Small Fry Making Acquisitions to Lure Big Buyers

Some banks are acquirers and some are targets; Community First Bankshares Inc. wants to be both.

This $810 million-asset bank has found a way to put itself on the map as bigger banks plot merger strategies. Last week, it raised $20 million in a public stock offering. The proceeds are specifically earmarked for acquisitions.

Raising public funds to foster external growth puts Community First out in front of the consolidation in the banking industry's lower tier. Mergers among small banks are not as visible as megamergers, but they are as important to bankers and customers in thousands of communities like Fargo, N.D., where Community is based.

Though a pittance by money-center standards, $20 million in new equity is enough to make Community a scaled-down powerhouse in the Dakotas and Minnesota, where about 800 independent banks dot the prairie. Most have assets between $50 million and $100 million, comfortably within Community's target range.

"Our objective is to grow $200 [million] to $300 million on average per year over the next three years," said Mark Anderson, executive vice president. "We see a lot of opportunity out there."

At that pace, Community will break the $1 billion asset ceiling by the end of 1992, nearly doubling its size in five years. Passing the $1 billion mark would create a fair-sized blip on the radar screen of some of the nation's more aggressive buyers, including KeyCorp and regional rival Norwest Corp.

A Leveraging Act

By leveraging the new proceeds, Mr. Anderson figures that Community can acquire up to $430 million of assets. Retained earnings nudge that figure to $630 million. As the bank gets larger its expects to generate more funds internally and develop new opportunities to tap capital markets.

"Community First sees an opportunity to make acquisitions. They also seen an opportunity to be acquired," said Robert Rinek, an investment banker with Piper Jaffray & Hopwood in Minneapolis, which comanaged the recent equity offering. Last year was the first year Community First went shopping for acquisitions. It bought two thrifts from the Resolution Trust Corp., a thrift in Minnesota and another in North Dakota, with a combined $80 billion in assets. This year, it has signed a contract to purchase a $25 million-asset bank in Breckenridge, Minn.

Trend Could Pick Up

Community First is not the first bank to follow a lower-tier consolidation strategy, but its successful stock offering could accelerate the trend.

Only a handful of small banks have tried building war chests by selling stock. But some commercial and investment bankers now predict that the number of small banks raising money through stock offerings will climb as investors exhibit new fondness for high-performing banks, regardless of size.

Traditionally, these small banks with less than $1 billion in assets, faced liquidity problems in issuing stock and did not have a track record to attract investors. But investment bankers say good small banks can raise money.

Quality Counts

"There is money out there for banks with niches and good stories," said Mr. Wirth. "The size of the bank is not as big an issue as it used to be. The quality of the bank is."

Some other small banks have followed the same game plan as Community First. Several are in California, where the economy was booming until recently.

Napa Valley Bank, for example, raised money through a public stock offering several years ago and has since doubled its assets to about $500 million. Civic Bank in Oakland, which began by purchasing some offices from First Interstate Bancorp, has since added other banks and boosted its assets to $300 million.

Buying Spree in Kansas

But aggressiveness is not limited to the West Coast. Fourth Financial Corp. in Kansas is another small bank with a big appetite. The bank has done 20 to 30 acquisitions of $50 million-asset banks in the past four years.

These buyers don't face stiff bidding competition from the big players - at least not right away. Money center and super-regional banks seldom take any interest in institutions with less than $100 million of assets - except as a way to market credit cards or navigate regulatory channels.

So the field is wide open for qualified bidders with several million dollars.

Management Is Key

At small banks even more than at the biggest institutions the ability to acquire depends on the efforts of a few key executives So far, Community First's management has had a good track record.

Don A. Mengedoth, chief executive, and Mark A. Anderson, executive vice president, started the bank in 1987. They bought 20 branches from their former employer, First Bank System Inc. For two years they concentrated on running the new bank, before turning to acquisitions.

So far, their record is enviable. The bank's leverage ratio exceeds 7%, way over the 4% to 5% the Federal Reserve Board recommends. Risk-adjusted capital is double the Fed's 8% requirement.

Similar Performance in '90

Community earned $1.2 million in the first quarter of 1991, for a return on assets of just under 1% and a return on equity of slightly over 18%. The performance was similar in 1990.

Investors liked that performance. They also liked the stock price, a bargain compared with that of regional rivals such as Norwest. Norwest's stock trades at close to double the book value and 11 times 1991 earnings. Community First's stock, on the other hand, sold for 1.35 times book and at 8.5 times 1991 earnings.

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