2012 Bank M&A: Volume and Pricing Improves, Uncertainty Remains

uncertainty-clouds.jpgOver the past several years, numerous pundits have predicted a wave of consolidation in the banking industry based on a number of factors, including increased cost of regulation, limited access to capital, and lack of growth opportunities, to name a few.

While the current level of uncertainty in the marketplace and the level of pricing available to sellers have kept the pace of consolidation consistent, the levels are well below the predicted tidal wave of consolidation.

Deal activity for the first six months of 2012 indicates a pace of consolidation ahead of 2011 and 2010 levels, but still well below levels before the credit crisis. The year-to-date price-to-book value (P/BV) and price-to-tangible book value (P/TBV) ratios for bank deals are improved over 2011 indexes and consistent with 2010 indexes.

M&A Deals*


# of Deals

Avg. P/BV

Avg. P/TBV









YTD 2012




Source: SNL Financial / *Excludes FDIC-assisted transactions

Uncertainty Does Not Breed Confidence

In a survey on merger and acquisition conditions jointly conducted by Bank Director and Crowe Horwath LLP in October 2011, one of the primary impediments to consolidation was reluctance to take a chance on an acquisition in uncertain economic conditions. This concern can be translated into uncertainty regarding credit quality.

History has shown that high levels of credit problems in the banking industry inversely impact the number of acquisitions closed.


To put this into more qualitative terms, buyers and sellers tend to view the levels of credit issues in different ways, and bridging the chasm between the two views has impeded acquisitions. In fact, survey respondents indicated that concern over the asset quality of selling institutions was the number one reason why they would not engage in bank acquisitions.

Lower FDIC Deal Volume

As the Federal Deposit Insurance Corporation (FDIC) continues to work with troubled institutions, the number of assisted transactions has diminished from its peak in 2010.

FDIC-Assisted Deals 


# of Deals

Avg. Assets Sold







YTD 2012



Source: SNL Financial

In addition to a decrease in the number of deals in 2012 from prior years, the average asset size of the institutions sold has also decreased. This indicates that the FDIC has resolved the issues for most of the larger troubled institutions and is now focusing on the remaining smaller institutions.

The FDIC also has been structuring more transactions in 2012 and 2011 without loss-share agreements, which were prevalent in 2010 transactions.

FDIC-Assisted Deals and Loss Sharefdic-loss-share.png

Some of this trend can be attributed to buyers opting against having the FDIC as a future business partner, and some is the result of the FDIC not offering loss-share agreements or offering loss-share agreements on only a part of the loan portfolio. This trend likely accounts for some of the increase in the asset discount on those deals in 2012 closed with a loss-share agreement. Based on a review of recent deals, the FDIC is tending to offer loss-share agreements on commercial loans instead of on single-family mortgage loans.

It looks as though the number of FDIC-assisted transactions will remain low in 2012, with the year on track to be substantially below 2011 transaction levels.

Slow and Steady

Although overall deal volume has increased thus far in 2012, indicators still point to consistently slow activity in bank mergers and acquisitions—a far cry from the tidal wave of consolidation many had predicted. While credit is improving and the number of banks on the FDIC’s troubled bank list has decreased, the level of nonperforming loans is still higher than optimal. This higher level of nonperforming loans will continue to affect the level of bank merger and acquisition activity in 2012.

Waiting for M&A, and waiting…

With an apology to the late, great Samuel Beckett, the bank mergers and acquisitions market has begun to resemble the story line in Beckett’s Waiting for Godot where the two central characters—Estragon and Vladimir—spend the entire play waiting for a man named Godot, who never shows up. For the last few years, U.S. banks have been waiting anxiously for M&A activity to recover after the financial crisis of 2008, but the rebound has yet to show up.

snl-ma2012.pngAccording to SNL Financial in Charlottesville, Virginia, there were 178 whole bank and thrift deals in 2010, with an average price-to-book valuation of 113.4 percent. Through Dec. 1 of this year, there were only 140 whole bank and thrift deals, for an average price-to-book valuation of just 104 percent—a clear indication that the bank M&A has cooled off. Unless something truly stupendous happens in terms of deal volume in what remains of 2011, this will turn out to be an even worse year for bank M&A than 2010.

And based on the results of an email survey of independent directors, CEOs and other senior bank executives conducted by Bank Director and Crowe Horwath LLP in October, 2012 might not turn out to be much better. Of the survey’s approximately 225 respondents, 48.3 percent said they did not expect to make any type of acquisition—including a healthy bank, failed bank purchased through the Federal Deposit Insurance Corp., or branches—for the following 12 months, which would take us through October 2012.

“Activity is occurring, but it’s at a more modest level than it has been in the recent past,” says Rick Childs, director of assurance and financial advisory services at Crowe. “We are seeing some opportunistic buying, but buyers are being careful about what they take on.”

Of those respondents who said they would consider doing an acquisition, 36.6 percent expressed an interest in healthy banks, 26.8 percent in branches and 23.4 percent in an FDIC-assisted deal. Not surprisingly, there was little expressed interest—just 11.7 percent—in buying another bank’s loan portfolio, a probable sign that asset quality continues to be a concern throughout the industry. Childs says there are “some willing sellers out there,” including banks that have been unable to raise capital and are feeling the heat from their regulators, and banks that are worried about the rising cost of regulatory compliance following the passage of the Dodd-Frank Act and other recent regulatory initiatives.

