Atlanta's Bank South making 2 local acquisitions.

ATLANTA - Bank South Corp. said Thursday that it will buy two community banks here in a move to strengthen its small-business lending efforts and improve overhead ratios.

Bank South, which has $4.6 billion of assets, said it would acquire Chattahoochee Bancorp, Marietta, with $251 million in assets, for $46 million, or 2.1 times book value.

It also agreed to pay $20 million, or 1.7 times book, for Merchant Bank of Atlanta, which has $141 million of assets.

Southtrust Said to Have Bid

Merchant Bank last week received a slightly lower offer from Birmingham-based Southtrust Corp., according to local banking sources.

Both deals will be paid for through stock swaps, in which shareholders of the target banks will receive Bank South shares for their stakes.

Bank South's stock fell 12.5 cents to $15.375 in late-afternoon trading.

The deals are expected to be completed in the first quarter of next year.

9.5% Market Share

When they are consummated, Bank South's deposit market share in metropolitan Atlanta will rise to about 9.5% from 8%, according to Ralph E. Hutchins Jr., the company's chief financial officer.

The figure also includes deposits Bank South will assimilate through its pending acquisition of $790 million of assets from Barnett Banks Inc.'s Atlanta bank.

Chattahoochee Bank's expertise in small-business lending was a big draw, said Mr. Hutchins. The community bank was Georgia's largest Small Business Administration lender in 1992.

Merchant Bank, which acquired an insolvent thrift three years ago, contributes a $50 million mortgage portfolio to Bank South's own $424 million book of mortgage loans.

Mr. Hutchins said the acquisition of both banks fits in with Bank South's overall strategy, of expanding its Atlanta franchise.

Savings Seen

The acquisitions will not dilute current shareholders, the company said, noting that it has identified $7 million to $8 million of annual costs savings at the banks. Bank South predicted that the purchases will add several cents a share to earnings beginning in 1995.

Most of the cost savings involve staff reductions and branch closings that Bank South predicts will help bring its efficiency ratio to 60% by 1995 from 67% currently. An efficiency ratio measures the degree to which a bank's operating revenue is absorbed by noninterest expense.

Chattahoochee Bank and Merchant Bank, each of which has six offices, are profitable. Chattahoochee earned $1.12 million in the first six months of 1993 and Merchant Bank booked $617,000. Chattahoochee's return on assets in that period was 0.91% while Merchant Bank's was 0.84%.

Stirring Up the Market

Bank South's letters of intent to purchase both companies are likely to revive interest in other community banks in Atlanta, observers said.

"It's been about five years since anybody made any money in community bank stocks in Atlanta," said consultant T. Stephen Johnson. "The type of prices paid here will create a whole new level of interest among investors and brokerage firms."

Indeed, the stock of Lawrenceville-based Gwinnett Bancshares, holding company for a $320 million-asset thrift, soared $3 a share to $35 Thursday in the wake of the Bank South announcements.

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