Even though the pace of community bank merger and acquisitions has picked up recently, it is still tough to close the deals.
The culprits that have hindered deals in the past few years — lower valuations triggered by credit-quality problems and regulatory delays — have led some banks in the past few months to amend their agreements, while even more have terminated them.
And in regions with many problem banks, deals are taking twice as long as expected to close, often because they require additional capital to reassure regulators.
"A lot of times, banks are getting into deals where they would like their pro forma" of the combined banks "to look better, and the way to do that is to raise capital," said John "Jack" P. Greeley, a banking attorney at Smith Mackinnon PA. "Is there a dilution issue? Yes. But it gets the bank further than they would be absent the deal."
A deal involving rival companies in Florida, Jacksonville Bancorp Inc. and Atlantic BancGroup Inc., is a recent example of such a delay. Last week the companies said they were issuing more shares of Jacksonville Bancorp's stock to four private investor groups to raise more capital for the deal. They also amended the pricing and pushed back the closing date.
Typically a bank deal would take four months to close. Now it takes about six to eight months, said Dan Bass, managing director at the investment banking firm FBR Capital Markets & Co.
This makes completing deals even more difficult for banks in distressed markets. Regulators take more time mulling such acquisition requests, which can further delay closing a deal that could bring the bank back to health.
Deals in distressed states like Michigan, California and Florida "are going to get closer scrutiny by regulators, so it only kicks the can down the road and makes things worse," said Tony Plath, a finance professor at the University of North Carolina in Charlotte.
But for regulators, the issue comes down to safety and soundness, and they have bigger worries about that in troubled markets.
"Regulators would obviously be concerned if both banks had loan portfolios with concentrations in similar areas" such as non-owner-occupied commercial real estate loans, said Flora Beal, the communications director of the Florida Office of Financial Regulation, in an e-mailed response. "But that scenario would have to be dealt with based on the current loan classifications for each bank."
Other areas that regulators consider in a deal include whether the combined bank would lower operating costs, whether investors would be more willing to put capital in the resulting bank and the public's perception of the combination, Beal said.
Regulators want as clean a bill of health as they can get from the acquiring banks before they will approve a deal.
"The regulators are somewhat expecting each bank to lick their own wounds and get healthy before they can acquire someone else," said Mark Kanaly, a partner and banking attorney at Alston & Bird LLP.
Sometimes bankers can't wait any more and terminate a deal. "There are a lot more terminations than there used to be," mostly because the selling bank's credit quality has deteriorated further or the buyer is having trouble getting regulatory approval, Bass said.
For example, a private investor group, Steele Financial Corp., which was seeking to acquire East Texas Financial Services Inc. in Tyler, mutually terminated its agreement in late August, largely because of poorer credit quality at the seller's banking subsidiary.
East Texas Financial's president and chief executive, Derrell W. Chapman, said in an interview that the agreement allowed Steele Financial to terminate the deal if there was a "material adverse change." That change, he said, occurred when nonperforming assets at the seller's subsidiary, the $236.6 million-asset First Federal Bank Texas, rose to 1.91% of total assets as of June 30, compared with 1.85% as of March 31.
Likewise, Metro Bancorp Inc. in Philadelphia called off its acquisition of struggling rival Republic First Bancorp Inc. earlier this year amid growing concerns about Republic's credit quality.
Continued losses from problem real estate loans have made it tough to establish valuations and a purchase price for deals without having to amend the agreement or raise more capital to close.
In the deal with the Jacksonville banks, the agreement was amended so that the seller's shareholders would receive another 2 cents a share in the cash portion of the stock exchange. Atlantic BancGroup, the seller, had agreed to sell certain assets upon closing. Yet it recognized a higher value in the sale of those assets.
That led Jacksonville Bancorp, the acquirer, to agree to pay more, the company's president and chief executive, Gilbert Pomar, said in an interview, and it went back to investors for extra capital.
"The $5 million gives us more gunpowder to have the maximum flexibility needed to put the banks together," Pomar said.
Atlantic BancGroup's subsidiary, Oceanside Bank, is operating under a consent order largely to raise its capital levels. The bank had a total risk-based capital ratio of 8.2% as of June 30, up slightly from 7.74% as of March 31.
Pomar said the additional offering was not spurred by regulators but by shareholders, who wanted to be "defensive" in addressing any deterioration and to be more aggressive when the economy improves.
