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Few so-called good bank/bad bank deals have been completed, with regulators or investors serving as key impediments. Bar Harbor Bankshares hopes to become the second acquirer in the past two months to complete such an acquisition.
May 4 -
The deal between Sterling Financial and First Independent, both of Washington state, relies on a complex carve-out from a bank holding company. Creative maneuvers are needed these days, but this model isn't for everyone.
November 7 -
BB&T Corp.'s unusual deal to extract the most valuable parts of BankAtlantic shows how inventive dealmakers can get a leg up on their rivals in the topsy-turvy merger market.
November 1
Colby, Wis., sits at the meeting place of state highways 13 and 29, but investment banker Steve Clinton would tell you it's the intersection of pain and agony.
One of his troubled clients, the $92 million-asset Community Bank of Central Wisconsin in Colby, may have avoided disaster in announcing a deal that King Solomon would have loved. It would basically break itself in two pieces, sell each to a different buyer and attempt to liquidate the leftover fragments.
The agreement, two parts creativity and one part desperation, is complicated and unusual. But what gives it broader meaning is the reality that there are a lot of banks at similar crossroads in many small and midsize markets around the U.S.
Banks under the gun from regulators and shareholders "may need to consider being a little more creative than the traditional 'Let's just go out and find a buyer,'" says Clinton, the president of Capital Market Securities in Kent, Ohio, who represented the seller. "You may have to structure a deal with a little more pain and agony, which means that you may be able to sell part of it and you may have to work through the rest of the issues yourself to maximize what limited value there is left."
Under the deal announced last week, two nearby banks — Forward Financial Bank in Marshfield and Citizens State Bank of Loyal — would buy all of the deposits and most of the loans of Community Bank. Financial terms were not disclosed.
The buyers come from completely different vantage points.
First Forward — which would get $42 million of deposits and certain assets from branches in Owen, Thorp and Colby — has struck six deals in the last seven years counting this one, Chief Executive William W. Sennholz says. The Colby location would fill a nice spot in the middle of its existing operations, he says.
Citizens State, which is more than 100 years old, has never made an acquisition before, CEO Travis J. Holt says. It would acquire $38 million of deposits and $38 million of assets in Marshfield and Colby. The bank wanted to expand in Marshfield but considered it too overbanked for de novo branches; the deal would also fuel the primarily agricultural lender's efforts to expand its small-business lending.
The buyers shared a crucial trait: neither had the financial wherewithal, nor the desire, to take over the sellers' entire operations.
"We just couldn't use the whole thing — neither could they," Holt said.
Community Bank tried to sell itself twice, last year and early this year, Clinton says. Some parties in the same or nearby counties were interested, but it could not get beyond the due-diligence stage because of its weak capital levels, a regulatory order that had been in place since early 2010, problems loans, staff turnover and other risks, Clinton said.
Most of the buyers only wanted to buy parts of the bank — primarily deposits. But regulators made it clear they wouldn't approve a piecemeal transaction that sold off valuable chunks and left the surviving operation without a viable exit strategy, those interviewed for this article said.
Big-city buyers who could afford the whole thing were not an option. "We don't have the best market demographics," Clinton acknowledged.
So that's when Community Bank's executive decided they would have to sell the bank in pieces.
It has been a hard road, all three parties report. The deal, scheduled to close in the first quarter, involve multiple contracts and teams of negotiators. Each buyer agreed to take on some problem loans. Community Bank will have to repay Federal Home Loan bank borrowings on those loans to complete the deal; it will also keep some nonperforming loans and some bankrupted properties, try to sell them and have money left over to distribute to shareholders.
"This is the most difficult bank sale that I have ever been involved in," says Clinton, who started in banking in the mid '70s and investment banking at the height of the banking and thrift crisis of the late 1980s and early 1990s.
The parties are optimistic. "It's turning out much better than I expected along the way," Sennholz said, though he noted the deal still has to close and integration challenges lie ahead such as reconciling routing numbers among three banks.
A sense of mutual interest may have been a factor, too. "We know each other," Holt said. "We know this is a deal that is good for all the communities involved."
However, creativity and reality checks by buyer and sellers are the most crucial ingredients, Clinton said.
"The expectations were you run a bank successfully, you get two or three times book and everybody makes a lot of money," Clinton says. "That ended with the credit crisis."
