ABA Banking Journal - July 2008 - (Page 20)

Community Banking play the local relationship card quite happily, and above $1 billion, it can enjoy some economies of scale. In between, the company is neither one nor the other, and suffers the ailments of the extremes, according to Musso. However, thus far M&A volume for 2008 remains significantly off the pace for 2007. In the first quarter, only 42 bank and thrift deals were announced, versus 86 in the first quarter of 2007. “Timing is everything,” says John M. Preparing for opportunities he experts we spoke with for the accompanying article agree there are steps that banks interested in selling can take now, during the market lull, to make themselves more attractive when opportunities arise. Below is a condensed, five-point “to-do” list compiled from our interviews. The full treatment of the five points can be found on our website, www.ababj.com, in an article entitled, “5 steps to be ready to sell,” that appears under the heading “Exclusives.” Review the following list with these two caveats from attorney David Baris, Kennedy & Baris LLP, in mind: First, “there’s only so much you can do. You are what you are.” And second, own up to things up front, before due diligence begins. “Buyers don’t like surprises,” says Baris. “If they find a problem later, that undermines the credibility of the target institution.” T 1. Eliminate the negatives. This is the top recommendation from most advisors, and typically what they really mean is, clean up the loan portfolio, both in content and records. 2. 3. Become realistic regarding what buyers really care about. Be ready to face some hard truths. Among them: buyers don’t care much about your bank’s name and history; may have little interest in your branches; will almost certainly have no interest in nontraditional activities (like insurance) that aren’t producing strong earnings. Their primary interest? Core deposits and core loans. Eggemeyer III, a noted bank investor and “rollup” artist. Eggemeyer’s Rancho Santa Fe, Calif., merchant banking firm, Castle Creek Capital, made a name for acquiring groups of banks into merged operations that could be later sold at a handsome profit. (See “Patient Capitalist,” ABA BJ, July 2006.) However, Eggemeyer has kept to the sidelines for about a year and a half. “We saw the economy softening,” he says, adding that even then, the way things have turned out defied his crystal ball. The speed and depth of deterioration have made both buyers and sellers hold back. “Sellers haven’t adjusted their thinking to the reality of the economic situation that we’re in right now,” says Eggemeyer. As a result, there is a “disconnect,” he says, between what institutions are worth to buyers, and what their current managers, directors, and owners think they ought to be worth. In addition, Eggemeyer points out, many potential buyers hesitate to buy right now, given the potential for paying to own someone else’s problems. Many bank managers are busy trying to deal with their own portfolios. “We are in the slowest merger market since 1990,” says Walter G. Moeling, IV, co-chair of the financial institutions group at Powell Goldstein LLP, Atlanta, Ga. “The few deals that are being done are very specific. By and large, historically active acquirors have gone to ground.” Reconsider management contracts. Contracts with the CEO and other top managers can be a ticklish balancing act between seller and buyer. Buyers may balk at huge change-in-control payments, but at the same time will want to keep “rainmakers,” while letting nonessential managers go. Banks considering putting themselves on the market need to address these issues before negotiations with a buyer begin, if possible, or as contracts come up for renewal. 4.Avoid entangling vendor and facilities contracts. A related point: If your bank appears to be moving toward selling, don’t create a batch of long-term contracts that a purchasing bank will either have to live with or buy out. 5.Consider hiring a financial advisor. An obvious suggestion from a group of M&A advisors, but that doesn’t mean it is bad advice. Outside expertise can help you get a better price. —Steve Cocheo Unwilling sellers, unwilling buyers With bank stocks taking a beating in the markets, the value of the “currency” that acquirors often use to do deals is devalued—which makes mergers about as appealing to publicly held buyers, thus far, as European vacations look this year to dollar-decimated American tourists. Attorney Moeling says that 90% of the merger picture at any given point hinges on the value of bank stocks in general. “You can have the best bank in the world, but if bank stocks are down or you are in a difficult market overall, your value will go down,” Moeling explains. A related factor, says Curtis Carpenter, managing director at Sheshunoff & Co. Subscribe at www.ababj.com 20 JULY 2008/ABA BANKING JOURNAL http://www.castlecreek.com http://www.castlecreek.com http://www.ababj.com http://www.pogolaw.com http://www.smslp.com http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - July 2008

ABA Banking Journal - July 2008 Contents Editor’s Column Searching for New Paradigms at BIS Snapshot: C&I Asset Quality 100th Anniversary: Then & Now BofA "Event Concept" Wins Awards, and Customers ABA Resources ABA Chairman’s Position M&A: Beat Today's Market Blues Pass the Aspirin Cover Story: Workout Time Correspondent Banking: No Longer Just a Handshake Business Getting IT Right By Thinking It Through Webnotes Are You "Red Flag" Ready? Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - July 2008

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