Though healthy companies scouting for acquisitions lately have preferred takeovers of failed banks, a deal in Indiana this week showed that a market for struggling banks exists for those willing to get creative.
With little competition, Horizon Bancorp in Michigan City, Ind., was able to create its own playbook for a deal announced late Tuesday in which the company agreed to buy pieces of the $122 million-asset American Trust and Savings Bank in Whiting, Ind.
Horizon, which has $1.3 billion of assets, agreed to pay $2.6 million for most of the assets, all of the deposits and four branches of American Trust and Savings, or a 3% premium on core deposits, plus $500,000. Horizon left the less desirable pieces out of the deal — American's portfolio of $12 million in loan participations, an insurance company and an investment company.
And it also left behind the bank's charter. American, which is operating under a regulatory order, has agreed with regulators to fold its charter as loans are repaid.
Industry watchers said this should not be interpreted as a sign that buyers are shifting from government-assisted deals. Acquirers have preferred failed banks because they often can pick up deposits and assets at a great price — and sometimes are paid to do so — while sharing credit risk with the Federal Deposit Insurance Corp.
Still, sellers in some areas — like Indiana, where the bank failure rate is expected to remain low — may have a better chance of finding a buyer. "In the state of Indiana, there are a couple names with some serious issues," said John Rodis, an analyst at Howe Barnes Hoefer & Arnett Inc. "But others can limp along. And to the extent that some are interested in acquiring, they may choose that [open-bank] avenue."
Philip J. Grenchik, American Trust and Savings' president and chief executive officer, said its representatives reached out to roughly 60 potential buyers but found few interested. In the end, it came down to two potential acquirers — a group of investors and Horizon.
"We would have much rather gone with investors' buying the whole thing," Grenchik, who has worked at the bank for 51 years, said in an interview. "It would have been simpler. At the last minute they couldn't come up with the investment. Then it was down to Horizon Bank, and the controlling shareholders decided to go with it."
Craig M. Dwight, Horizon's chief executive officer, said this deal made sense for the company because American Trust and Savings fits well with its expansion plan. "The branch locations complement our footprint," he said.
The purchase and assumption agreement, instead of an outright acquisition of American and its parent, Am Tru Inc., worked well for this particular deal. Dwight said. "We get to pick what we want, but it isn't an FDIC-assisted deal," he said, noting that it is expected to close in the second quarter — not overnight, as is usually the case with failed-bank deals.
American Trust and Savings' shareholders are to get $2.6 million at closing and also will be able to benefit from the $12 million of loan participations as they are collected.
Other buyers also have excluded less-attractive parts of their target in recent deals. In June the $134 million-asset Timberland Bank in El Dorado, Ark., was sold to the $698 million-asset Southern Bancorp Inc. in Arkadelphia, Ark., for $6 million. Timberland's shareholders kept $6.5 million of nonperforming loans. In September the $50 million-asset Town Center Bank in Coppell, Texas, agreed to be sold to the $87 million-asset Access 1st Capital Bank in Denton, Texas, for only the bad assets. That deal fell apart in October.
"A lot of investment bankers are offering this type of structure for banks that need capital," said Randy Dennis, the president of DD&F Consulting Group in Little Rock.
Michael A. Renninger, the principal of the investment banking firm Renninger & Associates LLC in Carmel, Ind., represented the seller in the Horizon deal. He has been able to find buyers for a couple of other small banking companies that had problems in the past year.
"I wouldn't say [the market for buying ailing banks] is opening up," he said. "I would say acquirers who are recognizing opportunities to acquire banks, with the proper amount of creativity, can insulate themselves from issues they don't want to accept."
In American Trust and Savings' case, the FDIC announced a consent order for the company on Monday. Among its requirements was that the bank must hire qualified management, increase its Tier 1 leverage ratio to 8.5% and total risk-based capital ratio to 12% by Feb. 22 and improve asset quality by charging off classified loans.
Through Sept. 30, American Trust and Savings had lost $1.1 million this year; its leverage ratio was 6.93%, and its total risk-based capital ratio was 13.72%. At Sept. 30, the ratio of noncurrent loans to total loans was 5.66%, up 145 basis points since June 30 and up 428 basis points from a year earlier.
In the third quarter, Horizon reported net income to common shareholders of $2 million, up 50% from a year earlier. Nonperforming loans were 1.87% of total loans, up 40 basis points since June 30.
American would be Horizon's first acquisition since 2005, and Dwight said more are on the way.