Merger Fever May Hurt Investors in Independent Banks, Analyst Says

Investors in the plethora of small, independent banks in California won’t necessarily see their investments grow bigger or faster if the industry is caught up in a feverish race to create bigger banks through mergers and acquisitions, a Costa Mesa banking consultant recently warned a group of Western bankers.

“Bankers do not have to sell their institutions to have a significant short-term return for their investors,” the consultant, Edward Carpenter, told a Western Independent Bankers seminar last week in Arizona. The trade group had gathered to discuss investment strategies and merger activity--especially the future for mergers under California’s interstate banking law, which allows banks in the state to be bought by companies throughout the nation in 1991.

The small community banks are scrappy competitors against bigger banks and provide better returns for investors, said Carpenter, who for years has promoted mergers as attractive means of building better banks and boosting return to investors.

He likened California’s climate for bank mergers now to that in New Jersey two years ago, when that state opened its doors to out-of-state banking companies. Operations at the merged banks in New Jersey have provided investors with an average 5% annual return on their investments, he said, while independent banks have given their investors an average 12% return a year.

The pending $16 million sale of CommerceBank, however, may give shareholders at other banks reason to doubt the bright picture Carpenter paints of remaining independent. Under tentative merger terms offered by Independence Bank in Encino, charter subscribers to the Newport Beach bank’s stock nine years ago would get at least four times their original investment--an average annual return of 33.3%.