DENVER — Bank M&A negotiations are changing behind the scenes, according to dealmakers at a Denver investment bank.

St. Charles Capital as a result is strengthening its bench for what it sees as a very busy year ahead in bank acquisitions. It announced last week that it has hired Michael Richter as a principal; he will help banks raise capital and shape their strategy. Richter previously served as a managing director at SBIC Funds, a unit of Commerce Street Capital in Dallas.

American Banker recently sat down with Richter and Adam Fiedor, a principal at the firm, in its downtown Denver office. Wesley Brown, managing director of the firm, participated by phone.

The following is an edited transcript of their comments about how M&A is evolving and their expectations for the remainder of the year.

What's your take on M&A so far this year?
: We are pleasantly surprised. We've been busier and more active than we have in the last several years. More conversations with clients are turning into engagements. Previously, we had a lot of boards talking about what they wanted to do and what their issues were, but a lot of that never turned into anything. A lot of that talk is turning into action.

Is most of your business coming from the buyers or the sellers?
FIEDOR: Mostly sellers, but we do have a lot of conversations with boards around what the strategy should be, including looking at acquisitions, mergers of equals — a really hot topic — and how do they position themselves to add more value.

What has happened in M&A this year that you didn't expect?
WESLEY BROWN: The preemptive transactions have surprised me. By that I'm mean a transaction where a bank is discussing a sale with only one other party, versus a marketed transaction.

We've recently been involved in two preemptive sales where we represented the sellers. We were brought in by our client to help them negotiate with buyers who had been courting them. It was now time to get serious and bring about a transaction. The first one was with Wheatland Bankshares and Glacier Bancorp (GBCI). Wheatland was a $280 million-asset bank in the southeast corner of Wyoming. They were doing very well and our client had a friendship with Glacier and felt there were advantages of having the company sell out at a high time when everything was doing well. We allowed Glacier to negotiate exclusively with our client and did not go out to other buyers.

Second one was just like it — New West Bank in Greeley, Colo., it was bought by the Bank of Colorado, a unit of Pinnacle Bancorp from Nebraska. Same situation — clients had been courted. We were brought in and told if we couldn't get a transaction with Bank of Colorado to go out to other buyers. And, again, it worked well. Both cases, we got high prices and one of the reasons were both of our sellers were successful and succeeding from an asset quality standpoint.

Both sold to multibank holding companies. Did they pick those buyers so management could stay in place?
BROWN: With Wheatland, that was the case. There was a strong feeling to survive and stay involved. At New West, the very top two people have retired, but the senior managers were well known to the acquirers and have stayed in place.

What's driving these preemptive deals?
FIEDOR: Competitive dynamics. In both of these deals, the franchise fit well within their footprint and with one of them, they kept losing to them and decided instead of continuing that, they would acquire them.

What is distinguishing 2013 from other recent years?
FIEDOR: I think the bid/ask spread has narrowed. We had three years where buyers were losing on things, so the prices they are willing to pay are creeping up. Sellers, their expectations have continued to come down.

MICHAEL RICHTER: The quality of deals has also changed. We've shifted from the distressed to higher quality.

To switch from broad-market trends, what's been going on at St. Charles?
BROWN: We've announced three transaction so far this year, and we have another seven deals in the pipeline that are real — that are really going to happen. (Fiedor knocks on the table.) We are busy, and we have several other transactions waiting for the clients to be financially or emotionally ready. They are waiting for the third-quarter or yearend numbers to launch or are waiting for a regulatory order lifted. We've met with the board, they've made a decision and are just waiting for the right moment.

How many prospective deals have you had fall apart this year?
FIEDOR: Right now, it is about 25% of the deals that we take on fall apart.

How does that compare with years past?
BROWN: Five years ago, it was essentially zero. Three years ago, it was 80%. It has improved a lot.

What's changed in the negotiating room versus a couple of years ago?
FIEDOR: Nonperforming assets are down.

BROWN: And appraisals are being raised and that makes a huge difference, because buyers don't have to be so conservative with their marks.

If the trend is toward healthy deals, what happens to all the remaining sick banks?
FIEDOR: There are two groups. There are a group of sick banks that still fit into someone's strategic vision. Then there are the banks with sick holding companies. That's where we hear about bankruptcies. The new thing is possibly foreclosing on bank-stock loans. There are more conversations in that realm, because it is quicker and easier than a lot of the bankruptcy transactions.

What have been the trends in the Mountain West? What's different here than in other markets?
BROWN: There was a shortage of buyers. The buyers that were strategic were dealing with their own problems. That has changed. Starting in late 2012, we've had many healthy, large strategic buyers emerging. They come to our office, they say, 'We've been out of the market for a few years, but we need to get back in, show us your opportunities.'

FIEDOR: We had a client that we took out to bid three years ago and we got one bidder and the deal didn't get done. We recently took it back out to market and got seven bids on it. It is under definitive agreement.

Michael, your experience is in capital raising; what's the mood of investors?
RICHTER: It depends on the story. There are the banks in no man's land and that is still difficult, but if they are a small strong group with a good story and they are out to grow or have some sort of strategic plan, they'll have access to capital.

Any trepidation from investors about their cash just sitting there?
RICHTER: Institutionally, they want liquidity in three years and they want a good story. Some of the retail folks want liquidity, as well, but they have an appetite for a four- to seven-year plan. There is money out there for the right opportunity.

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