This year’s weekly flurry of headlines about FDIC-assisted takeovers of failed banks has made it seem as though the pace of “live-bank” mergers is agonizingly slow. There is traditional M&A activity under way, but because most of it takes place between smaller banks it doesn’t generate much interest outside of the communities involved and banking industry analysts. Evidence is emerging, in fact, that 2011 may see a pickup in activity.
A variety of factors is expected to accelerate the pace of conventional mergers next year. According to Patrick Hayes of the CPA and advisory firm BKD LLP, these factors include increased earnings pressure, heightened regulatory scrutiny, less-attractive FDIC-assisted transactions, stabilizing values and investor groups entering the market.
Writing in a recent edition of the firm’s online newsletter, BKD Insights, Hayes points out that some banks are finding it difficult to generate adequate earnings and in assessing long-term profitability are weighing whether to merge to prosper or survive. Even healthy institutions are finding the regulatory environment more challenging, he adds, and some of these are looking for an exit strategy.
Such was the case for Union Bank of Chandler, Okla., which earlier this year agreed to be acquired by Oklahoma City-based BancFirst Corp. In an interview with SNL Financial, Ben T. Walkingstick, Union National’s chairman and CEO, cited the anticipated new regulations, the need to hire more compliance people and related costs as reasons for selling the $130 million family owned bank. Financially, Union Bank is having one of its best years in decades, Walkingstick told SNL.
BKD’s Hayes also sees improving values as motivation for sellers. “According to Highline Financial for year-to-date 2010,” Hayes writes, “the price to tangible book multiple is 1.20, compared to 1.16 in 2009.” Seven bank/thrift transactions were announced in the 12-state BKD service area during the second quarter of 2010 with a median price to tangible equity multiple of 1.21, a 53.2 percent increase from first-quarter 2010.
In an example of investor groups interest in acquiring live banks, Kansas City-based Bank Midwest sold itself to NBH Holdings Inc. With headquarters in Boston, NBH is operated by experienced eastern bankers who have raised $1.15 billion “to build a leading community banking franchise focusing on serving the needs of disciplined acquisitions and organic growth,” according to its announcement. Bank Midwest, an affiliate of family owned Dickinson Financial Corp., has been afflicted with troubled loans in recent years. The acquisition included 38 branches across Missouri and Kansas, as well as certain deposits and performing loans.
In another Kansas City-area transaction, 1st Financial Bank in suburban Overland Park, Kan., was acquired by the Aslin Group, headed by veteran banker Mick Aslin. The investors made an initial $12.5 million capital contribution to the bank. Most of 1st Financial’s foreclosed real estate and nonperforming loans were transferred to the sellers, according to Aslin, who earlier served as president of UMB Financial Corp. and the former Gold Banc Corp. He now serves as chairman of the acquired bank, which has been renamed Alterra Bank, and plans further expansion in the Kansas City metro area.
Another factor BKD’s Hayes suggests will motivate buyers to acquire live banks is the FDIC’s tightening of loss-share agreements on failed bank assets and increased competition among bidders.
Some buyers have found failed banks lucrative enough to pursue two or three. Just in Illinois, a state that has had more than its share of failed banks this year, four companies have acquired at least two of them — Northbrook (Ill.) Bank & Trust Co., FirstMerit Bank of Akron, Ohio, Chicago’s MB Financial Bank and First Midwest Bank of Itasca, Ill. And two private investor groups armed with shelf charters have acquired three banks each in the southeast.
In any event, it appears buyers will have ample choices of open-bank or failed-bank transactions for some time to come. A return to more normal M&A activity as the number of failing banks winds down is likely to take a couple of years, according to SNL Financial. In the last cycle, which peaked in 1989, “it took about two years for conventional M&A to outnumber government-assisted deals once the cycle of failures reached the apex,” wrote Nathan Stovall and Mac Mathews in a recent SNL Data Dispatch.
For buyers pondering which type of transaction to focus on, D.A. Davidson & Co. analysts Jeff Rulis and Luke Kautzer offered good advice in the firm’s August 2010 Banking Industry Update: “We suggest that if investors are trying to play the growth game, one should determine which growth method provides the greatest positive impact to an acquirer, either by FDIC activity or M&A activity.”
Bill Poquette is editor-in-chief of BankNews.
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