A Michigan company started two years ago to buy failed banks hopes to become the latest acquirer to use bankruptcy to separate a troubled bank from its unwieldy debts.
Talmer Bancorp's $45 million stalking-horse bid announced Monday for the 41-branch banking operations of First Place Financial (FPFC) in Warren, Ohio, resembles two deals in Texas and Washington in which dealmakers went to court to acquire distressed banks from their holding company parents.
These types of transactions are often considered but rarely pursued because they can be costly, time-consuming and risky, experts say. Rival bidders can enter the fray, and the seller's debtholders can cause a stink. The target can also fail before a deal closes.
So why is Talmer pursuing it? The $2.2 billion-asset company embraces messy situations, having bought four failed banks since raising some $200 million from private equity in 2010. It has a mandate to put that money to work, but the number of Midwestern failures is dwindling.
If this deal works out, Talmer would win a clean acquisition it has promised to prop up with $205 million in additional capital. If the deal falls through, Talmer is wagering the court would reimburse its transaction expenses by honoring the deals' $5 million termination fee.
"It's an opportunity to expand our presence in the Midwest," says David Provost, Talmer's president and chief executive. "At the end of the day if our offer is accepted, you'll have a very,very healthy bank."
There are precedents for this type of deal: MidSouth Bancorp (MSL) in Lafayette, La., last year bought five Dallas branches from the bankrupt parent of Jefferson Bank of Lubbock, Texas, and SKBHC Holdings — backed by Goldman Sachs Group (GS) and OakTree Capital Management — in 2010 bought the Utah and Washington banking operations of bankrupt AmericanWest Bancorp.
Buying a bank out of bankruptcy is a "new process" that Talmer has "considered more than once," Provost says, adding that is appealing to the selling shareholders because they are to be paid for their equity that would be wiped out in a failure.
First Place's bank unit is to be shopped in an "open process" that should be resolved within three months, he says.
First Place the holding company has too much debt and too little equity, with nearly $73 million outstanding to the Troubled Asset Relief Program. Its book value at Oct. 26 was $175 million and total debts were $64 million, according to its Chapter 11 petition filed Monday.
Talmer's deal is only for First Financial's banking subsidiary, First Place Bank. Talmer has not agreed to retire its Tarp or outstanding trust-preferred obligations, Provost says.
First Place Bank — the unit Talmer is bidding on — had returns on assets of 1.31% during the first six months of 2012, according to the Federal Deposit Insurance Corp.
Its ratio of nonperforming assets to total assets was 5.76%, and its cost of funds was 0.96%, according to the FDIC.
First Place the holding company last filed quarterly earnings with the Securities and Exchange Commission in 2010. The Nasdaq delisted its shares last year.
First Place needs to be recapitalized because the bulk of its equity is in the form of preferred capital, which runs afoul of a regulatory preference for common-equity dominated capital structures, says Ralph "Chip" MacDonald, a partner with law firm Jones Day who is not involved in this transaction.
Talmer is well-positioned to close the deal, he says. First Place does not appear to be in danger of an imminent failure, he says.
Talmer has started due diligence, giving it a leg up on rival bidders, he says. The $205 million it has pledged to recapitalize the bank could be tough to match.
And few banks embrace messy turnaround situations, he says.
First Place may be too big for most community banks to risk buying and too small to draw the interest of KeyCorp (KEY), Huntington Bancshares (HBAN), or other large Midwestern banks, he says.