Although the trend of consolidation in the banking industry is far from over, mergers and acquisitions have slowed this year. The acquisition of Nantucket Bank by CompassBank for Savings in July was the first deal announced in the state since January, when Andover Bank made public its plans to buy Gloucester Bank and Trust Co.
The other deals to close this year, Citizens Bank’s purchase of USTrust and Peoples Heritage Financial Group’s acquisition of Banknorth, had been in the works since 1999.
The slowdown comes as a surprise to some analysts, who predicted an increase in merger and acquisition activity this year because of a change in accounting standards next year. Beginning Jan. 1, companies will be required to use the more costly purchase-accounting method instead of a pooling of interests, because of rules set forth by the Federal Accounting Standards Board.
However, the stock market has not been kind to bank stocks this year, and the volume of mergers and acquisitions has declined as a result. Banks that want to make a deal may have trouble financing it as long as their stock values stay low.
“I thought we would have a rash of deals developing this past spring, which didn’t happen,” said Jim Moynihan, senior vice president at Advest. “I think part of the problem is a lot of the banks that might be potential acquirers don’t have the currency to strike deals. Their own stocks are selling too cheaply.”
Although the banking sector has produced strong profits this year, bank stocks have stayed in a slump as investors favor high-tech companies.
“If you look at the bottom line, a lot of these businesses are knocking the cover off the ball, but the marketplace doesn’t care,” Moynihan said. “The marketplace is not paying attention.”
Merger and acquisition activity has slowed in 2000, with 152 deals totaling under $17 billion in the first half of the year. In the first six months of 1999, 166 transactions worth $66 billion were announced, according to American Banker.
“There are fewer transactions nationally and regionally,” said John S. Carusone, president of the Bank Analysis Center in Hartford, Conn.
In addition to stock prices, the lower PE ratios (market price divided by earnings per share) has made it more difficult for banks to pay for acquisitions, Carusone said.
In the most recent Massachusetts transaction, Seacoast Financial Services Corp., the holding company for CompassBank for Savings, struck a deal to buy Home Port, Nantucket Bank’s parent company, for $37 per share. The transaction is valued at approximately $68.5 million. The merger will close in the fourth quarter of this year using the purchase method of accounting. The acquisition boosts Seacoast to $2.6 billion in assets, and gives CompassBank for Savings entry into the Nantucket market.
“It complements our Southeastern Massachusetts, Cape Cod and Martha’s Vineyard franchise,” said James R. Rice, Seacoast’s senior vice president of marketing. “Strategically it’s not a stepping stone for us into another market, but fills out our existing market area.”
The banks had long had a relationship in which CompassBank purchased mortgage and commercial loans from Nantucket Bank, Rice said. Nantucket Bank, which has two branches and the dominant market share on the island, will keep its name and operate as a subsidiary of Seacoast Financial Services.
If another deal or two is announced in the coming months, it could create a domino effect that leads to more mergers in Massachusetts by the end of the year, Moynihan said. Last week, Cape Cod Bank & Trust Co.’s stock beat its 52-week high of 18 1/8, as shareholders discussed rumors of a merger on Internet bulletin boards. The stock rose to 22 1/2 before closing at 20 on Aug. 10.
“If we have a couple more deals like that announced, I think you’ll see the bank stock market in New England and Massachusetts perk up,” Moynihan said. “That could open the door for a few other deals to be done.”
Andover Bancorp completed its $16.2 million acquisition of GBT Bancorp in July, using the purchase accounting method. The single branch Gloucester Bank & Trust brought $130.9 million in assets to Andover Bank, which grew to $1.7 billion in assets. Andover Bank, a savings bank, and the commercial Gloucester Bank & Trust will be separate subsidiaries of Andover Bancorp.
“They haven’t been very active in the retail market,” said Andover Chief Financial Officer Joseph Casey. “We’ll add home equity loans, mortgage loans and second mortgage loans. They bring expertise in commercial areas. We will be reviewing to see if we’ll add GBT products to Andover Bank.”
Potential Acquisitions
Despite the recent pause in local bank mergers, the trend of consolidation in the banking industry shows no sign of stopping. The consolidation has altered the industry drastically, creating a smaller number of very big banks.
According to the FDIC, the number of institutions shrank in the late 1990s as individual banks grew in asset size. That growth appears to have come at the expense of community banks. While community banks had the majority of deposits 20 years ago, the smaller institutions had just 21 percent of deposits by the end of the 1990s. At the same time, the number of banks with more than $20 billion in assets quadrupled to 46 institutions.
Banks with more than $10 billion in assets had 48.4 percent of assets in 1994, but held 66.7 percent of assets five years later. Banks with less than $100 million in assets held 7.9 percent of assets in 1994, but by 1999 their share dropped to 4.2 percent.
Last year Boston’s two largest banks, Fleet Bank and BankBoston, combined to form the nation’s eighth largest commercial bank with more than $180 billion. The 306-branch divestiture resulting from the merger ranked as the largest branch divestiture in U.S. history.
A number of factors drive the mergers, including pressure from shareholders and market share considerations.
“On the part of the seller, shareholders are pounding the table saying, ‘We can’t let the stock languish, let’s find a buyer and sell out,'” Moynihan said. “On the buyer side of the coin they’re looking at potential acquisitions whereby they can create economies of scale and enhance their own bottom line.”
Citizens Financial Group underwent a sizable growth spurt in the last year. The Providence, R.I.-based bank bought the $5.9 billion asset UST Corp. of Boston, and bought the banking business of State Street Bank & Trust Co. By June of this year, Citizens had grown to $30.2 billion in assets, compared to $19.8 billion one year before. With a purchase price of $1.4 billion, the USTrust acquisition ranked second on American Banker’s list of top 25 bank and thrift mergers completed in the first half of 2000.
Peoples Heritage Financial Group’s deal with Banknorth Group followed at No. 5 on the same list. Portland, Maine-based Peoples Heritage announced its intentions to buy Banknorth of Burlington, Vt. in June 1999, and completed the acquisition in May. Peoples Heritage paid $513 million for Banknorth, which had assets of $4.3 billion. The new company is based in Portland at the old Peoples Heritage headquarters, but uses the name Banknorth Group. It had assets of $18.5 billion at the end of June.
