Are Small Business Administration-backed lenders worth more to would-be acquirers? The answer appears to be yes.
An American Banker analysis shows that 1994 acquisitions of banks with a heavy orientation toward SBA lending have fetched above-market premiums.
More recently, the strong demand for banks' 7(a) loan portfolios has raised a question of whether participation in the popular program enhances the value of a franchise.
"For somebody who knows how to deal in the long-term loan market, I'd say, yes, they have added value," said Tony Wilkinson, president of the National Association of Government Guaranteed Lenders.
Indeed, some of the biggest players in the business have been aggressive buyers recently. ITT Small Business Finance, the third largest SBA lender over the last two years, has reportedly gobbled up a number of portfolios and is said to be hunting for more.
Lew Stone, president of Goleta (Calif.) National Bank, said his institution last year acquired two SBA loan portfolios worth $66 million at a discount from the Federal Deposit Insurance Corp. He said the yields on these portfolios have drawn a number of potential buyers - including ITT.
While sales of SBA portfolios have become common in recent years, the prospect of a premium for an SBA franchise is a new phenomenon. Only in recent years has the SBA simplified its processes and procedures to a point that made the 7(a) program attractive and profitable to more lenders.
The phenomenon also comes at a time when regional banks are looking for new ways to make smaller acquisitions more profitable.
To be sure, some deals to buy community banks can take on the characteristics of a line of business acquisition if they have a strong orientation toward SBA-lending.
One of the largest such acquisition was First Interstate Bancorp's deal for North Texas Bancshares, the holding company for Bank of North Texas, a $385 million-asset bank in Euless.
Undeniably, for its $66 million purchase price First Interstate bought one of the most successful SBA-backed lending franchises in the country.
During the SBA's fiscal years of 1993 and 1994, the Bank of North Texas generated 408 loans under the 7(a) program, according to SBA data. Worth nearly $94.1 million, those loans placed the bank fifth nationally among SBA lenders.
But it is difficult to know how much of the premium paid by First Interstate was attributable to the target's SBA focus.
The premium of 222% of book value at the time the deal was announced - which has since fallen to 185% because North Texas' earnings bumped up its book value - was higher than the average price-to-book value premium of 169% paid for comparably sized Texas banks in 1994, according to SNL Securities.
Nonetheless, First Interstate officials say the SBA franchise was only one piece in the puzzle.
"We will clearly not buy a bank just because of its SBA business," said Robert Chereck, executive vice president with First Interstate Bank of Texas. "It's a factor, but it's not an exclusive factor."
More important were the strategic location of North Texas' lead bank in the Fort Worth suburb of Hurst and the perception small business customers have of it, said John Durie, a senior vice president with First Interstate Bank of Texas.
Nonetheless, the bank was anxious to get its hands on North Texas' SBA operations. Within weeks of the deal's completion, First Interstate was using North Texas' staff and systems to process SBA loans originated by its California bank.
Atlanta-based Bank South Corp.'s purchase of Citizens Express Co. of Gainesville, Ga., had similar characteristics. Citizens' banking subsidiary was one of the largest SBA lenders in the state, according to Bank South management.
And the price Bank South paid - just under 214% of book value at the time of offer compared with an average pricing multiple of 205% of book value paid for comparable Georgia banks in 1994 - suggests the deal carried an SBA premium.
Not so, says Mike Lewis, a spokesman for Bank South. More important was the bank's strategic positioning in Hall County, north of Atlanta. Bank South needed to acquire a bank in the county because Georgia's conservative banking laws prevent branching into neighboring counties.
But being heavily focused on SBA loans can be a negative. Just ask Don Wigly, the 68-year-old chairman of Houston-based Questar Bank.
During the SBA's 1993 and 1994 fiscal years, the bank originated 237 SBA 7(a) loans worth a total of $58.1 million, making it the 16th-largest lender during that period.
Unlike Bank of North Texas, however, Questar sells the majority of its SBA loans into the secondary market.
Mr. Wigly said the bank was in talks last fall with Comerica Bank Texas about a possible merger. The tone of those discussions changed after the Republican victory in the November elections.
"They were very interested in our program," Mr. Wigly said. "But they became concerned about the Republican Congress cutting back the SBA program or even eliminating the program."
The result was a buyout offer that Mr. Wigly found unacceptable.