If you're a shareholder or executive at a community bank patiently waiting to sell out to First Union Corp. or some other big fish, you might be out of luck.
Multibillion-dollar banking companies have almost completely ceased acquiring small banks. Dwindling interest is causing sales prices of banks with under $1 billion of assets to level off or slump.
Executives at the acquiring banks say that if a company can't add to its earnings immediately and materially, it isn't worth buying anymore. The days of taking over a community bank mainly to enter a new, attractive market are pretty much gone, they say.
While such companies as First Union or Banc One Corp. have avoided buying community banks for at least a year, smaller, more regional companies say they are increasingly out of the picture, too.
"There are several banks we bought two or three years ago that we wouldn't buy today because those companies would fall below our radar screen," said Michael F. Elliott, chairman and chief executive of National City Bancshares, a $1.9 billion-asset banking company based in Evansville, Ind., that has bought at least five banks in the past three years and has nine additional acquisitions pending.
This decline in interest means prices for banks with under $1 billion of assets have started to level off, after rising steadily since 1995. These banks sold for a mean of 3.08 times book value in the first quarter, but fell by 5.8% to a mean of 2.91 times book in the second, according to Sheshunoff Information Services.
Sale prices of banks with under $100 million of assets fell by 6.6% in the second quarter, to a mean of 2.29 times book from the first quarter's 2.44.
Some investment bankers dismiss the fall as a fluke. As the number of high-quality banks for sale continues to fall, the best will still fetch high prices, they say. They note that First Commonwealth Financial Corp. of Indiana, Pa., agreed Thursday to fork over a 61% premium over market price and 3.2 times book for Southwest National Corp., an $847 million-asset bank in Greensburg, Pa.
But most dealmakers think such deals will be the exception. As the number of attractive sellers decreases, so too does the number of willing buyers, they say.
The industry's biggest players, such as First Union or Banc One, are focusing mainly on the handful of possible acquisitions that could make them nationwide franchises, investment bankers say.
Big banks like these greatly slowed their acquisitions of banks with under $1 billion of assets two or three years ago, and now avoid such deals almost entirely.
"In a lot of ways, a small merger takes as much work as a big one," said Gerard L. Smith, managing director at Donaldson, Lufkin & Jenrette, because the regulatory, accounting, and technology conversion issues are similar. "I think the big banks see small deals as distractions they don't need."
Investment bankers and lawyers say prices for the small banks may fall even further later in the year.
They expect executives at numerous small banks will decide to sell as they determine that Year-2000 issues are too onerous. But dealmakers who advise the small banks warn that would-be sellers may not find too many willing buyers, because big banks will have Year-2000 issues of their own.
"Even $10 billion or $20 billion banks are getting inhibited by the Year-2000 issue," said Christopher Quackenbush, an investment banker at Sandler O'Neill & Partners, New York.
First Union's acquisition of Covenant Bancorp, a $418 million-asset bank in Haddonfield, N.J., for a whopping 42 times earnings may go down as the last of its kind. The deal closed Jan. 16 and David P. Lazar, managing director at Berwind Financial who advised Covenant, observed that the deal probably wouldn't be struck today now that First Union has bought Philadelphia's CoreStates Financial Corp.
In the meantime, not every big bank has sworn off smaller deals. Regions Financial Corp. and Union Planters Corp. remain active buyers, as is Mr. Elliott's National City Bancshares.
Mr. Elliott, for example, agreed Tuesday to acquire Progressive Bancshares, a $143 million-asset bank in Kentucky. In May the company agreed to buy 1st Bancorp Vienna Inc., a $39 million-asset bank in southern Illinois, and Princeton Federal Bank in Indiana, which has $32 million of assets.
Mr. Elliott said he agreed to the deals because he will be able to fold the banks into the existing companies that make up National City Bankshares. Otherwise, he said, he is out of the market for companies with under $300 million of assets.
"I think a lot of community bankers were waiting for Banc One to buy them for two and a half times book," he said. "They may have waited too long."