Buyer?s market makes bank acquisition attractive for many

Anyone who has attempted to sell a bank recently knows it is a buyers' market. The days of receiving 2.5 to three times book value have gone the way of the dot-com stock. There are a few exceptions to this, of course. The Houston market has seen its fair share of lofty valuations recently, and there are other isolated transactions taking place at 1998 multiples, but those are the exception rather than the rule.

For those banks that stood on the sideline the past few years, it might be time to get in the acquisition game. Among the reasons for this:

Many of the active acquirers in recent years are still attempting to digest the institutions they paid such high multiples for. This will lower the amount of competition you may have when talking to a seller.

Prime rate is currently at an all-time low, which makes borrowing more at-tractive.

There may be opportunities to take advantage of someone else's mistake. Many institutions made acquisitions and now have facilities in markets they no longer want or never wanted and may be willing to divest of them for a good price.

For these, and other reasons, if there was ever a good time to acquire a bank or thrift, now is the time.

Starting the process

The first question any banker should ask is, "Why do I want to make an acquisition?" There are many good reasons, and more than one may be relevant in your situation.

Excess capital If your bank has excess capital and would rather not make additional distributions to shareholders, using this capital for an acquisition is a good strategy.

To remove a competitor Removing a competitor is a good way to increase market share and generally leads to a higher profitability for the combined operation than they had separately. The higher profitability often occurs as pricing strategies that the separate entities used to generate business will no longer be needed. This is especially effective in smaller markets.

Limited growth opportunities If your bank's growth has slowed or even stopped in recent years, making an acquisition is a good method of not only growing your bank in the short-term but also helping long-term growth. The long-term growth is achieved by making an acquisition in a geographic market that has better growth potential than your current market.

Assemble the team

This is often an overlooked step but should be completed early in the process as it can save everyone involved a considerable amount of time and money. The team should include:

Intermediary Many banking transactions have taken place without the use of an intermediary, and there are bank officers that believe they can do the job and save money by not having to pay someone else. It is important to remember that an acquisition can be a very time-consuming process, and it is often not in the bank's best interest to have one of its officers devoting most of their time to completing it. Unless your bank has a person filling this position full time, it is often worth the investment to let an intermediary handle the transaction.

Accountants Many tax implications need to be explored before completing an acquisition. An accountant that is fa-miliar with the acquisition process should be a necessity.

Attorney Just as important as an accountant with acquisition experience is having legal counsel familiar with banking transactions. It is certainly worth every penny to find an attorney that can handle the transaction.

Developing the plan

Once the team has been established, it is time to develop a plan. One way to keep the board involved in the process is to form an acquisition committee to monitor and report the status of the pro-cess and meet periodically with the team.

A few of the items to consider:

Geographic Area Where you want to make an acquisition is one of the most important decisions to be made and will simplify the process by eliminating po-tential targets not in the areas you have targeted.

Size of the Target It does not make much sense to pursue a target twice the size of your bank; therefore, size criteria should be established.

Type of Target Should you look at acquiring a holding company or a single institution? Do you look for a national charter or a charter in a different state than you are currently in? There are complex tax implications involved if the target is an S' corporation and your bank is a C' corporation and vice versa.

Completing the deal

Unfortunately, it would take a rather large novel equal in size to "War and Peace" to accurately detail this step, and even then it would not be complete. Every transaction has its little nuances, peaks and valleys that make it unique. But, if you have taken the above steps, then it should not be that complicated and will result is a successful acquisition.

(The preceding article originally appeared in the December 2001 issue of BankNews magazine. Pat Hayes is assistant vice president and senior financial analyst specializing in financial institutions for BKD Financial LLC.)