Mergers and acquisitions of community banks are expected to slow dramatically in the new year as small banks become more adept at staying independent and regional banks prowl around for bigger prey.

The number of community banks with assets of $100 million and under that were acquired or merged fell to 194 in 1997, from 337 in 1994, according to Sandler O'Neil.

The decline this year is expected to be greatest among deals where much bigger banks scoop up community banks to gain a small yet coveted market share.

"I would say the average bank of $10 billion of assets has an exceptionally low interest in any bank with $100 million of assets or less," said bank analyst Joseph A. Stieven of Stifel Nicolaus & Co. "In fact, make that no interest."

Smaller banks lack "critical mass," explained Mark T. Fitzgibbon, associate director and analyst at Sandler O'Neil. They require the same amount of time and paperwork that a big deal requires, added Mr. Fitzgibbon. "I've heard bigger banks tell some community banks to come see them after they partner up with some of their neighbors."

Then of course, there has been a decline in the number of potential acquirers.

A "classic example is Missouri, said Mr. Stieven. He pointed out that three years ago, Missouri had seven major buyers: Boatmens Bancshares, Mercantile Bancorp, Mark Twain, Commerce Bancshares, Roosevelt Financial Group Inc., Magna Bancshares, and UMB Financial Corp.

"Now three of the most aggressive acquirers are gone," said Mr. Stieven. "Nationsbank bought Boatmens and Mercantile acquired Mark Twain and Roosevelt. Because Mercantile has exceeded the state deposit gap, it can no longer make acquisitions. "The window is closed for these small community banks."

Some observers point out that bigger banks are still smarting from community bank acquisitions made in the past.

Last year, Banc One Corp. sold about 200 small-town and rural branches - some of which are believed to be the remnants of small acquisitions years ago. BankAmerica Corp. also divested branches in Texas also said to be part of community bank acquisition.

While the value of community banks appears to be shrinking - at least in the eyes of the superregionals - some market experts contend that some community banks are looking to be stay independent.

Community banks with assets lower than $100 million are likely to remain independent because they are becoming more adept at estate planning and succession issues, noted Lynn High, a bank consultant and chief executive officer of the National Institute of Community Banking, Dallas.

"Everyone has heard the story of the family who is stuck with land and bank stock, which are both illiquid, and must sell them off to pay off half of the estate taxes," said Mr. High.

Some bankers were selling off their companies just for the retirement income, he asserted.

Lack of a succession strategy also posed a problem as bankers' children opted to go into other industries and no other heir apparent was selected to take over the bank.

Nevertheless, a strong market remains for community banks in "small town America," asserts Mr. High.

"When a farmer comes into a community bank and asks for a loan, he is likely to know that day if he is going to get it or not," said Mr. High. "But big banks in small towns often can't make a loan decision that fast. People in small towns don't like that."

But Katrina Blecher, a bank analyst at Gruntal & Co., doubts that many community banks will remain independent in 1998. In fact, she believes that mergers and acquisitions among community banks will speed up this year.

"Because the Office of the Comptroller is saying that community banks must have a certain level of technology by 2000, many of them are going to sell because they cannot or will not pony up the money for the technology," she said. "It is good time in the market place to be selling."

Lynn Wright, the Chief Financial Officer of First Commerical Corp., in Little Rock, Ark. also believes that small bank acquisitions could increase in the coming year.

Wright ought to know. His $7 billion asset company has had spent the last three or four months "vacumning up" a number of small banks in the area.

Some of the most recent include: Citi National Bank, a $40 million asset bank in Whitehouse, Texas and First Charter Bankshares, a $73 million asset bank in Arkansas.

Acquiring companies that have assets under $100 million are awful tough to make work," said Mr. Wright. "However, for us small banks offer additional customer base and considerable cost savings."

He noted, however, that banks that have substantially increased their size because of small bank acquisitions are less likely to buy more.

Nevertheless, I think companies will continue to build themselves by buying smaller banks," he said. "We are always talking to people and looking for opportunities."

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