1. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 23 Bank Mergers and Acquisitions: Managing the Acquisition Process The purpose of this chapter is to understand why the banking industry undertakes so many mergers each year and to determine what legal, regulatory and economic factors should be considered when the management of a bank wants to pursue a merger.

3. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Motives Behind the Rapid Growth in Bank Mergers Profit Potential Risk Reduction Rescue of Failing Banks Tax and Market-Positioning Motives Cost-Savings or Efficiency Motive Mergers as a Device for Reducing Competition Other Motives

4. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Merger Motives Identified By Bank Executives Quality of Management Profitability (Return on Assets) Efficiency of Operations Maintenance of Market Share

5. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Most Important Goal of Any Merger The Most Important Goal of Any Merger Should Be to Increase the Market Value of the Surviving Firm.

6. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Impact on Earnings Per Share Generally Speaking Shareholders of Both the Acquired and Acquiring Firm Will Gain If: 1. Bank with Higher P/E Ratio Acquires Bank with Lower P/E Ratio And If: 2. Combined Earnings Do Not Fall After the Merger

7. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Merger Premium A Merger Premium is Paid if the Acquiring Bank’s Shareholders Receive More Than the Current Market Price for Their Stock

8. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Exchange Ratio The Number of Shares of Stock Offered By an Acquiring Bank for Each Share of Stock of the Acquired Bank

9. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Dilution of Ownership Dilution of Ownership Occurs When the Acquiring Bank Offers an Excessive Number of Shares to the Acquired Bank Shareholders. Often the EPS Will Fall Below its Original Level for the Acquiring Bank When This Happens.

10. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of Target Firm to Consider The Bank’s History, Ownership and Management The Condition of Its Balance Sheet The Bank’s Track Record of Growth and Operating Performance The Condition of Income Statement The Condition and Prospects of the Local Economy Competitive Structure of the Market Area

11. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Other Characteristics of the Target Firm to Examine The Comparative Management Styles of the Merging Organizations The Principal Customers the Targeted Bank Serves Current Personnel and Employee Benefits Compatibility of Accounting and Management Information Systems of the Merging Organizations Condition of the Bank’s Physical Assets Ownership and Earnings Dilution Before and After the Proposed Merger

12. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Purchase of Assets Method of Purchasing Another Bank A Method of Carrying Out a Merger in Which the Buying Company Purchases All of the Assets of the Acquired Firm

13. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Purchase of Stock Method of Purchasing Another Bank A Method of Consummating a Merger in Which the Acquired Firm Exchanges its Equity Shares for the Stock of the Acquirer

14. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Bank Merger Act First Major U.S. Law to Bring Merging Banks Under Federal Supervision, Requiring Government Approval to Merge with or Acquire Other Banks

15. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Under the Bank Merger Act Merger Must Be Approved By Principal Regulator National Banks – Comptroller of the Currency State Member Banks – Federal Reserve State Insured Banks – FDIC Regulatory Agency Must Give Top Priority to Competitive Effects Mergers with AntiCompetitive Effects May Be Approved if it Can Be Shown There Are Significant Public Benefits Such As Providing Convenient Services or Rescuing a Failing Bank

16. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Herfindahl-Hirschman Index Measure of Market Concentration It is the Sum of the Squared Market Share for All Banks in a Specific Market Area Department of Justice Guidelines Postmerger HHI of Less Than 1800 Change in HHI of Less Than 200

17. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Factors that Get In the Way of Merger Success Poor or Ill-Prepared Management Mismatch of Corporate Styles or Cultures Excessive Prices Paid for Mergers Failure to Take Into Account Customers’ Feelings and Concerns Lack of Strategic Fit

18. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Keys to Merger Success Acquirer Must Start By Evaluating Its Own Financial Condition Must Have Detailed Analysis of Possible New Markets Must Establish a Realistic Price for Target Firm Afterwards Combined Team Must Direct Progress Towards Consolidation Must Establish Communication Between Senior Management and All Employees Must Create Communication Channels to Promote Understanding of Why Merger Took Place and Likely Consequences of Merger Should Create Customer Advisory Panels to Evaluate and Comment on Merged Bank’s Image and Products