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Subject: A Bank Stock Dispute Worth Noting=BY RUDOLPH A. PYATT JR.=
Date: Mon, 2 Nov 92 04:35:15 EST
Message-ID: <49.1992Nov2.043515@AmeriCast.com>

A Bank Stock Dispute Worth Noting=BY RUDOLPH A. PYATT JR.=

 Finally, after five years of legal haggling and maneuvering, the
great $18 dispute is over between First American Bankshares Inc.
and former shareholders of its Virginia bank subsidiary. The
shareholders claimed victory with a recent ruling giving them $60
a share for their stock, which the parent company had valued at
only $42 a share.

 The shareholders may have emerged victorious, but the pivotal
question in this marathon parody of "The Price Is Right" remains
unanswered.  No one can say with certainty what the stock was
really worth.

 Officially, at least, a federal appeals court has had the last
word. The 4th Circuit Court of Appeals affirmed the finding of a
lower court jury, which had concluded that the shareholders are
entitled to $60 a share for their minority interest in First
American Bank of Virginia.

 One could argue that the stock was really worth more than $60 a
share. Conversely, it might have been worth less than $42 a
share. Prices that investors were paying to acquire other Wash-
ington area banks around that time certainly provide an intrigu-
ing context in which to consider the First American dispute.

 In May 1987, First American Bankshares, which already owned 85
percent of the stock in its Virginia bank, purchased the remain-
ing shares that it didn't own. Before 1982, First American of
Virginia was one of several banks in which First American
Bankshares's predecessor (Financial General Bankshares Inc.)
owned a controlling interest.

 After buying Financial General, the new owners, who were identi-
fied then as a group of investors from the Middle East, sought to
consolidate their holdings by buying the stock of minority share-
holders in the company's banks.

 Officials of the company asserted that $42 a share was a fair
price after consulting an independent appraiser, Keefe, Bruyette
& Woods Inc. The bank's minority shareholders cried foul and
demanded more for their stock, triggering the lengthy dispute
with directors and the parent organization.

 Interestingly, in 1988, First American Bankshares came up with
an identical price of $42 a share in a similar offer to buy out
minority shareholders who owned a 27 percent interest in another
of its banks, First American of Maryland. Those shareholders also
objected and eventually were awarded $55 a share, based on the
findings of an independent appraiser.

The difference between the final prices established for stocks in
the two banks not only raises a question of fairness but also
calls into question the appraisal process.

 A lawyer who represented the former stockholders at First Ameri-
can of Virginia points out that a jury originally found that $60
was a fair price, based on testimony from an expert witness.
Another expert testified, as expected, that the parent company's
$42-a-share offer represented the fair market value.

 How could two experts have been so far apart in their valua-
tions? And how could two banks belonging to the same company, but
dissimilar in size and market share - First American of Virginia
was roughly triple the size of First American of Maryland - be so
close in value? It is a question that will linger far longer than
the time it took to settle theNo one can say with certainty what
the stock was really worth.<suit brought by former shareholders
in the Virginia bank.

 The appeals court found that the earlier verdict supporting a
claim of $60 a share clearly shows acceptance by the jury of the
plaintiffs' expert witness's testimony. The expert, the court
noted, testified that he used two methods to valuate the stock.
He first determined the value based on the company's projected
ability to pay future dividends. Second, the stock prices of com-
parable banking institutions in and near Virginia were analyzed.
Each method yielded a value of about $60 a share, according to
court records.

 Still, the record shows that the expert also concluded that the
market for shares in the Virginia bank was "very inactive" and
that the price was inconsistent with that of comparable banks.
Moreover, the parent company's 85 percent ownership of the bank
tended to dampen trading activity, the expert found. In short,
there wasn't much of a market for the stock.

 The court of appeals found nonetheless that there was evidence
of a "going concern" value for the bank in excess of $60 a share.
That fact, said the court, was never disclosed by directors of
the bank.

 For what it's worth, the investors who purchased First American
Bankshares and converted it to a private company in 1982 paid
$33.80 a share for the stock.

 It's difficult to compare the value of bank stocks since the
number of shares outstanding, earnings potential, book value per
share and other factors vary so much.

 The expert who testified for the plaintiffs stated that he com-
pared First American with the six biggest banks in Virginia,
among them Crestar, Signet and the former Sovran Bank (since
bought by NationsBank). He then assumed that the value of First
American Bank of Virginia would be in the range of $54.63 to
$61.09, based on the stock prices of the six banks.

 So the $60 value "reflects our judgment as to the value of those
shares based on the prices at which the other Virginia banks were
trading ... and the projected future dividends and earnings of
First American Bank of Virginia," the expert testified.

 It's also worth noting that investors at the time were paying
considerably more than $60 a share for some peer banks in the
District. Others paid less than $60 a share for much bigger
banks.

 Crestar Financial Corp. of Richmond, for example, paid a whop-
ping $86.98 a share to buy the District's NS&T Bank at 2 1/2
times NS&T's book value. At the other end of the spectrum though,
American Security bank, which was much bigger than either NS&T or
First American of Virginia, was purchased by Baltimore-based MNC
Financial Inc. for about $40 a share. Its stock was trading in
the $40 range at the time.

 What all of this tends to show is that value is in the eyes of
the buyer and seller, and either one can usually find someone who
agrees with his or her position. 02:43 11-02C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

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