Like many small banks, the $22 million-asset Johnsonville State Bank in South Carolina has found it increasingly difficult of late to compete for deposits while grappling with higher regulatory costs and trying to maintain credit quality.
So rather than continuing to slug it out in a county where it competes with the likes of Bank of America Corp., Wachovia Corp., and BB&T Corp., the struggling, one-branch bank threw in the towel and agreed in March to sell itself to the $256 million-asset Citizens Bancshares Corp. in Olanta, S.C.
"It's hard to run an independent bank anymore because it's just too costly," said Ivan E. Hanna, who recently retired as president of the 61-year-old bank. Moreover, "people are taking their deposits elsewhere - big banks are out to win, and they take no" prisoners.
Johnsonville is far from alone in its decision to sell. Bankers and industry observers had predicted that the pace of deals would accelerate this year, and so far it has. Through May 1, 101 whole-bank deals had been announced this year, compared to 88 in the same period of last year, according to SNL Financial LC. The deal total this year is widely expected to exceed the 290 announced in 2006 and the 267 in 2005.
Experts say that the pace is picking up because of the persistently difficult operating environment: narrowing margins due to the inverted yield curve, sluggish loan growth worsened by the slowdown in housing, increased competition for deposits, and now a deterioration in credit quality.
"Some companies are also being affected by credit issues on top of a very difficult operating environment, which makes them more eager to sell or find a partner because they don't believe they can do it alone," said Brian Sterling, the co-head of investment banking at Sandler O'Neill & Partners LP.
Take Johnsonville State Bank. Its 2006 earnings fell 71%, to $45,000, and its returns on assets and equity - at 0.21% and 1.43%, respectively, as of Dec. 31 - were far below the average ratios for banks with less than $100 million of assets, according to Federal Deposit Insurance Corp. data. Furthermore, credit quality had begun to deteriorate; net chargeoffs were $257,000 at Dec. 31, compared to $92,000 the year earlier.
Most of the selling banks had $300 million of assets or less, and this is no surprise. Smaller banks are typically more vulnerable than their larger counterparts because they lack varied or large enough revenue streams to absorb hits to the bottom line. Still, a fair number of larger banks with operating challenges are also selling themselves.
Buyers are more determined to get banks that can beef up their own earnings streams in the current environment, observers said. Though buyers are still paying higher prices in order to increase earning assets, sellers' asking prices should drop in future quarters as more of them show earnings weakness, analysts said.
Companies as small as Citizens Bancshares Corp. are trying to bulk up through bite-sized deals. On the same day it announced the Johnsonville State deal, Citizens said it planned to buy the $19 million-asset Pamplico Bank and Trust Co. in Pamplico, S.C., for $4.9 million. (It did not disclose the price in the Johnsonville deal.)
Among larger banking companies, the $28 billion-asset New York Community Bancorp in Westbury, N.Y., continues to be a buyer in pursuit of deposits, said Ben Plotkin, the chairman and chief executive of Stifel Financial Corp.'s Ryan Beck & Co. Inc.
"It's very difficult for them to organically grow deposits, and so they found out that they can grow them much more efficiently by buying companies," he said.
Last month New York Community closed its $260 million deal for the $2.3 billion-asset PennFed Financial Services in West Orange, N.J., which added $1.6 billion in deposits. In March, it said it would pay $72 million for 11 New York City branches of the Doral Bank unit of Doral Financial Corp. in San Juan, Puerto Rico. This deal is expected to add $370 million in deposits.
Ever more foreign banking companies are buying U.S. banks. Banco Sabadell SA of Barcelona, Spain, is buying TransAtlantic Holding Corp. in Miami for $175 million and Banco Bilbao Vizcaya Argentaria in Madrid has a deal to buy Compass Bancshares Inc. for $9.6 billion.
"We are seeing transaction announcements of all sizes by foreign banks who want to build in the U.S.," said Sandler's Mr. Sterling. "Foreign buyers look at our market as more fragmented relative to theirs, and their ability to acquire more market share and get more growth is better here" than in their home countries.
John Blaylock, the associate director of Sheshunoff & Co. Investment Banking in Austin, said that most of the deals in a given year typically are made by acquirers that want to get into a new market. However, so far this year, roughly half the deals have been made for banks in the buyer's existing markets, and Mr. Blaylock said that a new consolidation trend may be emerging in highly fragmented markets such as Chicago - where seven deals have been announced already this year - and Atlanta.
"It is a shift in strategy from principally focusing on market expansion to consolidating and achieving either economies of scale or critical mass in markets," he said.
Even in the current operating environment, sellers are getting fairly high prices: The average price-to-book ratio was 2.7 for the deals announced through April 27, Mr. Blaylock said. This could be due in part to that fact that half the buyers were getting banks in their existing markets and could anticipate mitigating the deal price by achieving cost savings from overlapping operations, he added.
The $4.3 billion-asset Sterling Bancshares Inc. in Houston paid 3.3 times book value in its $52 million deal for the $186 million-asset Partners Bank of Texas, also in Houston.
J. Downey Bridgwater, Sterling's chief executive officer, said the company was willing to pay that price because the addition of Partners is expected be accretive to earnings within 12 months of the April closing.
"These days, sellers are still asking quite a bit for their franchises, but for us to acquire a bank, it must be a growing franchise," and Partners filled the bill, Mr. Bridgwater said. "Partners Bank has some very good bankers … who are able to add new relationships and expand the customer relationships we already have."
Still, deal prices should drop as ever more would-be sellers post weaker earnings, said Ryan Beck's Mr. Plotkin. "I think as we get more clarity on whose growth rates and net interest margins are going to hold up … there will be more sellers and buyers who come to the table with a sense of realism."
