091: 31 .1911 3 0.45 F911 21 M91 3 M91 0 M91 21 0 45 May 15 May 23 May 27 .1119 20 A9999“ by F1191 Na1no1191 5911119119199 199 195 F1191 11911 55 L1 101911 Noad)- 099 955 OTC R919— N999 P5'53- 0.50 0 9111 ‘52- 0.35 0 911 0.35 - 099 5 091: 15 099 21 .199 21 0.15 591 091: 0 09: 15 09: 21 .199 21 5*: $11 .191 1 .1111 12 .191 10 599 10 0 40 09: 0 099 14 091: 20 .19920‘04 0.20 591 091: 5 091: 14 095 20 .19920'04 F1191 N911 51 M91199 1195)- 099 9510 OTC R910- 0.505 P0'53- 1.20 '02- 1.00 0.50 Nov 0 Nov 24 Doc 1 .1911 3 0.20 591 .199 11 .199 25 091: 1 .199 24 0.50 May 10 .1119 2 .1119 1 .1119 30 0.50 Nov 0 Nov 25 091: 1 2911304 F991 N911 51 M91999|1 T99- 099 054 OTC 3919- N999 P5'53- 0.15 '52- 991111- 0.15; 915- 0.30 0 911 - - . . . 0.00 09: 0 .199 4 099 20 .199 3‘ 0.00 M9110 A91 4 M91 15 A91 1 F1191 1191101 519990199 0- 0919 955 OTC 11919- 0.150 "'53- 0.55 '52- 1.00 0.25 M91 15 M91 21 M91 25 M91 31 0.25 .1119 21 Jun 27 .1119 25 .1119 30 0.15 599 20 599 27 599 27 599 30 011110 099999 599919 5.099910 -P9195|9 F1191 N911 511 091.1999 115- 099 9510 OTC N919- 1.155 P11'53- 2.00 ‘52- 2.20 1.10 099 0 .199 3 099 10 .1911 3 0.55 £91 095 5 .199 3 099 10 .199 3 1.15 May 25 .1119 22 .1119 10 .1119 30 F1191 N911 51 10119199 111)- 0991 9520 OTC 3919- 3.005 P0'53- 11.00 '52- 10.50 3.00 091: 0 091: 20 099 1 .1911 3 5.00 E91 099 5 095 20 091: 1 .199 3 3.00 .1119 5 .1119 22 .1119 1 .1119 30 F1191 N911 511 F9191 5991:11- 0991 9510 OTC 3919- 0.000 P0'53- 3.50 '52- 3.45 0.00 F95 15 M91 11 M91 1 M91 10 0.00 M9y 20 .1119 3 .1119 1 .1119 10 0.90 A119 10 A119 25 599 1 $99 12 0.00 Nov 15 Nov 30 099 1 Doc 12 F1191 11911 511 0991191- 099 95100 OTC 3919- N999 Pd'53- N999 '52- 11.00 Aooo‘ud by F1191 P9999 0919 F1191 N 5 F911919911111 N N- 099 953 OTC 11919- N999 Pd'53- 4.50 '52- 9919- 3.50: 915- 91k 1.03 ' .1119 0 31111 14 .1119 20 .1119 so 2.57 . Doc 5 Doc 13 091: 10 Doc 30 F1101 N011 Bk 0910001119 710- 00111 031 OTC R019- 0.050 P0'53- 0.20 '32- 0.25 0.05 Fob 10 M91 5 M91 15 M91 31 0.05 May 12 .1119 5 .1119 15 .1119 30 005 A119 17 599 0 599 15 599 30 0.00 Nov 10 099 0 099 15 Doc 30 0.02 591 Nov 10 099 0 099 15 O9: 30 F1191 N 5 591991 01119- 09111 954 OTC 11919- No99 P5'53- 1.00 '52- 1.70 0.50 .1119 7 .1119 13 .199 7 .1119 21 0.50 099 13 099 10 Doc 0 09¢ 10 0.00 591 099 .13 099 10 099 0 099 15 Mon-195 by 599191y 0919 F1191 N911 It 59'9911-9 0919- 0991 1199299 OTC R919- N999 Pd'53- 1.02 '52- 1.54 0.51 09125 099 0 091: 15 .1911 3 0.51 Fob 22 M91 10 M91 15 A91 1 Exchanood 191 91999 91 F1191 Financial 0999919 F1191 N911 59 51911999 P1 N199)- 0991 955 OTC 3919- 0.705 Pd‘53- 1.50 ‘52- 1.50 070 May 17 .1119 5 .1119 10 .1119 15 0.70 Nov 15 091: 5 099 0 Doc 10 0.20 E111 Nov 15 099 5 09: 0 099 10 F1191 N911 511 Tu9ca1oo99 A19- 0991 955 OTC F1919- N999 P9'53- 0.50 '52- 1.25 0.30 .199 17 .199 20 .199 25 Fob 1 0.10 591 .1911 17 .1911 20 .1911 25 Fob 1 0.30 A91 15 A01 22 A91 25 May 1 0.10 E91 A91 15 A91 22 A91 25 May 1 Acommd by F1191 711911919999 0919 F1191 N911 511 (V1999b11191- 0919 955 OTC R919- N999 "'53- 1.00 '52- 1.00 0 9111 0.50 Nov 23 .199 4 099 31 .1911 3 0.50..___ .1119 25 .1111 1 .1119 25 .1119 30 91111 111111111 111 01199191 n- on 11929 OTC 11.1.- 2.500 Pd'53- 1:1.50'92- 13.10 2.50 091: 3 091: 14 091: 20 .199 3 1.50 Si 095 3 091: 14 091: 20 .199 3 2.50 M91 11 M91 17 M91 23 A91 1 2.50 Moy 25 .1119 14 .1119 20 111 1 0 M C“ 09..- “ 9... 99 9..- a. 9 9 9 76 merger/acquisitions are company specific. Past event studies of mergers, Balpern (1973), Mandelker (1974). Langetieg (1978), Lobue (1984), Desai and Stover (1985). Pettway and Trifts (1985) and others determined abnormal performance of acquiring firms surrounding the merger date. When monthly holding period return data could not be obtained from the £352 or compustat_1apg§, a holding period return was calculated (information collected from the sources stated above) using the following formula: N N P-S P1 + D1 + 1 0 P1 + 1 - P0 R1. t = o '2 (1) ’ *P 0 where: Ri t = Monthly Holding Period Return P1 = Stock Price at the end of the month D1 = Cash Dividend paid during the month N1. = Number of Shares at the end of the month N0 = Number of Shares at the beginning of the month 8 = Subscription Price of Rights Offerings R = Number of Rights needed to buy one new share P0 a Stock Price at the beginning of the month The market model form of the Capital Asset Pricing Model attributed to Sharpe (1963, 1964) and Lintner (1965) was used in these studies. 77 The market model states: q, A A ’b N Ri,t ' a1 + Bi,m Rm,t + ei,t (2) ’b where R'it is the monthly return including dividends, splits and rights of the acquiring bank or bank holding company i at time t, and where the tilde indicates a random variable. ’b Rr t’is the monthly return including dividends at time t of ’b a broad portfolio of stocks. This R", was that given by Ibbotson Associates in the St9gksL_agndsL_aills‘_and_1nf1a; tign_12§§_1garbggk. This;m is the same (market return measure) as the QRSP_T§2§§. This Rulis based upon the Standard and Poor's (S a P) market-value-weighted composite index. Market value weighted means that the weight of each stock in the index is proportionate to its price times the number of shares outstanding. During the sample period (for gathering returns data) January 1962 through December 1984, the S a P Composite index included the 500 largest common stocks (in terms of common stock market value) in the United States. The estimated coefficients, Si and gin! are estimated during the base period (-72 months to -13 months) before the Federal Reserve merger approval date at time 0 using the 'b ordinary least squares technique. The e1 is the error ,t term of the model. The error term will reflect the industry effect and company-specific effect. To eliminate the industry effect 78 and isolate the company-specific effect, the complete model becomes: ’b A A ’b A m ’b R1,: ' a1 + Bi,m Rm,t + 31,3 R3,: + 91,: (3) ’b where RBt is the monthly return at time t of a bank '\a industry portfolio of stocks. The R is calculated by B,t summing all the monthly holding period returns of the bank stocks listed on the QRSP_Tapg§ for a given month and dividing by the number of bank stocks. There is no accurate bank stock index available in the public domain. All readily available bank stock indexes were deficient in that either the dividend return was not taken into consideration and/or the number of bank securities was small and/or was not geographically dispersed. The coefficient £i,B is estimated during the same base period as above. The Assumptions of the model (equation 3) are: 'L E (ei t) = 0, for all t (4) E (g 2 ) = 02 for a1] t (5) i,t i’ N ’b . . Rm,t’ RB,t f1xed 1n repeated samples (6) m ‘ 2 T (Rm,t - Rm) = o (7) 79 Residual returns during the test period (~12 months to +12 months where the Federal Reserve merger approval date is t = 0) were calculated by comparing the actual versus the predicted returns using: A A ’b A "J ’1; 91,1: = Ri,t ‘ (a1 + Bi,m Rm,t + 81,8 RB,t) (9) ’L where ei,t is the monthly residual return of bank 1 at time t. Thi3< mo wHADmMm I... .V 550?“ fi m A . k. _ .1 1 _ V JCDm >m m_/_m3._.mm Jflézflozmfl. m04im>¢fl mod... 3.0.. no.0! «0.0.. rod! 95 from a high of 0.035029 to a low of ~0.93404. One would expect with a random selection of stocks that there would be 5% of banks with significant returns. Of course, this is not a random selection of stocks. Reasons why the acquirer banks are not earning excess abnormal returns could be that they bid too high a price for the target banks. That is, the intention of the acquirer bank is to maximize shareholder wealth but the result of their efforts fails to garner significant positive benefit. The goal of stockholder wealth maximization may not be reached because other potential acquirer banks bid up the price of the acquired bank. The premium paid over market price during 1968-83 was on average 40.48% (Source: W. T. Grimm and Co.). Another possible explanation may be due to thinly traded stocks. The varying durations between trades would unintentionally increase the standard deviation, making statistical tests of significance less powerful. Many of the 112 stocks in the study were thinly traded, i.e., long time intervals between trades. A partial correction for this was the use of monthly returns. In summary, the hypothesis that merger has no impact on stockholder wealth (per Average Abnormal Return Test by Bank) cannot be rejected. 96 11. W The results for the positive abnormal returns by bank test are presented in Table 8. This is only a signs test, not taking into consideration the magnitude of abnormal performance. The signs test is identical to the binom~ ial for a probability equal to 0.5. There are five banks (Bank Numbers 5, 77, 89, 93, and 111) with significant (a = .05) positive abnormal returns (Bank #111 is signifi- cant at a = .01), and nine banks (Bank Numbers 18, 35, 60, 67, 68, 73, 76, 82, and 94) with significant negative abnormal returns (Bank Numbers 18 and 94 are significant at (1: .01). These results are not that much different than what one would expect from chance. As stated in the Re- search Design and Hypothesis Section, this test is deficient in that it does not consider the magnitude of abnormal returns. Therefore, the hypothesis that merger has no impact on stockholder wealth (per Positive Abnormal Returns by Bank Test) cannot be rejected. 