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May 31, 2006
Washington-Area Community Banks: "The Easy Money is All Gone"
This week's Washington Business Journal examines the state of affairs for community banks in the D.C. area, and finds that
Investing in banks, long considered a conservative place to put money, has become a hot market for capital in recent years. Since 1998, the Washington region has seen 20 bank startups.
"When the availability of capital is great, the market gets overbuilt," says Barry Watkins, CEO of Bethesda-based Fidelity & Trust Bank. "That is what has happened to banks." . . .
"Everything is tougher," says Cardinal Financial Chairman and CEO Bernard Clineburg. "Everyone is on alert, and it just makes everything tougher."
Says Potomac Bank of Virginia CEO Larry Warren: "The easy money is all gone."
Meanwhile, more banks are opening -- at least two groups of organizers are planning new banks in Greater Washington next year -- and other established banks are looking to break into the region. Competition for deposits, retail space and loans is fierce . . .
One of this article's main points is that the competitive environment is pushing community banks to sell. If you're thinking that some big dumb super-regional bank is going to bail you out at four times book, however, think again:
The good news for the sellers is that there are many hungry newcomers and bigger regional players who consider themselves growers. Mercantile Bankshares and Provident Bankshares in Baltimore, Pennsylvania-based Fulton Financial, West Virginia-based United Bankshares and New York's M&T Bank have shown their penchant for expansion through acquisitions in the past few years, and no one would be surprised if they continue to gobble up smaller banks.
The small size and relatively poor performance of the banks already in the market, though, suggests to some that the buyers will come from a crew of younger, less-established banks in the region looking to quickly grow their assets. [Emphasis mine]
"It wouldn't surprise me to see a merger of equals," says Cardinal's Bernard Clineburg. Indeed, at least in terms of size, that was the case with WashingtonFirst's planned acquisition of First Liberty National Bank. . . .
If smaller banks make up a proportionally larger number of interested buyers, by definition sale prices for community banks will go down. Smaller banks do not have the balance sheet resources, much less patient enough shareholders, to pay foolish prices.
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