Why buy a whole bank when you can snap up its choicest assets? That appears to be the thinking of a growing number of acquirers these days as they troll for select assets and deposits rather than entire banks.
Several privately negotiated purchase and assumption deals have been unveiled in recent weeks, including the pending sales of Old Harbor Bank in Clearwater, Fla., and United Kentucky Bank of Pendleton County Inc.
The structure of each transaction includes unique features but in most cases buyers are cherry-picking a majority of the seller's performing assets and all its deposits.
On the surface, such transactions could provide a life preserver to banks floundering amid a flood of nonperforming assets. However, these deals could prove a tough sell with regulators, given that sellers are often left with nothing but rotten assets, industry observers say.
Rather than reject such deals outright, regulators are likely to thoroughly vet proposed transactions and impose contingencies, says C.K. Lee, a managing partner at Commerce Street Capital LLC and a former regional thrift regulator.
"The regulators have a tremendous amount of power to put in conditions on transactions," Lee said. "I would suspect deals like this to be more scrutinized than a whole bank purchase, because the [seller] is still left with something that's polluting the charter left behind."
Despite the regulatory hurdles, a some bankers remain hopeful that privately negotiated purchase and assumption deals will become gain approval.
Such deals "are better" than transactions that are handled through the Federal Deposit Insurance Corp., according to John Corbett, president and chief executive of CenterState Bank of Florida in Davenport. CenterState has been involved in two privately negotiated purchase and assumption deals after buying four failed banks.
In contrast with FDIC deals, "we're not taking on any problem loans" in privately negotiated deals, Corbett says. With failed bank purchases, "you're working with the government for 10 years, and accounting on [loss-sharing agreements] are pretty brutal."
CenterState, with $2.2 billion of assets, is orchestrating the purchase of Federal Trust Bank with assets of $367 million). The deal includes a clause to give CenterState the right to put back any loans it acquires that fail to remain current for a full year after the deal closes.
The creative structuring is one way to bridge the large gap between buyers' and sellers' disagreements on valuations, says Dan Bass, a managing partner at FBR Capital Markets. "Everyone is trying to be unique as possible," he said.
Old Harbor is selling essentially all its assets and liabilities to Community Bank & Co. in Lakewood Ranch, Fla. Community Bank's parent company, CBM Florida Holding Co. in Lakewood Ranch, also agreed to invest $25 million in Old Harbor, which is under a consent order to raise capital ratios. (Old Harbor's total risk-based capital ratio was 1.72% as of March 31.)
"One of the inherently problematic parts to these transactions is whether the selling bank has a viable business afterwards or [if] they surrender their charter as part of the process," said Mark Kanaly, a lawyer at Alston & Bird.
The Bank of Currituck in Moyock, N.C., dissolved its charter in December after selling all its $173 million of deposits, $96 million in performing loans and its six branches to TowneBank of Suffolk, Va. The $8 million deal was structured so that assets TowneBank rejected — including nonperforming loans and foreclosures due were spun into a noncommercial bank corporation that Currituck plans to liquidate over three years.
TowneBank was allowed to adjust its price at closing, which it eventually lowered from its initial offer of $10 million.
"For microscale banks with high classified asset ratios, your choices are very limited," Kanaly says. Privately negotiated purchase and assumption transactions "provide an exit for troubled institutions with limited options, so it is going to become more and more popular."
The $1.6 billion-asset Bank of Kentucky Corp. is buying $14 million in loans and $26 million in liabilities that belong to United Kentucky, which is operating under a consent order with the FDIC.
"There was no way to get [a deal] done unless they structured it this way," says Bryce Rowe, an analyst at R.W. Baird & Co.
Bank of Kentucky is set to file an application and does not expect regulators to take issue with the acquisition, chief financial officer Martin Gerrety said in an interview Friday.
"In this [transaction] we're taking just about everything they have … and leaving them with the cash to go forward with their issues," Gerrety said. "We wouldn't see any [regulatory] problems because we're really not leaving them with any significant assets."
Observers agreed that regulators may closely scrutinize sales of portions of struggling banks, yet conclude they're a better alternative than outright failures.
"There is a fine line between selling off the family jewels and realizing as much value as you can," says Commerce Street Capital's Lee. "Once a bank goes into receivership, whatever value was there is automatically degraded by 30% or more."