Is it better to buy, to sell out, or to stay put? This is a question that community bank executives are constantly asking themselves as mergers dog their industry.

For investment bankers, the answer is simple: community banks either must plan to sell themselves or bulk up their franchises through acquisitions.

"There are only three kinds of banks: gobblers, gobblees, and prunes," says David A. Budd, a managing director at McConnell, Budd & Downes, Morristown, N.J., a leading adviser on mergers and acquisitions to community banks. "Community banks that wait too long to act will be prunes - plums that have been left in the sun too long."

Professional advice for banks seeking strategic alternatives is abundant. Many large financial institutions use big investment banks such as Goldman Sachs & Co. and Morgan Stanley Dean Witter. But small banks should consider those companies that specialize in community banks.

Advisory firms that represented the largest number of community bank buyers and sellers in the first quarter included: Keefe, Bruyette & Woods Inc., New York; Baxter Fentriss & Co., Richmond, Va.; McConnell, Budd; and Hovde Financial Inc., Washington.

"Large investment banks tend to put their junior associates on the community banks," says Benjamin A. Plotkin, president at Livingston, N.J.- based Ryan, Beck & Co., which ranked eighth in American Banker's list of top financial advisers for community banks in the first quarter. "But firms that cater to community banks put their senior people on the job, because that is the market that they do business in. That is their bread and butter."

Another benefit about using small investment banks is that they often have the same resources as their larger New York counterparts, but tend to charge less for their services.

The urge to merge has become even more fervent since the Financial Accounting Standards Board voted recently to eliminate pooling-of-interests accounting, leaving purchase accounting as the only way to account for mergers. The new policy goes into effect late next year.

Merger-oriented banks have eschewed purchase accounting because it creates goodwill, which must be amortized and thus suppresses earnings. Community bankers should be concerned about this change, says James E. Baxter, president of Baxter Fentriss & Co. "The value of banks is likely to drop about 30% because of this accounting change and better-performing banks will suffer the worst."

Indeed, community bankers who were planning to sell two to three years from now are "dusting off their plans in order to do it soon," says Robert J. Rogowski, principal of Columbia Financial Advisors, a Seattle firm.

Still, even with the accounting-rule change, the main consideration that will determine whether a bank sells, buys, or stays put is its own competitive position, says Eric Hovde, executive of Hovde Financial.

According to Mr. Hovde, a community bank should consider selling itself if earnings are flattening or its margins are shrinking over time.

Banks that are not competitive in technology should also think twice about staying independent, he says. The Year-2000 bug forced many banks to upgrade their computer systems, but that is not enough, investment bankers say.

And specializing in a simple financial product will not help a community bank stay independent either, says Mr. Hovde.

"Products such as single-family mortgages are easy to get into. And because of that, the margins in that business have collapsed," says Mr. Hovde. "If anybody can do it, there's no specialty to it."

Potential acquirers should make sure that they have strong stock prices - the currency for most bank acquisitions - or excess capital. Acquisitions done without either will dilute shareholder value.

"Make sure you know what you want to achieve when you do an acquisition," adds Mr. Hovde. "Do you want to expand your distribution, or a product line? Do you want to be more efficient? Don't just do an acquisition for the sake of doing one."

In spite of the changing landscape, many community banks still cling to independence with ferocity, investment bankers says.

"Community banks have the ability to throw up fences around their organizations to protect jobs as opposed to shareholder value," says Raymond P. Davis, chief executive of Umpqua Holding Corp., Roseburg, Ore., which acquired Portland-based Strand, Atkison, Williams & York, a brokerage firm, in May.

"Many say, we've been here 50 years and, gosh darn it, we're going to be here another 50; so to hell with the shareholder."

Some banks have opted to handle their strategic alternatives without an investment banker's help. In fact, several banks have done so deftly. But community bankers should proceed down this route with caution.

"It is possible to do an acquisition on your own," says Mr. Davis, who chose Columbia Financial Advisors for its recent acquisition. "But you had better have the talent on board and do the proper homework. I don't think a lot of the small banks have that. So an investment banker comes in handy."

Even if a community banker decides to use an investment banker, homework still needs to be done.

Community bankers should look for investment bankers that have a track record with community banks, have national contacts, and offer a wide range of other services - such as tax and legal advice.

After an investment banker is selected, the process of selling a bank or acquiring one begins.

To make sure those negotiations go well, all parties must remember two important points, says Christopher Martin, chief operating officer of First Sentinel Bancorp, Woodbridge, N.J., which bought Pulse Bancorp, South River, N.J., in May.

"Hammer out the details up front and take your egos out of the room," says Mr. Martin. "Otherwise you'll be paying the lawyers to fight it out. And you wouldn't want to do that."

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