Theology Grad Is Norwest's Apostle to Buyout-Bound

With a master's degree in theology from Harvard University hanging on his wall, Justin Stets might seem out of place negotiating deals in the buy-and-sell world of bank acquisitions.

But on the contrary, Mr. Stets, vice president and manager of correspondent advisory services for Norwest Bank Minnesota, says his academic training has prepared him well for the frequently touchy task of helping small-town bankers sell their lives' work.

"It's amazing how philosophical it gets," says Mr. Stets. "Yes, they want the highest price for their bank. But it also gets down to 'Gosh, we've worked on this town for 30 years. We helped Joe finance this, and we did this at the school and this at the church ....

"They feel like major contributors to their communities, and by virtue of their selling, they're saying they are going to take a less prominent role."

Bespectacled Mr. Stets is Norwest's pivot man for a vital banking service: guiding small-bank executives through the maze of negotiations, financial issues, and regulatory requirements that come with selling or buying a bank in the consolidation-crazy 1990s.

Leveraging Norwest's role as a correspondent banking powerhouse - it has over 850 correspondents - and its knowledge base as the premier acquirer in the Upper Midwest, Mr. Stets has played the middleman on seven deals since taking the job 18 months ago. Four additional deals are in the pipeline now.

The service was initiated about eight years ago by John Sampson, Norwest's senior vice president of correspondent banking. "We were in a unique position, because we knew all the players in the region and we knew the value of banks better than most," he says.

Though other large banks informally advise their smaller cousins that are looking to buy or sell, Norwest appears to be alone in running such a targeted advisory service.

It seeks to straddle the line between the established securities firms, like Montgomery Securities of San Francisco or Piper Jaffray of Minneapolis, and entrepreneurial bank brokers.

"Norwest has formalized the process very effectively," says Donald Mengedoth, chief executive officer of Community First Bankshares, a $2.2 billion bank holding company based in Fargo, N.D. "They have recognized the need in the current consolidation environment and have capitalized on it."

For Norwest, the service provides a front-row seat on the acquisition marketplace and pays good fees, which are based on factors like the condition of the bank, its size, and its past relationship with Norwest.

Perhaps more significant, it opens the door to potentially lucrative spinoff relationships with the seller, who is usually left with a pile of cash or stock that needs to be managed.

"Once they sell, there's a likelihood that they'll invest in Norwest Investment Trust or Norwest Capital Advisors," Mr. Stets says.

Keeping an ear to the ground for bankers looking to sell also helps keep Norwest's correspondent employees alert. "They know that if a bank gets sold and we didn't know about it, we're going to be upset," Mr. Sampson says.

In today's environment, Mr. Stets says, there are about 15 buyers for each bank that goes on the block.

Inevitably, that has inflated prices, with the average urban bank going for as much as 12 times earnings. Rural banks fetch about 10 times earnings, Mr. Stets says.

About 85% of Norwest's deals come on the sell side. Mr. Stets says that bankers, in general, are "inept when it comes to selling ... they know when to sell, the timing of the marketplace, but they usually don't know the process, because they haven't sold before."

Indeed, selling even the smallest bank can be a complex transaction. Beyond the basics of balance sheets and income statements are issues of preparing a bank for sale and negotiating a deal that is fraught with fragile egos and regulatory hurdles.

In a typical deal, Norwest first seeks to understand the bank - its character, asset quality, and performance.

Mr. Stets also has to judge whether the owner is emotionally and mentally ready to sell.

If so, Norwest markets the bank to investors, gathers letters of intent and supervises the suitors' due diligence.

Next, Mr. Stets says, comes "truing up" the final bidders, and the hair- raising tasks of counseling and advising the seller through a definitive agreement and the buyer through any regulatory roadblocks.

Each deal is different, and price often is not the predominant factor.

"It depends on the orientation of the seller," Mr. Stets says. "One guy might say, 'I don't care who you sell this to, I want the highest price.' ... And another might say, 'I run this bank as an independent bank, and I don't want a chain coming in here.'"

Last year, Raymond Lamb chose Norwest to help sell his $15 million-asset First Bank in Drake, N.D., to Farmers State Bank in nearby Leeds.

"Norwest knows virtually all the bankers in the Ninth Federal Reserve District, so they really know who's looking," he says.

But the most important concern for Mr. Lamb was not shaking the confidence and trust he had built over 19 years of ownership.

Norwest "didn't disrupt the community or the employees," he recalls. "They were very discreet."

Buyers, too, are pleased with Norwest's role - even if they don't always get what they want.

Community First in Fargo acquired $700 million in assets during the first half of this year. Its CEO, Mr. Mengendoth, says his organization likes to get a bid package from Norwest because it has "already gathered all the information that we would typically gather ourselves.

"There is great value in what they do," he added, "and that includes finding buyers and getting a better price." Community First, he noted, has bid unsuccessfully on six of Mr. Stets' deals.

His task tests the strength of Norwest's correspondent relationships, Mr. Sampson says. And it takes a person - namely Mr. Stets - with integrity and a soft touch to do it right.

But Mr. Stets isn't soft on the competition.

He asks, for instance, how nonbank advisers can know the ins and outs of warranties and establishing "buckets" for future litigation, or whether they know the regulatory pressures faced by banks.

And how could J.P. Morgan & cob. or other bankers know the tolerance levels of local bankers and key variants in the Midwest market?

"There are people who try to broker deals in Minnesota who are based outside the state and have no idea of who the players are," he says. "They're trying to sell assets, but they are not calling the logical players, because they don't know them."

In contrast, he asserts, Norwest sticks close to home. Most of its deals involve small banks in Minnesota, Montana, and the Dakotas.

It is slowly expanding the service into Colorado and Texas, where the bank's correspondent presence is growing.

Sign on with Norwest, Mr. Stets asserts, and you get not only his services, but also the knowledge and resources of Norwest's high-octane acquisition team.

It is not uncommon for a small town banker to get a cold call, from Mr. Stets, who says he may try to plant the seed this way:

"I've spent some time on your franchise without having talked to you ... and if I'm reading you right, this is the direction that your organization is heading. Knowing that, these are some locations that don't seem to fit into your strategy ....

"And by the way, I can call up five buyers today and get that sold for you."

Norwest maintains a strict firewall between its advisory services and its own acquisition activity, he says.

"My first allegiance is always to Norwest," Mr. Stets says. So to avoid potential conflicts of interest, he stays away if the $66 billion- asset holding company is interested in buying a bank.

That can lead to lost business. A seller who wanted to make it seem that Norwest was interested would clear of Mr. Stets.

"We might not be interested," he says, "but one way to make it look like we are is not to have Norwest list it."

Mr. Engen is a freelance writer based in Minneapolis.

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