111. WWW]: The effect for each bank, at time t = +12, of the abnormal return compounded during the time period t = ~12 to t = +12 expressed as a percentage is presented in Table 9 and Figure 5. These are descriptive statistics only, no statistical tests of significance were calculated. Even 97 .. Tablea WWWMLM Number of Positive Bank Abnormal Monthly Return Periods 1 17 2 13 3 13 4 13 5 18* 6 16 7 10 8 13 9 9 10 13 11 13 12 13 13 l6 l4 9 15 14 16 9 l7 9 18 2** 19 12 20 13 21 12 22 10 23 16 24 12 25 16 26 14 27 14 28 16 29 13 30 9 31 15 32 16 33 17 34 12 35 7* 36 13 37 12 38 8 39 10 40 17 41 16 Significant (*)o: 8.05 (**) a = .01 98 Table 8 ~~ continued Number of Positive Bank Abnormal Monthly Return Periods 42 16 43 14 44 9 45 13 46 13 47 14 48 10 49 10 50 9 51 10 52 ll 53 ll 54 ll 55 15 56 15 57 15 58 13 59 ll 60 7* 61 15 62 12 63 ll 64 16 65 8 66 10 67 6* 68 6* 69 ll 70 8 71 9 72 12 73 6* 74 10 75 13 76 6* 77 19* 78 13 79 10 80 12 81 15 82 7* 83 11 Significant (*) a s .05 (**) a = .01 99 Table 8 -~ continued Number of Positive Bank Abnormal Monthly Return Periods 84 14 85 12 86 13 87 10 88 10 89 18* 90 13 91 10 92 13 93 19* 94 1** 95 9 96 10 97 16 98 15 99 8 100 10 101 14 102 10 103 8 104 15 105 10 106 14 107 15 108 10 109 12 110 16 111 20** 112 15 Significant (*) a = .05 (**) a 8 .01 100 1:121:51 Webmaeturnbxm Compounded Annual Return (as a %) +39.9684 ~17.0950 +42.9222 +46.7516 +45.2794 +67.5760 ~18.3720 +8.0186 ~49.2900 +18.0016 ~8.3710 +25.6113 +30.2482 ~10.8660 ~16.7500 ~31.9750 ~13.2480 ~98.4480 +10.3739 +3.0803 ~13.0350 -27.2030 +87.7391 ~9.5500 +34.ll49 +24.2884 ~12.2730 +16.2905 ~18.6330 ~2.4540 +22.0187 +7.2214 +113.2531 +28.8578 -46.7350 ~7.4990 +3.6092 -32.5050 ~8.3470 +126.5263 +65.1379 +115.1230 +13.5393 +4.5653 101 Table 9 -~ continued Compounded Abnormal Return (as a %) ~70.5630 +5.5597 +14.5498 +54.4310 ~40.5800 ~1.6920 ~46.7740 +20.0102 ~36.8480 ~15.9l70 +9.2029 +10.0948 +16.0102 +3.0128 ~29.2130 ~42.7920 +86.4905 +20.6000 ~14.0830 +16.5896 ~34.7890 ~0.5030 ~57.7120 ~26.7830 ~72.4540 ~24.7250 ~10.l420 ~36.8180 +5.5491 +2.8282 ~25.0560 +57.9503 +27.207l ~35.1360 ~29.9820 +27.9110 ~55.8000 ~18.0430 +11.4607 ~14.4590 ~32.0440 ~24.1040 ~13.2190 +50.8884 102 Table 9 ~~ continued Compounded Abnormal Return (as a %) -13.1920 -6.8510 -14.0630 ~47.2170 -55.1380 +28.0580 +17.3400 -9.7860 '16.8840 '3.9830 -30.2430 -32.8890 +10.6910 -52.9470 +23.5563 +71.3930 *5.0360 ~22.2730 +22.1219 +80.3458 +24.5584 103 £725 fin 555 43029. omozaomZoo ...I n 55on xcnm .mm mm mZmD._.mw_ DmOZDOn:zOU oowl 104 though no bank has statistically positive abnormal returns for this period (from Table 7), the stockholders of Bank Numbers 33, 40, and 42 earned a compounded abnormal return of 113.2531%, 126.5263%, and 116.1230% respectively. Bank #18 sustained a compounded abnormal return of negative 98.448%. Iv. AW Table 10 and Figure 6 present the results for the average abnormal return by time test. At no time period is the result, positive or negative, statistically significant. The range of the t~test statistic is positive 0.102933 (at time t = ~7) to negative 0.15580 (at time t = +10). Inspec- tion of the average abnormal returns indicates the average residuals are negative until t = ~7, where they change to a strongly positive 0.006355. They remain positive until t = ~4, where they turn negative again. This supports the results of Desai and Stover (1985) who found significant positive abnormal returns when the merger application was announced. On average, the merger application announcement period is at t = ~5 specifically the average was 178 days and the median was 155 days. This is the announcement date reported in the Federal Register. Investors may be aware of the merger intentions of the acquiring bank before the public announcement date. This reason would explain the residuals turning positive sooner at t a ~7. The average abnormal returns turn positive again at t = ~l until t 8 +1 where they change to a strong negative 105 11:21:19 _ mmmum Standard Average Deviation 87 Abnormal of Abnormal t~Test Time Return Return Statistic ~12 ~0.005600 +0.082979 ~0.067560 ~11 +0.002075 +0.058290 +0.035606 ~10 ~0.002220 +0.067l63 ~0.033100 ~9 ~0.001190 +0.068662 ~0.017350 ~8 ~0.006250 +0.053205 ~0.117470 ~7 +0.006355 +0.061747 +0.102933 ~6 +0.001758 +0.059996 +0.029307 ~5 +0.002592 +0.058201 +0.044551 ~4 ~0.000110 +0.072967 ~0.001530 ~3 ~0.000400 +0.068474 ~0.005870 ~2 ~0.000750 +0.065747 ~0.011400 ~l +0.005299 +0.082507 +0.064236 0 +0.001482 +0.056507 +0.026229 +1 ~0.012210 +0.058842 ~0.207640 +2 ~0.004290 +0.079618 ~0.053920 +3 +0.006240 +0.065322 +0.095529 +4 ~0.005520 +0.095832 ~0.057660 +5 +0.006861 +0.073174 +0.093770 +6 ~0.009410 +0.066079 ~0.142440 +7 ~0.002880 +0.074894 ~0.038490 +8 ~0.002820 +0.062365 ~0.045360 +9 +0.003544 +0.067766 +0.052306 +10 ~0.010100 +0.064846 ~0.155800 +11 +0.003973 +0.069098 +0.057504 +12 +0.002298 +0.077978 +0.029478 87 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 106 .538 rm ZMDHME A4552“? mo§m>< I... o 35on Laid. “£202 0.1.0me “5:02 arelormmnmm+na a . Pum+00nwmoeifi b b _ _ _ . F L . _ _ L _ — m _ b P.)— . ”F0.Onl __ .. a 3.0.. 1 :00: .. 6.0.. .. 000.0... 1 000.01 1 ...0001 000.01 _ .... 000.0... _ ... ... I. .700.0l. _ .. _ I ”00.0.... _ .0 _ I «00.0.. _ mu... r. .. . ~ .... ... I r00 0.! _ a a _ . 0 . _ _ B W ... _ I woo O __ ......nfl _ a... r «00 .0 _ _ .... __ .. 000.0 _ __ ,. __ _ . .. +000 _ “.0... __ .. 000.0 ... .. 000.0 .800 B I mg :38 --"‘B——_ -—l_‘__ *“u III—~— “..— — fl -_ --1 __ _ __ G ...Ec. am mzmakmm Agahmozmd 6.24.... 107 0.01221 return. This appears to indicate the market's favorable evaluation of the acquirer's merger. The strong negative return at t = +1 may be due to heavy selling by the acquired bank's stockholders who accepted the acquirer's common stock (for those acquisitions consummated by a stock swap). The average abnormal return is positive at t = +3, which is the period where the Federal Reserve Board's merger approval authorization expires, i.e., the acquiring bank has ninety days (three months) after the merger approval date (t = 0) to complete the merger transaction. Subsequently, the residuals flip flop in sign until t = +6 where they remain negative until t = +11 and t = +12, which are positive average abnormal returns. The hypothesis that merger has no impact on stockholder wealth (Per Average Abnormal Return by Time Test) cannot be rejected. WW The results for the standardized average abnormal return by time test are stated in Table 11 and Figure 7. As stated in the methodology section this test is conducted in the event the variance of abnormal returns for each bank are not the same. The standardized abnormal return starts negative at t = ~12, turns slightly positive for t - ~11 and t = ~10, switches back to negative at t = ~9 and t = ~8, and changes to a positive number at t = ~7 where it stays +12 88 Standardized Average Abnormal Return ~0.074870 +0.002046 +0.008480 ~0.069400 ~0.087540 +0.052599 +0.010196 +0.034230 +0.046219 ~0.035150 +0.036144 +0.051923 +0.012007 ~0.145790 ~0.027760 +0.064539 ~0.026920 +0.067203 ~0.172650 +0.008964 ~0.081300 +0.072317 ~0.13l400 +0.056342 +0.048773 108 Tablell WWW Returnbxnme Standard Deviation of Standardized Average Abnormal Return +1.093848 +0.894780 +0.879092 +0.847601 +0.874535 +0.996282 +0.908539 +0.977928 +1.047750 +0.952866 +0.881411 +1.056464 +0.784222 +0.919600 +1.089188 +1.073028 +0.999668 +1.038424 +0.958125 +0.894079 +0.990842 +1.027266 +0.905195 +0.991374 +1.048650 t~Test Statistic ~0.068450 +0.002286 +0.009647 ~0.081880 ~0.100100 +0.052795 +0.011222 +0.035002 +0.044027 ~0.036880 +0.041007 +0.049148 +0.015311 ~0.158540 ~0.025490 +0.060146 ~0.026930 +0.064716 ~0.180200 +0.010026 -0.082050 +0.070398 ~0.145160 +0.056833 +0.046510 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 109 a... 2.0—. m . mth >m mZMDHuM A< am-nd.q. -D._-m 00.0 .... +0.0 110 positive until t = 0 except for the period t a ~3. This provides stronger support for the hypothesis that the merger is of positive benefit to the acquirer and starts close to the announcement period of merger intentions and continues until the merger is approved by the Federal Reserve Board at t = 0. The standardized average abnormal return is positive at t = +3. Again, supporting the results from the Average Abnormal Return Test where t = +3 is the expiration time period of the Federal Reserve Board merger approval authorization. Subsequently, the standardized residuals switch in sign in alternating time periods indicating no discernible pattern and remain positive at t = +11 and t = +12. The range of the standardized average abnormal returns is ~0.17265 (at t = +6) to 0.072317 (at t = +9). None of the twenty-five time periods has a statistically significant ( = .05) standardized average abnormal return t~test statistic. The range of the t~test statistic is tight from ~0.18020 (at t = +6) to 0.070398 (at t a +9). In summary, the hypothesis that merger has no impact on stockholder wealth (per Standardized Average Abnormal Return by Time Test) cannot be rejected. VI. We A number of statistics were calculated on the portfolio of 112 acquirer bank stocks. These are for descriptive 111 purposes only, no statistical tests were undertaken. This will facilitate the comparison of these results to other studies where other measures and/or different time periods were used. A- Cumulatixe_A1erege_Beaidual Figure 8 and Table 12 show the cumulative average residuals (CARs) by time. The CAR starts negative at ~0.00560 and continues negative until time t = ~1. The lowest CAR before the merger approval date is ~0.013185 at time t = ~8. The CAR is positive for only two time periods during the test period, one year before to one year after the merger approval date, and that is during times t = -l and t = 0. The CAR in t = ~1 is +0.001559 and in t = 0 it is +0.003041. Subsequent to the merger approval date the CAR resumes its negative posture and goes as low as ~0.027544 at time t = +10. The CAR recovers somewhat during the remaining two time periods closing out at ~0.021273, or a negative 2.1273%. These findings support the results found by Kummer and Hoffmeister (1978). B- SLénQéLdizsd_Qnmflléii!£_A!££é9§_B§§ifln§l Figure 9 and Table 12 show the computation of the standardized cumulative average residuals (CAR) by time. The standardized CAR begins at negative 0.074870 and declines to a low of ~0.3859l3 at time t = +10. It stays negative throughout the entire test period reaching a pre- merger low negative 0.221284 at time t = ~8. After time 112 89 Tablelz WWWWMW Standardized Cumulative Cumulative Average Average 89 Abnormal Abnormal Time Return Return ~12 ~0.005600 ~0.074870 ~11 ~0.003525 ~0.072824 ~10 ~0.005745 ~0.064344 ~9 ~0.006935 ~0.133744 ~8 ~0.013185 ~0.221284 ~7 ~0.006830 ~0.168685 ~6 ~0.005072 ~0.158489 ~5 ~0.002480 ~0.124259 ~4 ~0.002590 ~0.078040 ~3 ~0.002990 ~0.113190 ~2 ~0.003740 ~0.077046 ~1 +0.001559 ~0.025123 0 +0.003041 ~0.013116 +1 ~0.009169 ~0.158906 +2 ~0.013459 ~0.186666 +3 ~0.007219 ~0.122127 +4 ~0.012739 ~0.149047 +5 ~0.005878 ~0.081844 +6 ~0.015288 ~0.254494 +7 ~0.018168 ~0.245530 +8 ~0.020988 ~0.326830 +9 ~0.017444 ~0.254513 +10 ~0.027544 ~0.385913 +11 ~0.02357l ~0.329571 +12 ~0.021273 ~0.280798 Where t = 0 is the month the merger is Federal Reserve Board of Governors. approved by the 113 mzae >0 zeaamm q<=¢0zn< uo< m>~a4 92.02.075.230 114 ("I L0 8.3“. ya szHmm 45202? mu§m>< m>HH< amazaomzou 11 o— masoam Lttd. “FISH—2 «in arm “fir—OE szovmmhmmfinfl.vo — “.....fimwhwmowvruv _I _ _ _ E _ _ _ _ r _ b _ . _ _ _ .1 11. _ _ _ a ..1 ‘3 . m C I s 5 .H II we“! _ B... _. r ......NI \\ a. a ., .4... 1 m.01 . «...... .p/ .I. (I __E U../.. 1. w . _. I ....8 .1 m. . w I ..f .8 I i‘ t F I .1. .m. .. .. ..m. 1 .... . _. .1 .. ...a ..a \. ...... .. .... ( ..... ~... a...» ..s. ...Dm ~.. 3... I vll ... ... .... ... _ ... .... 1 m . O l a B ., a ..u . .....E . m. .0 I ... ...—M .../K \....31 .—q . O .1, .....a----m11m11m a ... . _ ...... c I ... o _. .8 miss. I “.0 QEE. hm +1 .0 ~\ .. .. 5 mo mZmDHmm DMOZDOQZOU 118 1:121:11 Wmmnmr. Geometric 91 Average Time Return ~12 ~0.560000% ~11 ~0.176980% ~10 ~0.191990% ~9 ~0.173750% ~8 ~0.264l60% ~7 ~0.114780% ~6 ~0.006660% ~5 ~0.031810% ~4 ~0.029500% ~3 ~0.030550% ~2 ~0.038050% ~l +0.012320% 0 +0.022765% +1 ~0.066590% +2 ~0.090790% +3 ~0.046260% +4 ~0.076080% +5 ~0.035890% +6 ~0.081840% +7 ~0.092160% +8 ~0.101210% +9 ~0.080540% +10 ~0.121130% +11 ~0.105560% +12 ~0.086430% 91 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 119 H 8.3.“. H< N ngfimm mo§m>< onHmzomU 11 : mmDUHm GLOW. N “rip—0.2 112.1552 flvzovmmhwmflnflvorfl #mwnmmor:u FeL____r_r~___ __._____ 0.01. a _ __I 0.011 _ ___ f+01 __ __ IM..OI a . .......... ‘— ...... HEINIPIG I c 0 II 3.13..» m/ 31.10.11m111m. B .. E... B r v o I ...... ...... fix. a. 4 B. .... \.m.llmll1mll.m..f V. -. be 0 Wuifl v.0 ... 9E:- .70.. HEEFMEOMO mm m_./_m3._.m~n_ m04mw>4 120 11 and Table 14. The lowest geometric average return of ~0.56% is at the beginning time period t 8 ~12. Afterwards the geometric average abnormal return increased, but continues negative until consecutive time periods t - ~l and t = 0 where it is as high as 0.022765% (t = 0). Following this at time t = +1 the geometric average abnormal return becomes negative and remains below zero. The lowest the geometric average return reaches in the post-merger approval time period is ~0.12113% at time t = +10. It finishes at ~0.08643% at time t = +12. The statistically insignificant negative results of this bank merger study are in contrast to other studies, Dodd (1980), Pettway and Trifts (1985) (BHC mergers), in- dicating significantly negative returns to the acquirer. 8.5mm Another descriptive statistic, shown in Table 15, is the sum of the abnormal returns by time. This does not provide any additional information that the average abnormal returns by time test provided. It is furnished here only because some researchers report this statistic. The reporting of this statistic will facilitate the comparison of the findings of this study to others. The sum of the abnormal returns alternates throughout the test period. It begins negative at time t = ~12, in~ verts to a positive at time t 8 ~11 and changes bank to a negative at time t 2 ~10. The statistic turns positive next 121 Tableli . SumefAbngrmalBeturnebeme Sum of 92 Abnormal Time Returns ~12 ~0.627890 ~11 +0.232457 ~10 ~0.249060 ~9 ~0.133460 ~8 ~0.700050 ~7 +0.711864 ~6 +0.196933 ~5 +0.290413 ~4 ~0.012570 ~3 ~0.045070 ~2 ~0.084010 ~l +0.503595 0 +0.166003 +1 ~1.368480 +2 ~0.480860 +3 +0.698908 +4 ~0.618880 +5 +0.768432 +6 ~1.054230 +7 ~0.322890 +8 ~0.316890 +9 +0.397001 +10 ~l.l31590 +11 +0.445031 +12 +0.257450 92 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 122 at time t = ~7, remains positive until time t = ~4 where it does not regain being positive until time t a ~1 and t = 0. After the merger approval date it varies being positive (at times t = +3, +5, +9, +11, and +12) and negative (at times t = +1, +2, +4, +6, +7, +8, and +10). The range is ~1.36848 (time t = +1) to +0.711864 (time t a ~7). F.WWID§ The cumulative sum of abnormal returns by time descrip- tive statistic is reported in Table 16. Again, the informa- tion here is for comparative reasons only. This statistic provides information similar to the cumulative average residual statistics given earlier in the chapter. The cumulative sum of abnormal returns begins negative at time t = ~12 and remains negative until time t = ~1 where it is positive. It repeats as a positive number in time t = 0 and then reverts back to a negative number for the rest of the time periods (to t = +12). The range is ~3.1803238 (t = +10) to +0.249155 (t = 0). It stops at t = +12 at ~2.4778428. VII. W The results of the percent positive of abnormal returns by time test are presented in Table 17. This is a non- parametric signs test (identical to the binomial for p = 0.5) for the residuals of all banks at a certain time t. The range of percent positive of abnormal returns by time is from 40.18% (at time t = ~4) to 55.36% (at time t = +4). 123 Tablelf Wamefwnetumshxm 93 Cumulative Sum Time of Abnormal Return ~12 ~0.6278900 ~11 ~0.3954330 ~10 ~0.6444930 ~9 ~0.7779530 ~8 ~l.4780030 ~7 ~0.7661390 ~6 ~0.5692060 ~5 ~0.2787930 ~4 ~0.2913630 ~3 ~0.3364330 ~2 ~0.4204430 ~l +0.0831520 0 +0.2491550 +1 ~1.ll93250 +2 ~1.6001850 +3 ~0.9012770 +4 ~l.5201570 +5 ~0.7517248 +6 ~1.8059548 +7 ~2.1288448 +8 ~2.4457348 +9 ~2.0487338 +10 ~3.1803238 +11 ~2.7352928 +12 ~2.4778428 93 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 124 139.1211 WWQEWWMW Percent Positive of 94 Abnormal Time Returns ~12 50.00% ~11 52.68% ~10 50.00% ~9 44.64% ~8 43.75% ~7 50.89% ~6 50.00% -5 50.00% ~4 40.18%* -3 47.32% ~2 52.68% ~1 48.21% 0 52.68% +1 47.32% +2 45.54% +3 50.89% +4 55.36% +5 48.21% +6 46.43% +7 50.89% +8 50.00% +9 51.79% +10 43.75% +11 48.21% +12 48.21% 94 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. *Significant at a = .05. 125 None of the time periods are significantly positive or negative except at time t = ~4 which is significantly nega- tive at a = .05. This one negative result could be ex- plained by chance alone (i.e., out of twenty-five time observations one would expect a significant result once at a.8 .05). Therefore, the hypothesis that merger has no impact on stockholder wealth (per Percent Positive of Abnormal Returns by Time Test) cannot be rejected. VIII. WWW WM The results of the percent positive test of average abnormal returns for the complete sample by bank are pre- sented in Table 18. This percent positive test is a non- parametric signs test (identical to the binomial at p = 0.5) showing the percentage of acquirers with positive abnormal returns for the complete sample of 112. The percentage of acquirers with positive average abnormal returns was 49.107l4%. This is not statistically significant as the t~test statistic is only ~0.1890146. Therefore, the hypothesis that merger has no impact on stockholder wealth (per the Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank) cannot be rejected. 