Some banks are trying to steer clear of the fiscal cliff.
More banks were expected to sell themselves because of the threat of an increase in capital gains taxes next year if Congress fails to break its budget stalemate.
The worry hasn't stirred an M&A wave, but it has driven and shaped some deals. Negotiators structured at least three late-summer deals — those for Fidelity Bancorp, Western Liberty and Savannah Bancorp — in ways that would enable the selling shareholders to cash out by yearend or soon after.
In each case, banks with aging boards sought stock-based deals that are to be classified as "reorganizations" for tax purposes. That would mean the selling shareholders would not have to pay federal income taxes on the shares they receive. Any cash received in closing by yearend would be taxed at the current rate of 15%.
All three aim to finalize their agreements by Dec. 31, and two of the deals are contingent on the shares that change hands being cleared for listing on a public exchange. That would give the sellers the option to sell their holdings should it become evident the Internal Revenue Service will take a bigger slice of their capital gains.
Executives with Fidelity and Western Liberty declined to comment for this story, and calls to Savannah officials were unreturned.
"We have seen a number of banks motivated by the tax change," John Adams, director of mergers and acquisitions with Sheshunoff & Co. in Austin, Texas, said without referencing specific deals.
He listed several signs, including some sellers' emphasis on liquid forms of payment in recent months and the relative stability of deal values despite a pickup in the number of transactions.
The following are breakdowns of the three deals:
Buyer: WesBanco (WSBC), Wheeling, W. Va.
Seller: Fidelity Bancorp of Pittsburgh, Pa.
Deal Value: $71 million
The $661 million-asset Fidelity Bancorp is a moderately profitable bank in a desirable market that decided to sell for several reasons, according a deal-related filing with the Securities and Exchange Commission this month.
Mounting regulatory compliance costs were hurting profits, as were dividend payments on $7 million owed to the Troubled Asset Relief Program.
It wanted to retire that debt before the annual dividend on it increases to 9% from 5% next year. The board was also facing a succession issue with the "future retirement of [Chief Executive Richard] Spencer" on the horizon, the filing states. Spencer's age was listed as 64 in the company's annual proxy statement in January.
The median age of its directors and executive officers was 62, and the group cumulatively holds 16.07% of Fidelity's outstanding shares, according to the proxy.
Six potential buyers expressed interest, and Fidelity took the $5.5 billion-asset WesBanco's offer over two other final bidders partly because WesBanco agreed to pay in cash and stock. WesBanco ultimately agreed to a split of 80% cash and 20% stock whereas the other two bidders only offered stock. Fidelity also felt WesBanco would be able to secure the necessary regulatory approvals to close in a "timely fashion," the deal-related filing states.
The tax attorneys for each bank have to provide a "receipt of opinion" that the deal is indeed a tax-free reorganization and that the WesBanco shares issued as payment are approved to trade on the Nasdaq. Either party can terminate the deal if it does not close by March 31. It has other important covenants: Fidelity agreed to certain restrictions limiting its ability to field other offers while WesBanco agreed to let Fidelity walk away if WesBanco's shares decline in value against an index at closing.
The parties aim for a closing by yearend, with certain terms changing should the deal be completed in the first quarter instead. WesBanco is not allowed to charge off more than $2 million in loans between July and the end of December. If the deal is not closed by then, it can charge off an additional $200,000 for every extra month until closing.
Buyer: Western Alliance Bancorp (WLBC), Phoenix
Seller: Western Liberty Bancorp, Las Vegas
Deal Value: $55 million
The $199 million-asset Western Liberty had fewer options than Fidelity. Five potential suitors scrutinized its books last year but took a pass, according to its deal-related filing this month. It lost money during the first six months of 2012.
Chief Executive William Martin is 70, and its shareholder base is also dominated by hedge funds interested in liquidating sooner rather than later, the filing says.
Negotiations with $7.6 billion-asset Western Alliance began in earnest in May. The buyer was unwilling to budge much on price while continually promising to move fast. Western Alliance added $9 million to its initial bid in June of $46 million -- despite Western Liberty asking twice for at least $60 million, the filing states.
Western Alliance said it could "negotiate and execute a definitive transaction agreement in a three-to-four-week" period. It also promised that the transaction would "be moved quickly through the regulatory" approval process and close by yearend.
Western Alliance took just two weeks to conduct due diligence.
Western Liberty promised to make its best effort to seek shareholder approval within 35 days of the filing; both parties have the right to walk away if the deal is not completed by April 30.
Western Liberty is to be paid 50% in cash and 50% in stock.
Buyer: SCBT Financial (SCBT), Columbia, S.C.
Seller: Savannah Bancorp, Savannah, Ga.
Deal Value: $67 million
The $952 million-asset Savannah also is a small bank with an aging board and shareholders angling for liquidity.
Chief Executive John Helmken said as much in detailing its all-stock agreement to sell to the $4.4 billion-asset SCBT.
"For our shareholders this will immediately unlock the value of our" stock," Helmken told analysts and investors in an Aug. 8 conference call.
The "trading volumes" of SCBT and the "liquidity of the currency" it has are "something that gets us excited," he said.
Savannah's executives and directors own 16.03% of the company, and their median age is 63, according to its latest annual proxy statement.
The parties are shooting to complete the deal by yearend, counting on the familiarity between the companies and SCBT's ability to do the deal without having to raise money.
"This is a franchise that's fairly close to us. It's not logistically going to be that big a mountain to climb to integrate this," SCBT's CEO, Robert Hill, said in the conference call.
Among the closing conditions, the deal has to qualify as a tax-free reorganization and the shares that change hands have to be approved to trade on the Nasdaq.