The stock market's recent swoon could spell the end of record acquisition premiums for community banks and slow the consolidation frenzy, analysts and bankers said this week.
With their stock prices off as much as 40% from 1998 peaks, holding companies with assets ranging from $3 billion to $20 billion-the ones offering high multiples for community banks in recent years-are expected to pay less and buy fewer.
"Few, if any, regional banks will step up prices when our currency is worth less," said Dale M. Gibbons, chief financial officer of Zions Bancorp., Salt Lake City. "It's a little bit more sober for all of us."
Bank stocks fell sharply Monday as the overall market plunged 512 points, or 6.4%. Many bank stocks bounced back Tuesday, but buyers, sellers, and analysts all agreed that the volatility of recent weeks is having a chilling effect on deals and prices.
Mr. Gibbons of Zions, which has announced deals to buy five western community banks so far this year, said the days of big spending could be over. The $10.6 billion-asset company's stock, which was trading at a 52- week high of $58.125 as recently as July, hit $38 Monday.
Stocks of other community bank buyers have slid as well. For example, Union Planters Corp., Memphis, which has purchased 50 institutions since 1992, was trading in the low $40s this week, off 33% since July. And Hubco Inc., the Mahwah, N.J.-based company that has purchased or agreed to buy 12 institutions in the last three years, is down 20% from its 1998 high of $32.
"The stocks of most active acquirers have just been hammered," said Chris Hargrove, president of Professional Bank Services Inc., Louisville, Ky.
As deals dry up or premiums plunge, the number of community banks interested in selling is likely to decline as well.
"We are going to see a hiatus from deals" if bank stocks do not recover quickly, said Ed Najarian, an analyst with Wheat First Union, Richmond, Va. "It is going to take a little time for the sellers to get comfortable with a lower pricing environment."
Richard M. Rieser Jr., chief operating officer of First Oak Brook (Ill.) Bancshares, agreed that his $1 billion-asset company would fetch a lower premium in a softer stock market.
Mr. Reiser, who owns about 6% of First Oak Brook's shares, said the market's gyrations would force him to take a hard look at any potential acquirer's stock valuation and exposure overseas.
To be sure, dealmaking continues, and high premiums are still out there. For example, $2 billion-asset MainStreet Financial Corp., Martinsville, Va., struck a deal Aug. 27 to sell to BB&T Corp. for 3.25 times its book value.
But such premiums will become rare, buyers insisted.
Mr. Gibbons of Zions said record-high premiums are "no longer available," which is causing some western community banks to take themselves off the market.
Some banks are turning to stock buybacks to boost their shares' value and cut excess capital. Analysts said they expect buyback activity to pick up over the next three months. "It's become an extremely opportune time at these prices," said Hans Schroeder of Hoefer & Arnett in San Francisco.
For example, Interwest Bancorp, Oak Harbor, Wash., announced Monday that it would buy back up to 230,000, or 1.5%, of its outstanding shares.
If community banks still want to sell, they should get comfortable with lower take-out prices. Michael F. Elliott, chief executive officer of National City Bancshares, Evansville, Ind., said sellers should concentrate on factors other than price. "You should focus on the (stock) exchange ratio and pickup in earnings per share and dividends," he said.
The $1.8 billion-asset bank, which has eight community bank deals pending, will probably pay less for acquisitions, Mr. Elliott said. Its stock price hit $34 Monday, from a June 18 peak of $42.25.
Other acquirers said they were afraid they would be punished by the market if they pay too much.
"The market has turned on deals," said Brian S. Arsenault, spokesman for Peoples Heritage Financial Group, Portland, Me., which has announced three community bank acquisitions in the past year. "Even if a bank had a good deal, they might be reluctant to do it, for fear that it would cause a hit on their stock price."
Mr. Arsenault said he expects Peoples to pull back from deals for a while, because the $10 billion-asset company's stock was trading at $15.6875 on Monday, down from $25 in July. (It popped back to $16.25 on Tuesday.)
Meanwhile, the recent market downturn has left some deals in jeopardy. Typically, sellers have the right to back out if a buyer's share price falls before the merger is completed.
For example, Home Bancorp of Elgin (Ill.) Inc., could walk away from its deal to sell to State Financial Services Corp., Hales Corners, Wis., if State Financial's stock price dips below $20 during the last few days of 1998. It closed at $20 Monday, but George L. Perucco, Home's president, said it is too soon to know whether the deal will go through.
Mr. Hargrove, the Louisville investment banker, said a lot of sellers are in the same position. "I am spending a lot of time holding my clients' hands right now," he said.
But there's not much reason for sellers to back out when the stock of most other potential buyers is hurt as well, observers said.
"Assuming the buyer just falls with the rest of the market, chances are their price is as good as anyone's," said Jon D. Holtaway, senior vice president of Danielson & Associates Inc., a Rockville, Md.-based investment banking firm.
Worried buyers might sweeten the pot to make sure their deals get done. For example, Triangle Bancorp, Raleigh, N.C., on Tuesday amended its agreement to buy United Federal Savings Bank "in response to the significant decline in the market price of most publicly traded securities, including Triangle stock."
Shareholders of Rocky Mount, N.C.-based United will now receive 1.098 shares of Triangle for each share they own, up from 0.945 shares when the deal was announced in March.
Down the line, even a sour stock market cannot stop consolidation, analysts said.
"Inevitably, there are still banks looking for exit strategies," said Hope Willard, analyst with J.C. Bradford, Nashville. "Consolidation is still the easiest way to accomplish that."
And Collyn Bement, analyst with Baltimore-based Ferris, Baker, Watts, said that the declining market could even push some community banks to find a deal. "For a small bank tossing around the idea of selling, the thought that we could be heading for a recession might be the motivation needed to make a deal," she said.