126 Tablelfi mmmumwm mmmmmmmumk Percent Positive of Average Abnormal Returns for the Complete Sample by Bank 49.10714% Standard Deviation 4.72376% t~Test Statistic ~0.1890146 127 IX. W The percent significant test results are given in Table 19. The percentage of banks with significant positive average abnormal returns was zero. This produced a t~test statistic of ~0.5291526 which is not significant atcx= .05. A potential reason to explain this result may be due to the fact that there was no minimal size of acquisition criterion. A target bank of a relatively large size when compared to the acquiring bank would provide an opportunity for a larger impact on returns, depending on the price of the target bank compared to its intrinsic value (i.e., the greater the discrepancy between the target's price and its value the greater the impact on the acquirer's abnormal returns). Desai and Stover (1985) found no significant change in the results of their bank merger study when the size of acquisition was considered. In summary, the hypothesis that merger has no impact on stockholder wealth (per Percent Significant Test) cannot be rejected. X- Buna_Teat The results of the non—parametric runs test on the average abnormal returns by time (given in Table 10), and the standardized average abnormal returns by time (given in Table 11) are presented in Table 20. The number of runs in the average abnormal returns is fourteen producing a z-test Percentage of Banks with Significant Positive Average Abnormal Returns 0% Standard Deviation 9.44907% t~Test Statistic ~0.5291526 129 131113.29. Nonparametric Runs Test Average Abnormal Returns by Time 0 14 up 13.32 0 2.4105877 11 z-Test Statistic 0.4895071 Percentile Rank 69th Standardized Average Abnormal Returns by Time 16 13.00 2.3452078 1.4924050 93rd 130 statistic of 0.4895071. This result is placed at the sixty- ninth percentile (compared to the random average percentile rank placement of fiftieth). The number of runs in the standardized average abnormal returns by time is sixteen producing a z-test statistic of 1.492405. This result is placed at the ninety-third percentile (compared to the random average percentile rank placement of fiftieth). The results of this non- parametric runs test of the standardized average abnormal returns by time indicate a definite pattern of signed standardized average abnormal returns. The standardized average abnormal returns are positive from time t a ~7 to time t = 0 (except for time t = ~3). However, this result is not significant at the a.= .05 level. Therefore, the hypothesis that merger has no impact on stockholder wealth (per Runs Test on the average abnormal returns by time and the standardized average abnormal returns by time) cannot be rejected. x1. WW There is an opportunity for bank acquirer stockholders to gain from merger in selected time periods. The nine tests of the impact of mergers on stockholder wealth show no statistical significance in the time period t - ~12 to t 2 +12. But there is an indication, from the runs test on standardized average abnormal returns by time, that the time period t = ~7 to t = 0 does provide gains from merger. 131 This section will reexamine the residuals of the banks in this study by conducting all nine tests of the impact of merger on stockholder wealth, but for the shorter time period seven months before and up to the merger approval date. AW Table 21 and Figure 12 contain the results for the subperiod average abnormal return test by bank. Observing the table and figure, one notes that there is only one bank (Bank #94) with a statistically significant abnormal return in this subperiod. Bank #94 had a negative 0.004970 average abnormal return. This return is not that negative, but when compared to its standard deviation of 0.000452 it results in a t~test statistic of negative 11.00350. Other notable, but not statistically significant, bank returns are Bank #18 and Bank #3 with t~test statistics of negative 1.302430 and positive 1.126311 respectively. One limitation of this test for the subperiod is the small number of time periods (eight) causing the variances to be high. This makes it much more difficult to find statistically significant results. The hypothesis that merger has no impact on stockholder wealth (per Subperiod Average Abnormal Return Test by Bank) cannot be rejected. 132 1:121:21 5111221211211 mmmmm Standard Average Deviation Abnormal of Abnormal t~Test Return Return Statistic +0.015611 +0.053625 +0.291125 ~0.005680 +0.046658 ~0.121760 +0.033088 +0.078937 +0.419175 ~0.002850 +0.030713 ~0.092920 +0.010448 +0.056856 +0.183772 +0.008659 +0.04027l +0.215022 +0.004361 +0.033579 +0.129895 ~0.016570 +0.066878 ~0.247820 ~0.020270 +0.048209 ~0.420600 +0.011691 +0.068784 +0.169969 +0.012764 +0.022847 +0.558669 +0.014339 +0.069471 +0.206407 +0.037542 +0.100076 +0.375139 +0.004121 +0.054080 +0.076207 +0.012155 +0.059704 +0.203593 +0.009240 +0.076585 +0.120657 ~0.003000 +0.039682 ~0.075670 ~0.142280 +0.109248 ~1.302430 +0.000936 +0.054168 +0.017281 +0.028038 +0.101334 +0.276690 ~0.000260 +0.084649 ~0.003070 ~0.018880 +0.091005 ~0.207540 +0.020286 +0.099131 +0.204646 +0.031664 +0.043881 +0.721584 +0.027890 +0.062976 +0.442880 +0.020306 +0.097246 +0.208817 ~0.000710 +0.097262 ~0.007310 ~0.000000 +0.035627 ~0.000080 +0.003414 +0.055552 +0.06l463 +0.017969 +0.115565 +0.155493 +0.041929 +0.253215 +0.165587 ~0.002010 +0.08l950 ~0.024580 +0.059963 +0.053238 +1.126311 +0.029l6l +0.099519 +0.293020 ~0.035250 +0.045497 ~0.774770 +0.002880 +0.069115 +0.041680 +0.009313 +0.129509 +0.07l916 ~0.024360 +0.067132 ~0.362990 ~0.009400 +0.047l64 ~0.199410 +0.034239 +0.048063 +0.712363 +0.013442 +0.050490 +0.266230 +0.032038 +0.150859 +0.212373 Table 21 ~~ continued Standard Average Deviation Abnormal of Abnormal Return Return +0.031612 +0.041498 ~0.005840 +0.073264 +0.042731 +0.127l77 +0.024045 +0.109916 +0.011097 +0.058400 ~0.046020 +0.105933 ~0.013920 +0.063411 +0.014978 +0.110775 +0.006336 +0.068362 +0.009657 +0.141266 ~0.017030 +0.098033 +0.020102 +0.128202 ~0.011710 +0.119569 ~0.012490 +0.057598 ~0.006600 +0.042532 ~0.001150 +0.054000 ~0.022150 +0.034335 ~0.018600 +0.033906 +0.032574 +0.080715 ~0.003280 +0.032381 ~0.012450 +0.109958 +0.015578 +0.017341 ~0.015850 +0.059533 +0.000927 +0.047933 ~0.021520 +0.026887 ~0.059020 +0.064756 ~0.011910 +0.059458 ~0.054500 +0.064441 ~0.007310 +0.033425 ~0.007810 +0.073062 +0.001079 +0.043745 ~0.007380 +0.086761 +0.005061 +0.032442 +0.002504 +0.052120 +0.028093 +0.036848 +0.004619 +0.058539 +0.001261 +0.126060 +0.019757 +0.045838 +0.002032 +0.040920 +0.008713 +0.122700 ~0.010720 +0.037179 +0.007646 +0.061628 +0.027867 +0.104778 ~0.013660 +0.045892 133 t~Test Statistic +0.761771 -0.079810 +0.335997 +0.218764 +0.190020 -0.434500 -0.219510 +0.135216 +0.092687 +0.068359 ~0.173770 +0.156803 -0.097990 -0.216980 ~0.155290 ~0.021350 -0.645190 -0.548810 +0.403571 ~0.101360 -0.113280 +0.898335 -0.266250 +0.019347 -0.800460 -0.911460 -0.200400 ~0.845870 -0.218740 -0.106990 +0.024682 -0.085110 +0.156025 +0.048057 +0.762422 +0.078916 +0.010007 +0.431028 +0.049672 +0.071017 -0.288420 +0.124069 +0.265965 -0.297690 112 Table 21 -~ continued Standard Average Deviation Abnormal of Abnormal Return Return ~0.043930 +0.066386 ~0.006250 +0.04137l +0.009876 +0.056349 ~0.000630 +0.073642 +0.006374 +0.064597 +0.022270 +0.165396 ~0.005100 +0.037008 ~0.004970 +0.000452 ~0.009920 +0.040207 ~0.010260 +0.058942 +0.009l98 +0.104262 +0.006788 +0.105368 +0.000517 +0.017582 +0.001806 +0.042094 ~0.006800 +0.07l785 ~0.018540 +0.103996 ~0.005170 +0.058783 +0.018943 +0.030009 ~0.009950 +0.068093 +0.014591 +0.074079 +0.043933 +0.077201 ~0.010300 +0.074999 ~0.034230 +0.050332 +0.014390 +0.064270 +0.0307l9 +0.057585 +0.010676 +0.035149 Significant (*) a = .01 134 t~Test Statistic -0.661810 -0.151100 +0.175272 ~0.008630 +0.098681 +0.134651 ~0.137840 -11.00350(*) -0.246940 -0.174110 +0.088227 +0.064428 +0.029432 +0.042912 '0.094830 '0.178330 -0.088070 +0.631243 -0.146260 +0.196971 +0.569071 -0.530130 +0.223909 +0.533464 +0.303755 135 xzm hmmh zmahmm 4<2mozm< mw< oommmamzm -1 NH mzzwmm 4240 ELE.E::_~»_:_:_::1_:__br_::.P::w~___:—:C._L__P2;—.LCLELELLFC»-_1C1—.—._1P._._1._1PEI a I w I _ _ T .4 1:. H A ___. _ ____ Mm .. .... __ .4... 4.... ... _ ._._._ 4 a 4. ... .. .fl _nflu nu . _ _L I 444.4441 -.1. _. 4 ......a,_.._.__1 ; .... ...... .. .... . _._ .. . .1... 4.. .44.... .4444... ....__:_- :44: 1... . ..1-.. .14; 3. a _. . ...._ E __ .4. __ _a __ ._ .. _: ......mmf:n ... _ .... _. ,_ .... . ..._ ._4 ...... __ 1... m. _ a a _ ...E ___ a. 3.. .r. . ._ _ 3 “TE. . __ a .. _. up... .... . m. _. w m. - xcam.?u.fi0tvmflzm Zm .4.er 44.122 W_O_..,_mxu M. 0 4:1” 44w; “W.H/Jmn .15. 