Bank mergers, formations likely to grow
Meredith Jordan
Atlanta Business Chronicle
Published June 14, 2004
The number of new banks being started in metro Atlanta has not kept pace with the number of banks being acquired over the past 12 years, but experts expect a lot more of both this year.
Since 1992 there have been 89 acquisitions of banks or savings institutions in metro Atlanta, and 64 de novos, or new bank startups, according to Charlottesville, Va.-based SNL Financial LC, an independent information provider for the bank and thrift industries.
"I think it's a pretty clear phenomenon that consolidation in the industry is outstripping the slower-paced de novos," said Bobby Schwartz, a partner in the banking practice at Smith, Gambrell & Russell LLP. "You can do an acquisition faster than you can form a new bank."
SunTrust Banks Inc. (NYSE: STI) completed its acquisition of National Commerce Financial Corp. (NYSE: NCF) in less than two months. The first meeting between CEO L. Phillip Humann and NCF CEO William Reed was March 19. The deal was announced May 9. That deal is valued at a little less than $7 billion.
Despite that high-profile acquisition, which still must be approved by regulators and shareholders, there have been relatively few mergers or acquisitions in the banking industry in Georgia in the past two years, according to SNL. There was just one in 2003 and one as of May 24. The number does not reflect any deals that have not yet closed.
De novos on the way
Meanwhile, 2003 saw a boom in de novos in Georgia, with 10 new banks started. Although SNL reports no de novos so far this year, bank consultants say there are numerous new banks in development.
"I know of at least six right now that I predict will come on board, and we're just at June," said Bob Calvert, president and founder of Calvert Consulting Co., a bank consultancy based in Alford, Fla. "We're looking at probably another six to eight from June through December," for a total of 12 to 14 this year, predicts Calvert, who has started 68 banks in the 22 years he has been in business.
Atlanta bank consultant T. Stephen Johnson also predicts an increased number of de novos this year.
"I know of about 10 banks that are getting started," said Johnson, president of T. Stephen Johnson & Associates Inc.
But consolidation also will continue, Johnson said. He predicted that Georgia's three most acquisitive banks will continue to look for banks to add, including Blairsville-based United Community Banks Inc. (Nasdaq: UCBI), GB&T Bancshares Inc. (Nasdaq: GBTB) of Gainesville, and Main Street Banks Inc. (Nasdaq: MSBK) of Kennesaw.
"They've become the exit strategy" for the de novos of five years ago that have matured. Banks historically provide strong returns for investors willing to wait through the maturity process.
"After the fallout of Enron Corp. and all the other corporate and scandals, the idea that you can ride by and look at our investment is a neat thing," Johnson said.
Johnson also predicted that two relative newcomers could play big roles as acquirers in the second half of this year. The merger between Alpharetta-based CNB Holdings Inc. (OTC: CNBY) and First Capital Bancorp Inc., completed June 3, has created a $600 million asset bank under the CNB name. Meanwhile, Georgian Bank has climbed to $450 million in assets from about $71 million in less than a year. The bank was reborn with a $50 million equity infusion brought by Georgian's new CEO, Gordon Teel.
"I look for them to be pretty aggressive acquirers, as well," Johnson said.
Starting a bank is a long, involved process because of regulatory hurdles and the challenges of raising money from investors.
It takes a solid year, on average, to start a new bank, Calvert said.
"It takes about six months to get approvals and then another six months to raise the money," he said. "So you're really looking at a 12-month time frame."
"It's not that easy to form a new bank," said Schwartz of Smith Gambrell. "It takes time, expertise, effort and money."
Non-compete agreements
New banks often are formed by the former managers of banks that are acquired, and those executives often are slowed by non-compete agreements, Schwartz continued.
That means there is a lag time of one to three years before the managers of an acquired community bank can return to the market. Schwartz said he represents one bank that makes not just executives, but directors of a bank being acquired, sign two-year non-compete agreements.
Schwartz said there is good reason for non-compete agreements. "When you're acquiring a community bank, what you're acquiring is the business contacts and business status of that institution," he said. "If you don't wrap up the people who created that favorable business circumstance, then you'll lose a lot of what you paid for."
Schwartz predicts consolidations will increase, provided that bank stock prices remain high.
"They're using stock as currency, and as long as the market value of the natural acquirer remains robust, I think the pace of consolidations will accelerate," he said.
Schwartz is less optimistic about the pace of de novos.
"I think they'll hold their own," he said. "But I'm not sure they're going to accelerate."
Walt Moeling, a partner at law firm Powell, Goldstein, Frazer & Murphy LLP and head of its financial services practice, said supply and demand also could play a role.
"There are a lot of de novos out there right now," Moeling said. "And there are not a lot of obvious places where we need another bank out there."
Some markets, such as Alpharetta and Gwinnett County, are feeling crowded, he said.
"There are an awful lot of good small banks having to compete with each other [in those markets]," he said. "And that doesn't encourage yet another new small entrant."
Moeling predicts the banking market in metro Atlanta will see a lot of all types of activity in the second half of this year.
"Going forward, I think we'll continue to see some acquisitions and we'll continue to see some de novo activity," he said. "But we're probably at a stage where I would expect a little more consolidation before we see a lot of de novos."
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