A Minnesota community bank has made an offer to buy American Bank of St. Paul in what would be the first time a bank was forced into a sale over unpaid trust-preferred debt.

American Bancorporation, the parent company of the $309 million-asset American Bank, was forced into bankruptcy in May, after its creditors demanded more than $51 million in defaulted trust-preferred debt. The holding company has proposed to auction off both American Bank and AmeriNational Community Services, a subsidiary that services loans for government-based housing developments.

The $250 million-asset Deerwood Bank agreed this week to be the stalking-horse bidder for both companies, according to court documents. This agreement, and the proposed auction procedures, would have to be approved by a U.S. bankruptcy judge. The proposed auction will take place in December.

While other bank holding company have voluntarily declared bankruptcy and sold bank units to settle debt, American is the first to be forced into bankruptcy by its debtors.

The stalking-horse bidder in bankruptcy sales is the company that agrees in advance to a negotiated sales price, which serves as the opening bid. In the earliest bankruptcy auctions, the stalking-horse bidder was usually the winning bidder — and often at prices that creditors considered low. In more recent auctions, however, bidding has been vigorous and the stalking-horse has not always prevailed.

Deerwood agreed to two different structures for the proposed transaction, depending on whether American Bancorporation sells its two subsidiaries to the same bidder or separately. That will depend on which possible deal offers the best return.

If it buys both American Bank and AmeriNational, Deerwood agreed to pay 65% of the adjusted book value of the bank, minus a loan-loss provision. The price would have been about $15.8 million as of June 30.

If it buys the bank alone, Deerwood agreed to pay 41.4% of the adjusted book value, minus the loss provision. This would have been $10 million as of June 30.

American Bancorporation is the first company to be forced into liquidation over trust-preferred debt, but it is unlikely to be the last. The trust-preferred creditors of FMB Bancshares in Lakeland, Ga., have begun the legal procedure to force it into bankruptcy, but the $566 million-asset lender has resisted.

In September, a judge ruled that FMB's involuntary bankruptcy could proceed, but the creditor, Trapeza Capital Management, still has to prove the facts stated in its petition before FMB enters bankruptcy.

The judge's ruling in that case could embolden other trust-preferred creditors to seek to force holding companies that have defaulted on their debt into bankruptcy. Trust-preferred issuers can defer payment on their debt for five years, after which creditors can demand payment of the entire amount deferred. As of late last month there were 231 bank holding companies that have defaulted on their trust-preferred debt and 196 that are still deferring interest, according to Fitch Ratings.

America Bancorporation, like FMB and many other companies that have defaulted on their trust-preferred debt, is under a regulatory order forbidding it from paying interest on its debt.

After suffering heavy losses in the downturn, American Bank has returned to profitability, earning $2.1 million in the first six months of the year and $6.8 million last year. AmeriNational currently services 64,000 loans with about $5 billion in outstanding principal.

The stalking-horse agreement calls for Deerwood to receive a break-up fee of $450,000, plus $250,000 in fee reimbursements, if it doesn't win the auction. The fee would be reduced by $100,000 if Deerwood buys the bank but not the loan servicer.

All bids on American Bank must be in by Dec. 3, and the winner will be named on Dec. 11, according to the proposed procedures. Court documents show that Carl Marks Securities, the investment bank tasked with marketing American Bank, contacted 165 possible buyers.

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