1 ‘ ." L.- :“~.I 55393 15.1.2111" EU! "’ NHRLE 136 managermuemmsmmmum The results for the subperiod positive abnormal returns by bank test are presented in Table 22. There are six banks (Bank Numbers 33, 40, 64, 77, 80 and 93) with significant (0 = .10) positive abnormal returns, and seven banks (Bank Numbers 18, 35, 67, 68, 70, 87 and 94) with significant (0 = .10) negative abnormal returns (Bank Numbers 18, 70 and 94 are significant at a = .05). These results are not that much different than what one would expect from chance. It was necessary to use the significance level of a - .10 as there are only eight observations per bank. The hypothesis that merger has no impact on stockholder wealth (per Subperiod Positive Abnormal Returns by Bank Test) cannot be rejected. C- S2h2QLi9d_QQm2Q2nfl2d_Ahn9£m§l_82§n£n_b¥_flflnk The effect for each bank, at time t = 0, of the abnormal return compounded during the time period t = ~7 to t = 0 expressed as a percentage is presented in Table 23 and Figure 13. These are descriptive statistics only, no statistical tests of significance were calculated. The range of the subperiod compounded abnormal return is negative 71.863% for Bank #18 to a positive 58.3318% for Bank #33. mW Table 24 and Figure 14 presents the results for the subperiod average abnormal return by time test. The same 137 111111122. Subperied BeeitixeAbnszmalBeturnebeank Number of Positive Bank Abnormal Monthly Return Periods g. g. N O \lehbHO‘flU‘O‘WfiU‘IWO‘O‘GU'l-bubmmowulmhQO‘O‘U'IWIthU‘O‘NQUIUI Significant (*) a = .10 (**) a = .05 138 Table 22 ~~ continued Number of Positive Bank Abnormal Monthly Return Periods *fl- 1- I: g. l- 0‘ 1... \INWQWWfifiUNONHwaqwbmk’wwwwwmwhUIuthw-bUINOiU‘UI I: Significant (*) a = .10 (**) a = .05 139 Table 22 ~~ continued Number of Positive Bank Abnormal Monthly Return Periods ** \O 01 WO‘UINNO‘UWGWNW:bNUchIbUOQUIbUImhI-‘ubfile-bb 112 Significant (*) (x = .10 (**) (x = .05 140 111210.22. 5111293111211 WWWMM Compounded Return (as a %) +12.3968 ~4.9890 +27.9629 ~2.4890 +7.8272 +6.7151 +3.2567 ~13.5580 ~15.6320 +8.4926 +10.5402 +10.7536 +31.3407 +2.6l66 +9.1687 +6.0395 ~7l.8630 ~0.0070 +21.8849 ~2.1210 ~16.1l40 +14.6l98 +27.7423 +23.4481 +14.7362 ~2.8370 ~0.3240 +1.9787 +1l.7275 +17.8607 ~3.2370 +58.3318 +23.0913 ~25.3770 +1.1274 +3.6330 ~18.8620 +30.2066 +10.5801 +22.2500 +27.7517 ~5.8390 141 Table 23 ~~ continued Compounded Return (as a %) +34.6604 +17.5170 +8.3375 ~33.4320 ~11.5340 +9.4339 +3.9544 +2.4663 ~14.9970 +12.6491 ~12.l400 ~10.3700 ~5.5950 ~1.6370 -16.6650 ~l4.2140 +27.2510 ~2.8520 ~12.2150 +13.0816 ~12.8080 +0.1587 ~l6.l320 ~39.2650 ~9.9420 +36.9040 ~5.9650 ~7.3670 +0.3837 ~7.5270 +3.8593 +1.3625 +24.4186 +2.9005 ~2.5250 +16.3347 +1.2218 +3.1405 ~8.5840 +5.3411 +21.4258 ~10.9080 ~31.0360 ~5.3000 +7.3561 ~1.8600 142 Table 23 ~~ continued Compounded Return Bank (as a %) 91 +4.1715 92 +12.0987 93 ~4.3550 94 ~3.9l40 95 ~8.0570 96 ~8.7500 97 +4.7940 98 +2.4910 99 +0.3377 100 +1.0164 101 ~6.4970 102 ~l6.2640 103 ~4.8920 104 +15.9485 105 ~8.7370 106 +10.7781 107 +39.1319 108 ~9.2240 109 ~24.8270 110 +10.9867 111 +26.3926 112 +8.5407 143 T312321 5111222111351 mmmmnm Standard Average Deviation 95 Abnormal of Abnormal t~Test Time Return Return Statistic ~7 +0.006355 +0.061747 +0.102933 ~6 +0.001758 +0.059996 +0.029307 ~5 +0.002592 +0.058201 +0.044551 ~4 ~0.000110 +0.072967 ~0.001530 ~3 ~0.000400 +0.068474 ~0.005870 ~2 ~0.000750 +0.065747 ~0.011400 ~1 +0.005299 +0.082507 +0.064236 0 +0.001482 +0.056507 +0.026229 95 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 144 ¥zm zmamm ._< ooEmEmam 11 3 was: e E h ._. 41 n- m1 +1 m1 41 A- _ t r _ t . v 0 O . o I 411.... .... 1111401111.... 1...... 1 o ,. 1 v 0 0 .0 w... . .m. ..9 .- 1 .... o 0.0 m .... 3.. .... 1.1.1 .11 . O . I -_-.— .311-.. ml .. 1 4.00.0 P .... ... _ ....fi— .... .... . M... .... 3..... .... 11 .Wq O O 1 O M .. ..—.. ..... .1 m. 0 0 . O 1 m. 0 0 .0 S m. o o . o OEC. >2 . .002 Gan—3.”... “a m...— 1H 4.5.... .4qu .....Esemm 04._>_mo_._m4. mm... 146 data are imbedded in Table 10 and Figure 6. At no time period is the result, positive or negative, statistically significant. The range of the average abnormal return is positive 0.006355 (at time t = -7) to negative 0.000750 (at time t = -2). The average residuals are positive for the first three time periods, change to a negative average residual for the next three time periods and end as a positive average residual for the last time period. The hypothesis that merger has no impact on stockholder wealth (per Subperiod Average Abnormal Return by Time Test) cannot be rejected. E. W Iimflest The results for the subperiod standardized average abnormal return by time test are stated in Table 25 and Figure 15. The same data are imbedded in Table 11 and Figure 7. The standardized average abnormal return begins positive at t = -7 and remains positive for the entire subperiod except at time t = -3 where it is a negative 0.035150. This provides a strong indication that the merger provides positive benefits to acquirer stockholder returns during this subperiod. But at no time period are these returns statistically significant. Therefore, the hypothesis that merger has no impact on stockholder wealth (per Subperiod Standardized Average Abnormal Return by Time Test) cannot be rejected. 147 Ignaz: .Subaeuod WWW Beturnbxnme Standard Standardized Deviation Average of Standardized 96 Abnormal Average Abnormal Time Return Return -7 +0.052599 +0.996282 -6 +0.010196 +0.908539 -5 +0.034230 +0.977928 -4 +0.046219 +1.047750 -3 -0.035150 +0.952866 -2 +0.036144 +0.8814ll -1 +0.051923 +1.056464 0 +0.012007 +0.784222 96 t-Test Statistic +0.052795 +0.011222 +0.035002 +0.044027 -0.036880 +0.041007 +0.049148 +0.015311 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 148 m2: >m mzmzpma 4< omNEmngb oogmamzm .. a maze: 2:; I— L m a. It. 1' .‘lllu-‘O- L‘D I no.0! -uod- .. v0.03 "'1 r-” [3" [3 ”PP—”F \mHm ajomL’nmflzm .95-...l- .. rod .. «0.0 I no.0 .. 2 L 3 -r m L .L 4 .2 L o z m .... .. L #06! UJ n49 a [DLUJOU (413' “MS 149 KW A number of statistics were calculated on the portfolio of 112 acquirer bank stocks for the subperiod. These are for descriptive purposes only, no statistical tests were undertaken. This will help in the comparison of these results to other studies where other statistical measures were used. i. E l . 1 g 1 l' E E .1 1 Figure 16 and Table 26 show the subperiod CARs by time. The CAR starts positive at 0.006355 and stays positive for the entire subperiod until t = 0 where it ends at a positive 0.016226. The time periods t = -7 through t = -5 and the ending time periods t = -l and t = 0 provide the large increases in the CAR statistic. ii. ,99- Tee ..., .' ‘2 u. - ' - - - 3.- :-:'- Figure 17 and Table 26 show the subperiod standardized CARs by time. The standardized CAR begins at positive 0.052599 and increases every time period, except at time t = -3, until the end at t = 0 where it is positive 0.208168. iii. Sub2ariQd_Q9mnsnnded_Abnormal_Return The subperiod compounded portfolio abnormal return at each time period is shown in Figure 18 and Table 27. This is the total compounded excess return of the portfolio calculated at each time period during the subperiod. The compounded return starts positive at 0.6355% and never turns 150 m2: >m zmama ._< m> H 2.52:0 oommmmmzm -- 3 mass H n. 0 E _ ... v I H ... m. I .v. ... m .. m... -.. .m. ... _ _ _ F _ _ ....s 2.31-..- I! .. .....-erllllll .. ......mllllllllm JflDO_mmm .OL23L. GEE. L3 ...uotfimfiflm .. _._....._ 3 G J if} 1?" 151 HE: E 555m .3252? ww§m>< m>:<._:z=u 35935235 ooEmamnm -- Z $5.3”. D E Z. all I... _. .... m. .... .v. I. m... ... m. .... h. I. _ L F . _ . hi ......3 aw- .. no r ..E. .../r r! E... ...E.. [I b... .. III llmlllu ... 0E; in. .flDLLsQDSM .443D_mm_w_ -O>...Lu .230 0:2 .4. ..IJ mod mood no.0 90.0 mod (on m m .— dddddd cl ff'ldr '0“. O 152 mzH» >m zmzhmm 4< uEEzomw oomamamzm -- a maze: ... E .L ... o L. a. ml 3- m- m- L: L _ r P _ _ llllvmlfllr. Hum-Illlllllmqlllll Iml . i an Ila... --...m._1nxll 10E. II .3 DEE. >3 .muomtamflfim 2m DPME OEPMEOMQ V} ‘9 If} c? PM .0 c} m 157 11:21:28 Subperiod Wmmfimt 99 Geometric Time Average Return -7 +0.6355000% -6 +0.4053869% —5 +0.3566343% -4 +0.2645992% -3 +0.2036052% -2 +0.157117l% -l +0.2102870% 0 +0.2025241% 99 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. 158 m2: Summing WWQfAthmlBatumsbxlm Percent Positive of 100 Abnormal Time Returns -7 50.89% -5 50.00% -4 40.18%* -3 47.32% -2 52.68% -1 48.21% 0 52.68% 100 Where t = 0 is the month the merger is approved by the Federal Reserve Board of Governors. *Significant at a = .05. 159 1:121ng W mmmummim mmmmum Percent Positive of Average Abnormal Returns for the Complete Sample by Bank 56.25% Standard Deviation 4.6875% t-Test Statistic +1.33333333 160 positive average abnormal returns was 56.25%. This is significant at an alpha level of 20% (two-sided test) as the t-test statistic is positive 1.33333333. The hypothesis that merger has no impact on stockholder wealth (per Subperiod Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank) cannot be rejected. 