Bank interest growing – acquisition interest, that is

After several years of quiet on the traditional merger and acquisition front, the banking industry might be poised for a flurry of activity.

Interest from inside and outside of the industry appears to be picking up – much of it driven by the stress banks are currently under. In a recent Grant Thornton survey of bank executives, 42 percent of respondents said that their bank is interested in bidding for a failed bank’s assets or deposits, but only 2 percent have actually made such an acquisition.

While bank-to-bank transactions are scarce, investor groups are creating banking dream teams to take advantage of bargain-basement prices. Denver-based Community Bank Partners formed late last year with an eye toward picking up distressed institutions and failed assets. In November, the group filed with the Federal Reserve Bank to become a bank holding company to close on its first deal: the purchase of The Palisades National Bank, currently owned by Greeley-based Bank of Choice Holding Co.

Palisades isn’t exactly a distressed asset. While the $50 million bank has its share of past-due loans, it reported higher return on assets and return on equity than banks of its size – under $100 million in assets – in general. It also had a much lower ratio of net charge-offs to loans.

Bank of Choice started exploring options to raise capital early in 2009 and decided it could shed the small bank, because it was outside of its traditional market. The holding company picked up Palisades in the early stages of an expansion period in 2004.

Bank of Choice President and CEO Darrell McAllister said that the interest in Palisades was pretty good. The holding company tapped Denver’s St. Charles Capital to broker a deal. One offer fell through on the buyer’s side, but three additional offers came in.

McAllister doesn’t anticipate that the deal will close until around April – about a year after discussions started – due to regulatory requirements.

“If it were a bank buying a bank, it would be closed by now,” he said.

Banking regulators require more documentation and go into more depth on topics such as management for a newly formed holding company than an established one.

Surge in interest

Companies such as consulting and accounting firm Kennedy & Coe LLC are seeing a surge in interest in acquisitions from clients on the banking and investing side.

“The activity seems to come in waves,´ said Paul Mendoza, a consultant in Kennedy & Coe’s financial institutions group.

Mendoza explained the past few years have been virtually devoid of M&A activity because investors were worried about where the banking market would bottom out. At the same time, potential sellers were getting valuations well below what they thought their banks were worth or substantially less than a valuation from a few years prior.

“At some point, the investors are going to be comfortable that it’s hit bottom,” he said, adding that sellers are also going to adjust to the reality of lower valuations.

Investors are getting into the early stages of acquisition, seeing what is available and trying to determine what its value might be. Even if the initial negotiation stage is successful, there is the regulatory process to prepare for. Because of the several-stage process, investors posturing now aren’t necessarily likely to be making purchases soon.

“There’s been a lot more inquiries,” Mendoza said. “It’s a long and winding road.”

He points out that banks will also now be turning to acquisitions for growth, since growth from commercial and residential real estate development will not be picking up anytime soon. According to the Grant Thornton survey, about a quarter of bankers reporting they expect to grow plan to do so through acquisition in 2010. About 26 percent of respondents said they would not be growing in the coming year.

“In this industry and this marketplace, in the next five to 10 years we’ll see a lot of bank growth coming from acquisitions,” Mendoza said.

Kristen Tatti covers the banking industry for the Business Report. She can be reached at 970-221-5400, ext. 219 or ktatti@ncbr.com.

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