Small Banks Catch Merger-of-Equals Fever

West Jersey Bancshares sees the industry's big players getting into the merger game, and it doesn't want to be left on the sidelines.

Last Wednesday, the $98 million-asset, single-branch bank disclosed that it has been working with investment adviser Ryan Beck & Co. for the last year, actively seeking an in-state partner for a so-called merger of equals.

It's not alone. In the wake of the megamergers that have swept the banking industry since the beginning of the year, community bankers are renewing their interest in the long-spurned concept of a merger of equals, analysts say.

West Jersey's reasoning is typical: Bank officials have concluded that the institution is too small to compete alone. So they want to find a partner to help the bank grow and enhance shareholder value - all without losing the institution's identity.

"What we are seeing is a heightened awareness that size and consolidation have become critical factors in the future of the industry," said James T. Hill, senior vice president of Ryan Beck.

Such mergers are increasingly seen by bankers as an inexpensive way to grow quickly into a larger organization and be more competitive without surrendering culture or control. In such combinations, neither party pays a premium and management duties are typically split equally among the merger partners.

The combinations can also create larger entities that are more likely to catch the eye - and a fat premium - of a regional or superregional institution.

"You don't lose anything. It's just a step forward," said one community banker who didn't want to be identified because of a pending merger. "In terms of where you were the day before you did it and the day after you did it, the bank's the same, the board's the same, everything's the same. But you've got more buying power and the chance to get some economies of scale."

Of the 11 mergers of equals announced since January 1994, seven involve community banks. Four of them are still pending. And investment bankers say many more small institutions have been chatting about the possibilities during the past nine months.

"I think everybody is evaluating right now what they should be doing strategically," Mr. Hill said. "That's obviously a direct result of the major mergers that have been announced."

In the past, bankers and merger gurus were cool to marriages of equals, arguing that the lack of a clearly dominant party and takeover premium make them hard to consummate.

"The market is accepting mergers of equals much more. They're not rejecting them the way they were a year ago," said Emmanuel Friedman, principal of Friedman, Billings, Ramsey & Co. in Arlington, Va.

And this year's blockbuster mergers of superregionals are making community bankers think twice about going it alone, as they realize that even their much larger competitors are worried about survival.

"When you see companies like NBD and First Chicago undertaking a transaction of that nature, it can give additional impetus for the smaller people," said Steve Hovde, executive vice president of Hovde Financial Inc. in Chicago.

For example, officials of American River Bank in Sacramento, Calif., are looking for another small institution with a solid niche to consolidate as multiple institutions under one holding company.

"You're building a larger institution under one holding company, but you're allowing two banks to run and continue doing what they've been doing successfully," said chief financial officer Mitchell A. Derenzo.

Similar interest is spreading among smaller banks nationwide, particularly in areas with high concentrations of small community banks with few significant acquirers, such as the Northeast and Texas.

"We're seeing that a number of community banks are recognizing that a merger-of-equals structure is an option that is available to them that they might not have thought about before," said Don Kaplan, managing director of Kaplan Associates in Washington, D.C.

Conceptually, in a merger of equals, no premium would be paid by either of the parties. They would divide management proportionally, with special care to avoid giving one partner the upper hand.

The goal is to cut redundant costs and gain efficiencies of scale by consolidating operations. For the smallest institutions, the merger can also create a more liquid stock, giving the bank more market visibility and increased buying power for further growth, without compromising either institution's independence.

But the lack of a premium also poses the transactions' most troublesome hurdles. Without a clearly dominant buyer, the bank boards often descend into bickering over where the new entity will be based, whose culture will dominate, and who will fill the top slots.

"These are by far the toughest deals to get done," said Richard J. Kelly, director of investment banking for M.A. Schapiro in New York. "It's the only transaction where nonfinancial issues can dwarf financial issues."

And the deals often face opposition from shareholders, who are unhappy that they're not getting a premium for their investment and believe the bank can do better by remaining independent until a better deal comes along. That's the problem facing New England Community Bancorp and Equity Bank in Massachusetts, whose merger of equals has angered several Equity shareholders.

"It's a very interesting concept, particularly for some of these medium- sized bank," said Peter J. Ostrowski, managing director of investment banker Ostrowski & Co. "There are some compelling financial reasons, as compelling as merger-conversions. But there weren't an overwhelming number of conversions done because of the social considerations."

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