1. S l . i E l 5' 'E' I I I The subperiod percent significant test results are given in Table 31. The percentage of banks with significant positive average abnormal returns was zero. This produced a t-test statistic of negative 0.5291526. Bank #94 providing a negative significant return is ignored in this test. The hypothesis, that merger has no impact on stockholder wealth (per Subperiod Percent Significant Test) cannot be rejected. J. thpgzigd Buns Igs; The results of the non-parametric subperiod runs test on the average abnormal returns by time (given in Table 24), and the standardized average abnormal returns by time (given in Table 25) are presented in Table 32. The number of runs in the average abnormal returns for the subperiod is three producing a z-test statistic of 1.86. This result is significant at the five percent level (one-sided test). The 161 23121351 Submerged WWMQfiWW mmmmmmum Percentage of Banks with Significant Positive Average Abnormal Returns 0% Standard Deviation 9.44907% t-Test Statistic -0.5291526 162 mien Magi Nflnfifllflmfitili Runs.Test Standardized Average Abnormal Average Abnormal Returns by Time Returns by Time u 3 3 “p 4.75 2.75 Cu 1.21 0.433 z-Test Statistic 1.86* 1.73* Percentile Rank 97th 96th Significant (*) at a = .05 level (one-sided test) 163 results of this runs test of the average abnormal returns by time show a definite pattern of signed average abnormal returns. The number of runs in the standardized average abnormal returns by time is three producing a z-test statistic of 1.73. This result is significant at the five percent level. The results of this runs test of the standardized average abnormal returns by time indicate a definite pattern of signed standardized average abnormal returns. Therefore, the hypothesis that merger has no impact on stockholder wealth (per Subperiod Runs Test on the average abnormal returns by time and the standardized average abnormal returns by time) cannot be accepted. XII. new The results of Table 33 are presented as descriptive data only. This table shows the number of mergers in the sample by year (the "year'' is the merger approval date) from 1968-83 and the number of mergers per year which resulted in a positive average abnormal return. Due to the small number of mergers in each year, a non-parametric signs test of significant results would only be able to be calculated on a partial number of years. Therefore, no statistical tests were conducted. When observing the number of mergers (in the sample) column, the evidence suggests that the number of mergers was approximately constant during the 1968-79 Year 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 164 16:21:33 8219;131:1131 Number of Mergers in Sample (Approval Date Year) H wwqmawwmwwazoohm pus on» Number with Positive Average Abnormal Return (Majority Positive (*)) 10* Year 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 164 1:121:33 Wham; Number of Number with Mergers in Positive Average Sample Abnormal Return (Approval (Majority Date Year) Positive (*)) 6 2 4 l 8 2 4 2 3 2* 3 0 5 1 3 2* 3 3* 6 4* 9 4 7 2 13 9* 9 4 13 7* 16 10* 165 period. Then in 1980, the number of mergers per year increased. This increase coincides with the deregulation of the banking industry. The times when the number of mergers with positive abnormal returns becomes the majority of mergers in that particular year appears to be more frequent in the recent time periods versus the earlier years in this study. A possible reason may be that antitrust objectives to mergers, once very strong, have diminished tremendously over time. x111. MW]; The results of the comparison of the volatility of abnormal returns by bank between the estimation period (time t = -72 to t = -l3), and the test period (time t = ~12 to t = +12) are presented in Table 34 and Figures 20 and 21. An F-test statistic was calculated to check for significant differences between the variance of abnormal returns for the estimation period and the variance of abnormal returns for the test period. There were twenty-five acquirer banks that experienced a significant increase (at the a = .05 level) in the vari- ance of abnormal returns in the test period compared to the estimation period. These banks were Bank Numbers 3, 8, 11, 21, 23, 41, 42, 45, 48, 49, 50, 51, 53, 56, 67, 73, 77, 85. 92, 95, 96, 97, 98, 102, and 111. There were seventeen acquirer banks that experienced a significant decrease (at the 0.: .05 level) in the variance 166 T361334 Weffietumabxfiank Variance of Variance of Abnormal Abnormal Returns, Returns, Estimation F-Test Test Period Period Statistic 0.003540 0.003969 0.891978 0.005289 0.004624 1.143816 0.003507 0.001600 2.101898 0.003456 0.004121 0.838683 0.001318 0.002652 0.497036 0.002903 0.003516 0.825796 0.001609 0.002171 0.741389 0.002868 0.001176 2.438089 0.002068 0.016027 0.129067 0.002015 0.005256 0.383429 0.003778 0.002007 1.882695 0.003226 0.004316 0.747591 0.004943 0.008118 0.608993 0.001572 0.002361 0.665975 0.002907 0.014161 0.205339 0.002096 0.001980 1.058594 0.001533 0.002693 0.569184 0.020382 1.685582 0.012092 0.002581 0.003660 0.705375 0.006175 0.005329 1.158879 0.003038 0.001482 2.049911 0.003367 0.002190 1.537440 0.005711 0.002714 2.104140 0.005211 0.009840 0.529593 0.004394 0.003588 1.224692 0.003327 0.002450 1.357895 0.004001 0.006512 0.614399 0.001856 0.001528 1.214335 0.003714 0.003113 1.192835 0.005336 0.003306 1.614196 0.015150 0.013806 1.097338 0.002213 0.005867 0.377226 0.006079 0.007140 0.851498 0.004584 0.004610 0.994359 0.003567 0.003528 1.011232 0.004165 0.003660 1.138095 0.006724 0.003624 1.855467 0.002684 0.003540 0.758229 0.004426 0.003956 1.118820 0.002257 0.001482 1.523179 0.003890 0.001624 2.395366 167 Table 34 -- continued Variance of Variance of Abnormal Abnormal Returns, Returns, Estimation F-Test Test Period Period Statistic 0.008403 0.003014 2.788278 0.003382 0.003856 0.877127 0.005163 0.006480 0.796868 0.034887 0.001980 17.61797 0.006335 0.005461 1.163694 0.003193 0.001705 1.872330 0.019979 0.010404 1.920398 0.009417 0.004395 2.142484 0.008234 0.003113 2.644656 0.008823 0.001398 6.308682 0.009090 0.009389 0.968152 0.004170 0.001840 2.265865 0.016984 0.012365 1.373568 0.004574 0.002756 1.659666 0.003494 0.001406 2.485347 0.003035 0.005929 0.512031 0.000900 0.002992 0.300829 0.002387 0.011299 0.211327 0.006583 0.005715 1.151925 0.003355 0.013133 0.255481 0.003779 0.002352 1.606732 0.005240 0.003552 1.475351 0.001482 0.001169 1.267709 0.001190 0.003576 0.332980 0.001505 0.001156 1.302687 0.003499 0.001624 2.154577 0.005286 0.004238 1.247288 0.003096 0.001772 1.747182 0.005661 0.003794 1.492052 0.001426 0.002894 0.492792 0.003149 0.003306 0.952614 0.001598 0.000552 2.894615 0.006177 0.003340 1.849202 0.000681 0.000829 0.821697 0.001129 0.002724 0.414532 0.007988 0.003433 2.326500 0.003044 0.002520 1.208163 0.007009 0.004395 1.594666 0.004856 0.003422 1.419014 0.001108 0.001528 0.725158 0.007043 0.008100 0.860579 0.002085 0.001681 1.240587 168 Table 34 -- continued variance of Variance of Abnormal Abnormal Returns, Returns, Estimation F—Test Test Period Period Statistic 0.004085 0.003317 1.231289 0.005391 0.001918 2.810360 0.001381 0.004044 0.341565 0.002777 0.004678 0.593731 0.000724 0.001303 0.556320 0.001674 0.004610 0.363140 0.001983 0.003588 0.552793 0.002108 0.002052 1.027365 0.009463 0.002256 4.194338 0.001970 0.001361 1.447462 0.000158 0.000484 0.326827 0.005026 0.001862 2.699222 0.008855 0.002199 4.026059 0.003046 0.001095 2.780394 0.006264 0.001156 5.419471 0.000342 0.000973 0.351387 0.002361 0.001892 1.248144 0.001669 0.003721 0.448700 0.003354 0.001354 2.477231 0.002149 0.001324 1.622196 0.001741 0.007779 0.223850 0.011232 0.013479 0.833340 0.004120 0.004830 0.852996 0.006215 0.016078 0.386557 0.004124 0.003113 1.324676 0.001894 0.001428 1.326178 0.003119 0.003192 0.977147 0.003014 0.001466 2.055042 0.002001 0.003445 0.580986 169 ' aonmm onH 7an3me 4.1 ..M ...... _2. m 0 Z m «fl. {1 (I ‘0 ‘1' (I O O O 0 r5 0‘ (“I 170 Qonm—m Emma. .xz II HN 5507“ :2:::::JF.:::: b 2.. ..:2:_Eb::_:E:::.::::F::_C.E..PEZ:E:::_:h:::::: =8 1‘ f L. L. Lu G L? _L: = :B=‘:=B ML; (l (I 1 ‘O ‘4' 0 O 0 O O O mmOZflzfifix ZEDHME JCBm Lam .....LDTFm +0.5. J<2m02mq (I 171 of abnormal returns in the test period compared to the estimation period. These banks were Bank Numbers 9, 10, 15, 18, 32, 58, 59, 61, 65, 76, 86, 89, 94, 99, 101, 104, and 107. Figure 20 shows one outlier (Bank #18), compared to the other banks in the sample, with a high variance of abnormal returns in the estimation period. No statistical test of the riskiness of the residuals on the complete sample of acquirer banks in this merger study can be conducted, only on the individual acquirer banks. In view of the results of the individual F—tests stated above, the effect of merger on the variance of abnormal returns appears to be inconclusive. XIV. WW Information on the regression equation statistics is presented in Table 35. The median, mean and standard of the regression coefficients (a1, Bi m' and Bi B) are given in 9 addition to the same descriptive statistics for the adjusted R2. The mean adjusted R2 for the 112 acquirer bank stocks of 0.216784 compares favorably to other stock return studies. Median Mean Standard Deviation 172 1:161:35. WW 5 EE' . ! 