Executives of small and midsize community banks are watching developments on the merger and acquisition front with trepidation.

Many of them find managing a small bank daunting. They simply do not have the wherewithal to meet compliance requirements, provide the delivery channels customers want, and fight the war for customer ownership.

Selling the bank used to be an exit strategy available to all. But today, with a changing market in which the relative value of the physical distribution franchise has declined, small-bank executives are asking, "Did I miss the boat?"

Have prices of community banks peaked in the homogenizing financial services business? Will they never reach the highs of 1994 again?

The merger and acquisition market activity among banks and thrifts has been evolving.

In the early 1990s, only major acquirers like Banc One and NationsBank were actively pursuing transactions, including Resolution Trust Corp. deals and on-the-ropes banks.

Following their success, many other banks jumped on the bandwagon, increasing demand in the face of static supply. Consequently, bank prices skyrocketed. Super community banks and superregionals started considering acquisitions an excellent way to grow.

As prices escalated, most banks remained on the sidelines waiting for prices to rationalize.

Subsequently, mergers-of-equals became very popular, especially among larger banks in the $10 billion to $50 billion range. Pricing in such deals appeared more rational, and survival was at stake. Last year, large mergers of equals dominated the acquisition scene.

But as big banks grew even larger, their interest in smaller banks declined.

In addition, Wall Street soured on some of the major mergers as the promised savings from the newly created institutions went unrealized.

As a result, acquirers are now more judicious about the prices they pay. So the traditional merger exit strategy has become more difficult for hundreds of bank executives nationwide.

But as small banks become harder to manage, exit by sale is still an attractive solution - if the price is right.

We can expect at least one more buying cycle of community banks before deposit premiums become less attractive and prices truly hit rock bottom. The trend toward wholesale funding will continue, as is evident by the ever-increasing popularity of the Federal Home Loan Bank System. But deposits represent the customer relationships that all financial institutions covet. The delicate balance between cost of funds and the value of the customer base in deposit premiums will continue to tip favorably toward the core relationship.

However, this window of opportunity may close as branch-based funding becomes even more expensive versus wholesale funding (at most banks they are almost on par) and customers anchor on remote delivery channels such as the personal computer or telephone.

One way community banks can boost their franchise value is by making branch distribution more efficient and offering multiple services to improve customer retention.

Low-cost funds and valuable customer relationships may still attract buyers, despite overcapacity in the financial services industry and the availability of alternative distribution channels.

Ms. Bird is chief operating officer of Roosevelt Financial Group, St. Louis.

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