Community commercial banks and thrift institutions looking to sell out may be in for a long wait.
Yes, the nation's banking industry is relentlessly consolidating. But that perversely means the pool of potential buyers for many smaller institutions is steadily drying up.
Community bankers' fear of being targeted by some far-off superregional banking powerhouse is now being replaced by a sense of dread that nobody will buy their banks, according to analyst Joseph Stieven of Stifel Nicolaus & Co., St. Louis, who tracks many small midwestern banks.
The upshot, he said, is that the value of these institutions to prospective buyers is on the decline.
Other analysts and bank merger specialists have warned of such a scenario, but the surging profitability at many banks in recent years has apparently delayed its onset and impact.
"There are a number of smaller banks that have seen the light by deciding to sell quickly," said Mr. Stieven. "But for those mediocre banks that haven't, they better take that avenue because their franchise value will only diminish."
Arthur Loomis, president of Northeast Capital and Advisory Inc., Albany, N.Y., doesn't necessarily agree that values are falling, but he conceded that larger banks are no longer interested in acquiring banks with assets of $1 billion or less.
"The customer base of a community bank is not statistically significant for them," he said. "And so they take the view that it is not worth the cost" of an acquisition.
Instead of a superregional like Banc One Corp. or First Union Corp., the ideal acquirer of a community bank has now become the only slightly bigger banking company-with assets of $5 billion to $10 billion, added Mr. Loomis.
But the number of these banks is dwindling-particularly in heavily consolidated areas like New England, where superregionals have steadily gobbled up institutions at this level, he pointed out.
This poses a growing challenge for community banks that have decided the best route to enhanced shareholder value is to be acquired, market experts noted.
Although many community banks still espouse the virtues of staying independent, others are reconsidering their options as competition heats up, said John Carusone of the Bank Analysis Center, Hartford, Conn.
"Some community banks can't see themselves as long-term viable competitors," said Mr. Carusone. "There are management succession issues, low capital efficiency, poor asset quality, and declining market share. Eventually, they will have to face the music."
That has apparently led some community banks, with their shareholders in mind, to take advantage of recent strength in bank stocks to strike deals.
Already this year, 595 deals involving community banks with assets of $1 billion or less have been announced, compared with 1,315 deals in the four years from 1992 through 1995, noted Mr. Loomis.
The emergence of a new type of buyer was also noted by Christopher Quackenbush of Sandler O'Neill & Partners, New York. He said the average asset size of acquiring banks has declined this year, to $3 billion, compared with $7.8 billion in 1993.
"The buyer of community banks today is much more likely to be a $5 billion regional bank and not a $40 billion or $100 billion money-center," said Mr. Quackenbush. "We are seeing a lot more similar-sized companies."
Yet this does not mean that consolidation is on the wane, Mr. Quackenbush insisted.
"The driving forces behind consolidation are still there," he argued. "If anything, the pressure to generate returns for shareholders only heightens the need to merge."