31' Bi ,m 31,3 0.004360 0.027670 0.511150 0.006485 -0.006661 0.507665 0.017783 0.503226 0.537309 Adju ted R? 0.161915 0.216784 0.213016 CHAPTER SEVEN SUMMARY AND CONCLUSIONS The purpose of this dissertation was to examine the effect of commercial bank acquisitions on BBC stockholder wealth. Bank mergers were identified from the £gfig;a1_3ggi§;gLL W11 and the WWW Journal. Monthly stock return data were gathered from several sources including the Bank_ang_gn9;atign_ngggrd; HQQQXLE_Dilid§nd_B§£Q£d3 SLBnQQLQ_BDQ_RQQLLE_Dilid£nd Record: We; and We. The Period of study was all bank mergers occurring during 1968-83. The sample size was 112 after passing all the mergers through two screening criteria (isolated mergers and stock return data available for a 7 year period surrounding the merger approval date). A three-factor market model, adjusting for general stock market risk and industry risk, was employed. The three-factor market model parameters were estimated for acquirer banks during a pre-merger period. Then the estimated pre-merger parameters were extrapolated to a post- merger period. Deviations of the actual post-merger returns 173 from the expected returns were abnormal returns attributed to 174 the merger. LlesLBerigLBetums A summary of the statistical tests for the test period twelve months before to twelve months after the merger, conducted to assess the hypothesis that merger has no impact on stockholder wealth, follows: 1. Average Abnormal Return Test by Bank. None of the acquirer banks had statistically significant positive or negative abnormal returns. Positive Abnormal Returns Test by Bank. Five acquirer banks had significantly positive abnormal returns whereas nine acquirer banks had signifi- cantly negative abnormal returns. Average Abnormal Return by Time Test. None of the monthly time periods in the test period (one year before and after the merger approval date) pro- vided significant positive or negative abnormal returns. Standardized Average Abnormal Return by Time Test. None of the monthly standardized abnormal returns in the test period were significantly positive or negative. Percent Positive of Abnormal Returns by Time Test. None of the time periods were significantly posi- tive or negative except at time t = -4 which is significantly negative. 175 6. Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank. The results of this test were not significant, positive or negative. 7. Percent Significant Test. No significantly positive or negative results. 8. Runs Test, on the average abnormal returns by time. This test showed no statistically significant results. 9. Runs Test, on the standardized average abnormal returns by time. At a significance level of a = .05, this test was not significant but the runs test mean was placed at the 93rd percentile rank. Observing the standardized residuals by time one sees that they were positive from t = -7 to t = 0 (except for time t = -3). This result suggests that acquirer banks may enjoy positive standardized abnormal returns from (approximately) the merger announcement date through to the merger approval date. This result is discussed further in the conclusions. A summary of results for the test period (t = -12 to t = +12) is also shown in Table 36. 11. W There is an opportunity for bank acquirer stockholders to gain from merger in the subperiod from t = -7 to t = 0. 7. 8. 9. 101 Test Average Abnormal Return by Bank Positive Abnormal Returns by Bank Average Abnormal Return by Time Standardized Average Abnormal Return by Time”1 Percent Positive by Time Percent Positive by Bank for Complete Sample Percent Significant Runs by Time Runs (Standardized) by Time 176 Table 36 9f Results Test Period (t = -12 to t = +12) Statistical Result Significance -0.01899% None 5 positive None 9 negative 98 insignificant -0.08509% None 13 positive None 12 negative 49.107148 None 0 None 14 None 16 a = .07 (one-sided test) Percentage reported, where one standard deviation is one—hundred percent. 177 The nine tests of the impact of mergers on stockholder wealth in the subperiod before the approved merger date shows the following: 1. Subperiod Average Abnormal Return Test by Bank. Only one bank had a statistically significant (negative) abnormal return. Subperiod Positive Abnormal Returns Test by Bank. Six acquirer banks had significantly ((18 .10) positive abnormal returns whereas seven acquirer banks had significantly negative abnormal returns (four acquirers significant at a a .05). Subperiod Average Abnormal Return by Time Test. None of the monthly time periods in the subperiod provided significant positive or negative abnormal returns. Subperiod Standardized Average Abnormal Return by Time Test. None of the monthly standardized abnormal returns in the subperiod were significantly positive or negative. Subperiod Percent Positive of Abnormal Returns by Time Test. None of the time periods were significantly positive or negative except at time t = -4 which is significantly negative. Subperiod Percent Positive Test of Average Abnormal Returns for the Complete Sample by Bank. The results of this test were positive at an alpha level of ten 178 percent. That is, the hypothesis that merger has no impact on stockholder wealth cannot be accepted. 7. Subperiod Percent Significant Test. No significantly positive or negative results. 8. Subperiod Runs Test, on the average abnormal returns by time. The results of this test were statistically significant ((1: .05). That is, the sequence of signed abnormal returns provides a time period where merger does have an impact on stockholder wealth. 9. Subperiod Runs Test, on the standardized average abnormal returns by time. This test provided similar results as the previous test. At a significance level of a = .05, the results of this test were positive. That is, the hypothesis that merger has no impact on stockholder wealth cannot be accepted. A summary of results for the subperiod (t = -7 to t = 0) is also shown in Table 37. 111. Minn In the investigation of the change in volatility of abnormal returns, between the estimation period (t = -72 to t = -13) and the test period (t = -12 to t = +12), the evidence was mixed. The variance of sixty-five banks in- creased during the test period, when compared to the estimation period, as opposed to the variance of forty-seven banks decreasing. At a significance level of alpha equal to five percent the variance of twenty-five banks increased in the test I/ 102 SQEEELX Subperiod (t = Test Average Abnormal Return by Bank Positive Abnormal Returns by Bank Average Abnormal Return by Time Standardized Average Abnorm§%2 Return by Time Percent Positive by Time Percent Positve by Bank for Complete Sample Percent Significant Runs by Time Runs (Standardized) by Time 179 11121331 $2me -7 to t = 0) Result 0.01448% 1 negative 6 positive 3 negative 4 negative 99 insignificant +2.0282% +2.6021% 5 positive 3 negative 56.25% Statistical Significance None .10 .10 .05 (x: (1: (1: None None None Ga .10 (one-sided) None as .05 (one-sided) a= .05 (one-sided) Percentage reported, where one standard deviation is one- hundred percent. 180 period, when compared to the estimation period, versus the variance of seventeen banks decreasing. IV. WW Answering the question, 'Do mergers increase stockholder wealth?', the pattern of merger abnormal returns (for the time period [subperiod] seven months prior to and through to the merger approval date) was found to be significant. This result provides support for the maximization of stockholder wealth motive to merge, and is consistent with Langetieg (1978) who found merger study results dependent on the time period chosen. The common stock of the acquirer BBC portfolio increased by a standardized cumulative average abnormal return of 2.08168% during the subperiod. This gain indicates that the merger increases stockholder wealth. However, the magnitude of the gain is not significant. This conclusion suggests that the merger market to acquire banks is highly competitive and that potential significant stockholder wealth gains vanish when competing acquirer banks bid for a target bank. Therefore, the hypothesis that merger has no impact on stockholder wealth cannot be accepted. V- WWW Suggestions for further research include: (1) An examination of bank holding company acquisitions solely after the bank industry deregulation date, (2) The effects 181 of state reciprocity laws creating inter-state banking and inter-regional banking, (3) the analysis of returns to the acquirer could be based on a public announcement date rather than regulatory approval date, and (4) The examination of merger motives for specific bank holding companies, analyzed by techniques such as cluster analysis and logit, other than stockholder wealth maximization, for example, matching of financial characteristics. APPENDIX APPENDIX A Table A-1 A I T A I A E 1. 