Posted on Wednesday, December 22, 2010
As many as a dozen well-capitalized banks and investment groups are swimming around South Florida's financial waters, looking for banks they can acquire to expand their footprints in the region.
At least as many banks are looking for buyers, or at least investors.
Talks and due diligence are well under way — have been for months. BankAtlantic went on record last week that it will consider offers, amid rumors of interest from PNC Bank. Yet few if any deals have actually been done. That's left many struggling banks adrift and quite a few of the nation's and region's biggest banks looking all hat and no cattle on the acquisition front.
So where are all the deals? A lot of prospective buyers are checking out what is available and saying thanks, but no thanks.
"You're seeing a lot of people looking, and quickly walking away," said Martin Schrier, a partner in K&L Gates's Miami office in the corporate and private equity practice groups. "In other regions, it's more active because there is less volatility. Here, things are all over the place."
Schrier, who represents clients looking into bank acquisitions, recalled one deal in particular that ended up not working out.
"Thank God it fell apart. We had some diligence outs and performance outs, and once the numbers came in, we just scratched our heads and went, 'Oh my goodness, we're walking away,' " said Schrier, who would not identify the parties. "I've seen three deals where the acquirers have just walked away when they've seen the pre-deal numbers or they've got close to closing and found things in the diligence. They've tried to re-price or walk away."
Schrier said that's a contrast to previous downturns where deals happened rather quickly and people had a good idea of what they were getting.
"Here, people are terrified. Some of these holding companies, they want to get the first deal to be a real nice deal to serve as a platform," he said. Some banks on the market "need capital, and they can't raise it, and there is a reason they can't raise it. It's because the smart investors aren't willing to take that risk."
While some consolidation advocates found hope in Bank of Montreal's pending $4.1 billion takeover of U.S. regional bank Marshall & Ilsley, announced on Friday, others see such deals taking their time to come together.
"It could take a period of months," said L. David Shear, a Ruden McClosky shareholder in the corporate, real estate and banking practice groups. "Right now, everyone is so cautious because of all the things that are occurring, particularly with the regulatory authorities. You want to carefully review the loan portfolio and the financial issues and the structure of the bank in terms of its capital. I, too, am finding that not a lot of deals are closing. Many banks are having a hard time."
The preferred way to acquire banks has been through Federal Deposit Insurance Corp. acquisitions, where the acquiring bank picks up a failed bank in a loss-share agreement with the regulator. The FDIC, however, has been driving tougher bargains in recent months, stung by criticism over what many saw as the one-sided deal they gave the private equity group that acquired the failed BankUnited FSB in May 2009.
That means banks and other investors now are more likely to find deals by striking out on their own.
"When you have these groups that are coming in, particularly ones that are not local, they're trying to first identify the management, who they have down here that is established and has the reputation and they can trust going forward," Schrier said. "Where we have had a lot of problems on diligence is … Florida's got all of these horrible loan portfolios out there based on the housing market.
"A couple of the banks we've looked at, we've had a real hard time getting comfortable with 'What is our exposure here on this portfolio?' It's just really hard to quantify the downside with these, and you're just not sure where to go because the market is so volatile in the sense of the values of the underlying collateral of a lot of these loans."
Even so, a wave of acquisitions seems a matter of when, not if. "If you're going to build from scratch, it's very costly," said Ken Thomas, an independent banking analyst in Miami.
Thomas said he is seeing banks paying $4 million to $5 million for corner locations. By the time the building is put up on the raw land, the tab is running $8 million to $10 million for a prime location.
"We know Florida is one of the three most attractive markets in the nation. There just are not that many franchises available or locations," he said. "You can cobble them together with small deals, but that is going to take a lot of time. There is a small supply of substantial franchises with substantial locations."
Frank Gonzalez, partner in charge of the financial institutions division at accounting firm Morrison Brown Argiz & Farra, said his firm has been involved in several due diligence projects for would-be bank investors, and noted that there is no end to issues an acquirer needs to explore.
"Any regulatory orders in place? How many branches does the entity have? And not just any branches, but strategic branches?" Gonzalez asked. "Some of these institutions are really drilling down into specific issues. … They are looking for banks doing that business with doctors, with CPAs, with attorneys."
Shear said another red flag is if a bank is going to require further loan-loss allocations. Demographics and geographics also come into play — some investors are specifically looking for high-net-worth customers or depositors. Relationships with regulators also are crucial.
"Reporting Bank Secrecy Act issues is highly confidential, and it's really hard to get input on that," Shear said. "They are very carefully handled by the feds, and an important issue is getting access to that information. Some of it is public, and some of it is not so public. You do sign confidentiality agreements so you can see all, but there are some things that may not be available for understanding or review very easily."
Gonzalez said that with Dodd Frank and other upcoming regulations making it more expensive to operate a community bank, some healthy banks will put themselves up for sale.
The thinking is, "let's get a better deal when we're healthy instead of waiting for the going to get tougher going forward," Gonzalez said.
Many stalemates stem from timeless issues.
"The expectations of the buyers and the sellers still need to align on the economics. How big a discount to book value are the sellers willing to tolerate for the investment in the bank?" said Carlos Junco, partner of the corporate and securities group at Bilzin Sumberg.
"We've seen deals where the bank's condition continues to deteriorate between signing and closing while the parties are seeking regulatory approval. And when that happens, you have situations where the buyers may trigger their termination rights. The bank's financial picture is not the same as when they originally underwrote the deal."
Alan Axelrod, Bilzin's corporate and securities chair, said the underlying value of commercial real estate and residential assets has yet to stabilize.
"So you're seeing a hesitancy to a certain extent on the part of potential buyers," he said. "We've had a couple of deals that we signed and didn't close because of deterioration."
There are institutions that are not well capitalized, but not in serious danger in terms of failure, Shear said.
"If you're able to capitalize these banks, and they have good demographics and good staff, they just need an infusion of money, and they can be very profitable and very desirable," Shear said.
"Banks right now are not selling for great prices," he said. "Of course, years ago, they were getting two or 2½ times book. Now I'm finding you can get certain institutions at par, sometimes even less than par."
Shear said some smaller banks are even thinking one step ahead.
"I do see particularly the small community banks talking to each other about consolidating so they can be big enough to be attractive to a regional or national acquirer," he said.