When the financial crises hit in 2007, numerous bank deals were in the pipeline but never completed given changed economic conditions. We then went through a period of bank failures resulting in numerous transactions between bank buyers and the FDIC as receiver of failed bank assets and liabilities. Bank failures have slowed considerably from 157 in 2010, to 93 in 2011, to only 51 in 2012. Now that such regulatory transactions are on the decline, many industry observers are expecting that private bank deals will increase.
Over the past few months, private deals have indeed increased. Fredrikson & Byron’s Bank Group closed numerous transactions in 2012, and we have a steady stream in the pipeline. This is the result of various market dynamics.
Reasons Why Buyers Are Pursuing Transactions
First, buyers have indeed turned to the private market as FDIC deals have decreased and become less attractive. Buyers continue to look for acquisitions as a means of increasing earning assets. Loan demand is still not robust, and competition for solid loans is very brisk. As a result, many banks are buying loans, either through branch acquisitions or whole-bank acquisitions. Other banks are acquiring new lines of business. As a result of the financial crises, bank balance sheets are going through significant restructuring. Banks will no longer be able to rely on traditional lines of business, such as commercial real estate lending, given regulatory constraints and market conditions.
Second, some banks have determined that they need to get larger to absorb the increased costs of regulation.
Third, some buyers view this as the perfect time to enter the market—that banks are an outstanding investment right now. Loan portfolios have stabilized, yet prices are still affordable. This might be the right time to consider pursuing that bank next door, or to expand into a new market.
Reasons Why Banks Are for Sale
The reasons for bank sales are varied. Some banks are for sale because they need additional capital. If a banking organization is unable to raise capital, the alternative in many cases is a sale. Other banks are selling because the owners have determined that it is the right time in their careers to liquidate and retire or pursue other interests. Some banks are for sale due to a lack of management succession. Still others may be available because ownership and the board have determined that they must either sell or grow to absorb the costs of additional regulatory requirements associated with Dodd-Frank, as well as increased capital and liquidity requirements. Also for some owners and management, regulatory fatigue has set in—bankers tell me that “it’s not fun anymore.”
Whether deals ultimately get done depends on a number of factors. One of those factors is price. Over the past few years there was a huge gap between buyers and sellers in terms of price expectations. Many transactions never went beyond the initial letter of interest or expression of interest stage because the proposed price was far below what the seller thought their bank was worth. That gap has narrowed, which is one of the reasons why we are seeing increased M&A activity. Another consideration is financing. In the past, many deals were funded with the proceeds of trust preferred securities. This option is no longer available given that such securities no longer count as regulatory capital and the market for such securities has all but dried up. However, bank stock loans are once again becoming available.
Another important deal consideration is regulatory approval. Obtaining approval during the crises has been extraordinarily difficult. Regulators have been cautious about approving any expansion and concerned about whether the buyer could handle expansion in light of its own condition and the condition of the target institution. The climate has improved lately. The amount of time taken by regulators to process expansion applications has decreased while approvals have increased. However, obtaining regulatory approval is never something that should be taken as a granted, even if both the acquirer and the target are “1” or “2” rated. To enhance the odds of approval, it is imperative that deals be structured to address potential regulator concerns and that regulatory applications be carefully completed. The regulatory approval process consists of much more than simply filling out some forms.
If you are thinking of buying or selling, become familiar with the steps of the process. As a seller, retain advisors early on in the process. There are items that need to be addressed as part of any decision to sell, and there may be a more optimal time to place your bank on the market (e.g., the timing of examinations, contract terms, tax matters, etc.). Also, understand the process and the various ways in which you can package and market your bank for sale. Become familiar with the legal documents that are a part of the sales process—the confidentiality agreement, the letter of intent, and typical purchase agreement terms. Similarly, as a buyer, talk with your advisors about how to pursue transactions. Also, obtain advice on the pros and cons of various transaction structures (taking into consideration regulatory, accounting, tax, and financing considerations). Understand financing options and seek legal advice on the regulatory approval process.
We are moving into the next phase of the cycle—buying and selling. Now is the time to consider your options and to become well versed in the process.