10. 11. 12. Northwest Bancorporation/ First National Bank of Ely Wells Fargo Bank/ Bank of Pasadena, California Merrill Trust Company/ Hammond State Trust Company Bangor Bankers Trust Company/ Northern Westchester National Bank Chemical Bank/ Chemical Bank of New York Trust Company First Pennsylvania Bank and Trust Company/ Chestnut State Trust Company Marine Midland Bank/ Tinker National Bank of East Setauket, New York Trust Company of Georgia/ Atlanta Bank and Trust Walker Bank and Trust Company/ First National Bank of Coalville Connecticut Bank and Trust Company/ Tradesmen National Bank of New Haven Peoples-Liberty Bank and Trust Company/ Bank of Independence Seattle Trust and Savings Bank/ Cle Elum State Bank ’ 182 DATE January 1968 March 1968 June 1968 October 1968 November 1968 December 1968 April 1969 September 1969 October 1969 November 1969 January 1970 January 1970 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 183 Grace State Bank/ Southern Bank and Trust Bank of New Orleans and Trust Company/ Bank and Trust Company of Greater New Orleans Union Trust Company of Maryland/ Metro National Bank of Maryland Houston Bank and Trust Company/ Citizens Bank Bank of Delaware/ Millsboro Trust Company Long Island Trust Company/ Seaside Bank Marine Corporation/ Farmers State Bank Commercial Trust Company of New Jersey/ Bergen County National Bank of Hackensack United Virginia Bankshares/ Security National Bank of Roanoke First and Merchants Corporation/ First National Bank of Danville Commerce Union Bank/ Broadway State Bank Union City Trust Company/ Keanesburg-Middleton National Bank Savannah Bank and Trust Company of Savannah/ Chatham Savings Bank New England Merchants Company/ Barnstable County National Bank of Hyannis Union Planters Corporation/ Tennessee National Bancshares March 1970 April 1970 September 1970 September 1970 September 1970 November 1970 March 1971 May 1971 July 1971 August 1971 February 1972 March 1972 April 1972 May 1973 October 1973 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 184 Commonwealth National Corporation/ Town Bank and Trust Company Baystate Corporation/ First National Bank of East Hampton Manchester Financial Corporation/ National Bank of Affton, Missouri Fidelity Union Bancorp/ Colonial First National Bank Pittsburgh National Corporation/ Central Mortgage and Investment Company Trust Company of Georgia/ First State Bank of Fitzgerald Detroit Bank Corporation/ First National Bank of Warren First National Cincinnati Corporation/ Miami Deposit Bank Suburban Bancorp/ Thurmont Bank United Counties Trust Company/ Springfield State Bank Charter New York Corporation/ Peter DePuy State Bank First National Bancorp Denver, Colorado/ First National Bank of Montrose Marshall and Ilsley Corporation/ Fox Heights State Bank Old Kent Financial Corporation/ People Bank and Trust First National Cincinnati Corporation/ Third National Bank of Circleville Bancorp of Montana/ Bank of Montana November 1973 March 1974 April 1974 May 1974 August 1974 October 1974 April 1975 August 1975 December 1975 February 1976 April 1976 September 1976 March 1977 October 1977 October 1977 November 1977 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 185 Marine Corporation/ American Kettle Moraine Bank First Bank System/ Granite City National Bank of St. Cloud Suburban Bancorp/ PeOples National Bank Central National Corporation/ Citizens National Bank of Emporia Fidelity Union Bancorp/ Burlington County Trust Company Citizen and Southern Corporation/ Carolina Credit Life Insurance Company First Bank Group Ohio/ Sterling State Bank Exchange Bancorp/ Vanderbilt Bank Detroit Bank Corporation/ Detroit Bank of Novi Florida National Bank Florida/ National Bank of Cape Coral Connecticut Bank and Trust Company/ Liberty National Bank Manufacturers National Corporation/ American Heritage Bancshares Commercial Trust Company New Jersey/ Community State Bank and Trust Company Trust National Bank Financial Corporation/ Pioneer Bancorp Valley Bancorp/ Wisconsin National Bank in Watertown United Virginia Bank Commonwealth/ United Virginia Bank November 1977 December 1977 January 1978 April 1978 May 1978 August 1978 September 1978 September 1978 September 1978 October 1978 November 1978 March 1979 April 1979 June 1979 August 1979 September 1979 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 186 Southeast Banking Corporation/ First Bancshares of Florida First Charter Financial Corporation/ Syracuse Bancorp First National Charter/ Farmers Savings Bank Bank Iowa/ Cedar Falls Trust and Savings Bank Southeast Banking Corporation/ Community Bank of Pasco Heritage Bancorp/ City National Bank and Trust of Salem Fidelity Union Bancorp/ Garden State National Bank Virginia National Bankshares/ First National Bank of Troutville Great Lakes Financial Corporation/ Montcalm Central Bank Central National Bankshares/ Spencer National Bank Centran Corporation/ Franklin Bank Bank New York/ Empire National Bank Manufacturers Hanover Corporation/ Bankers Trust Company (8 branches) Flagship Bank/ Florida Bankshares Colorado National Bankshares/ Arvada State Bank First Virginia Banks/ Peoples Bank of Hanover County NED Bancorp/ National Ann Arbor Corporation October 1979 December 1979 January 1980 February 1980 May 1980 June 1980 June 1980 July 1980 July 1980 July 1980 August 1980 August 1980 August 1980 August 1980 December 1980 April 1981 April 1981 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 187 Northwest Bancorp/ State Financial Services Independent Bankshares Corporation/ Vaca Valley Bank wyoming National Corporation/ First Bankshares of wyoming Charter New York Corporation/ Citizens Central Bank Jefferson Bancorp/ Republic Bank and Trust Company Mercantile Bankshares Corporation/ Peoples Bank of Maryland Florida National Banks of Florida/ Alliance Corporation Bank Iowa/ Avoca State Bank Old Stone Corporation/ Pacific-Southern Mortgage Trust Maryland National Corporation/ Central Atlantic Bank Greater Jersey Bancorp/ Anthony Wayne Bank of Wayne, New Jersey Philadelphia National Corporation/ Philadelphia Bank of Delaware First and Merchants Corporation/ Wise County National Bank First Maryland Bancorp/ First Omni Bank First Alabama Bankshares/ Anniston National Bank Sun Banks Florida/ Century Banks First Bank Group Alabama/ First National Bank of Russellville May 1981 July 1981 July 1981 July 1981 October 1981 F 1 . December 1981 up December 1981 January 1982 January 1982 February 1982 March 1982 March 1982 April 1982 April 1982 May 1982 May 1982 June 1982 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 188 Affiliated Bankshares Company/ Littleton National Bank Bank of Virginia Company/ Bank of Vienna Northeast Bancorp/ Security Bank and Trust Southeast Banking Corporation/ Florida National Bank of Florida United Counties Trust Company/ Kenilworth State Bank United Jersey Bank, Hackensack/ North United Jersey Bank, Montvale Key Bank/ Bankers Trust Company of Western New York Utah Bancorp/ Intermountain Thrift and Loan Rainier Bancorp/ Peoples Bank and Trust of Anchorage Texas Commerce Bankshares/ Bank of Pasadena Mercantile Bancorporation/ Interstate Bank of St. Peters State National Corporation/ Bank and Trust Company of Arlington Heights Fidelcor/ Southeast National Bancshares of Pennsylvania Barnett Banks of Florida/ Boulevard Bank Bank America Corporation/ Seafirst Corporation Dauphin Deposit Corporation/ Bancorp of Pennsylvania August 1982 November 1982 December 1982 January 1983 January 1983 January 1983 February 1983 February 1983 March 1983 March 1983 March 1983 April 1983 May 1983 June 1983 June 1983 July 1983 189 110. First Connecticut Bancorp/ September 1983 Independent Bank and Trust Company 111. American Fletcher Corporation/ September 1983 American Fletcher Mortgage Company 112. Banc Oklahoma Corporation/ November 1983 American Bancshares The preceeding bank numbers are not identical to those bank numbers referred to in Chapter 6. B IBL IOGRAPHY BIBLIOGRAPHY Aharony, J. and I. Swary, “Contagion Effects of Bank Failures: Evidence from Capital Markets,“ lgurnsl 9f Businsss, Vol. 56, July 1983: 305-22. Aharony, J. and I. Swary, “Effects of the 1970 Bank Holding Company Act; Evidence From Capital Markets,“ lgusnsl sf Einsnss, Vol. 36, September 1981: 841-53. Alberts, W. W. and J. M. McTaggart, “The Short-Term Earnings Per Share Standard for Evaluating Prospective Acquisitions,“ usggsgs sag Aggnifii: £1205. Vol. 12, Winter 1978: 4-18. Alhadeff, D. A. and C. P. Alhadeff, “Growth and Survival Patterns of New Banks, 1948-1970,“ Jeurna1.ef M9021; Credit and Banking. Vol. 8, May 1975: 199-208. Alhadeff. 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