Among likely acquirers, the top barrier to doing a deal—cited by 66 percent of the respondents—was lingering concern about the asset quality of potential targets. Other impediments included the “unreasonably high” pricing expectation of most potential sellers (56.9 percent), and the perceived risk of doing an acquisition in an uncertain economic environment (43.7 percent).

Also, when asked what the greatest barriers to selling their banks were, 69.3 percent responded that current pricing was too low.

“There is still a bit if a price gap between buyers and sellers,” says Childs. “Sellers understand that prices are down, but they’re still hoping for a higher price.”

Looking ahead to 2012, Childs expects there will continue to be an active market for FDIC assisted deals since there is still in excess of 800 banks that are in some kind of trouble. Many of those could end up being taken into receivership by the FDIC and either sold or liquidated. However, Childs does not look to see a significant increase in healthy bank acquisitions in 2012, even though organic growth will also be harder to come by, which normally would be a strong argument in favor of more takeover activity.

Instead, expect to see potential buyers wait for a stronger economy to lessen the risk of doing an acquisition, and for likely sellers to wait for better pricing.

“I think we’ll see a pretty sluggish market next year,” Childs says.

Just like Estragon and Vladimir in Godot, everyone’s still waiting.

Intangible Benefits of FDIC Deals

deal.jpgWhen I attend conferences or speak with investors, everybody wants to know about the financial consequences of doing an FDIC-assisted deal. My bank has done eight of those deals. To be fair, the financial advantages of buying failed banks are the driving force behind the large amounts of institutional capital that has gone almost exclusively to acquiring institutions. Tracking and reporting on progress relative to expectations will continue and it should.

What is becoming increasingly clear, even to a number cruncher like myself, are the intangible benefits that have been realized during this strategy. With many bankers starting to wonder if the opportunity to participate is over, or at least drawing to an end, maybe it’s appropriate to give some airtime to some these intangibles.

Opportunity to be on offense with the FDIC

We all understand the healthy, but defensive, give and take between bankers and regulators. In today’s environment, with so many banks on the FDIC’s problem bank list, the defensive tone is more pronounced.  These deals have allowed us to work offensively with the FDIC, to partner with them in the resolution of our industry’s problems. I am not using the term “partner” lightly here because it is exactly that kind of relationship that they want to foster with acquiring institutions.

This spirit of partnership does not mean that we escape serious oversight from the resolution and supervision departments of the FDIC. As with most successful relationships, though, the congeniality is maintained with consistent communication and a thorough understanding of each party’s goals. More face time with our primary regulator has been very good.

Opportunity to build or rebuild a workforce

Chances are your bank has made some hard decisions over the past few years that would not have been considered during the boom years immediately preceding the current economic period. Most banks, even the super-regionals, have rationalized virtually every expense line and every strategy to ensure that the timing was right and appropriate given the circumstances.

The hardest decisions bankers have had to make relate to staff reductions.  People matter in banking because this is still an industry where customer relationships count.

Not to repeat myself, but this “offensive” strategy has improved the morale of our bank, relieving some of the sting of the staffing decisions. Because of the increase in loan and deposit customers, we have been able to rehire some past employees and transition other idled employees to help manage those assets.  We have been able to build out new divisions and even hire new staff in both line and corporate functions.  And there is something real about the energy that new employees bring to a company, along with new ideas and best practices.

Opportunity to build M&A expertise

How many times have you heard in the last two or three years about the record levels of consolidation taxiing down the runway? It does seem likely to us, given the perception that banks need more operating leverage to counter all of the revenue headwinds (weak economic recovery, new regulations, etc.). The rapid improvement in operating efficiency that investors and boards want to move the needle on earnings is most easily accomplished through consolidations.

For an institution that plans on being an acquirer instead of being acquired, the FDIC deal strategy has been an excellent opportunity to build out an M&A line of business. Obvious divisions here include special assets and our data conversion team. These teams have mastered certain “transitional” functions that are vital to getting us to the next stage.

It is the cultural M&A expertise that has been fine tuned. “Ripping out” the acquired company’s culture with all due haste and replacing it with your own culture seems simple enough. Doing that and still having a team that wears your jersey with pride is more difficult. Our other teams have learned how to “sell” our cultural points (H/R systems, credit administration processes, sales culture) in such a manner that our new employees WANT to follow us.

As I mentioned at the outset of this article, the financial benefits deserve serious discussion.  But these and other intangibles will have their 15 minutes of fame someday. They will impact the bottom line in ways that are hard to quantify right now. 

Buying into trouble? Experts give their advice on FDIC acquisitions

Buying a failed bank can be a brutal experience. There may be opportunity to grow your bank, but there also is risk and hard work to do in a short amount of time. Plus, all that work can feel like a waste, if you lose the bid to buy. As the final post in a series on FDIC-assisted bank acquisitions, we’ve summarized advice for those considering such a deal from the final session of Bank Director’s May 2nd conference in Chicago:


Walt Moeling, partner in law firm Bryan Cave, says that bankers looking to do transactions “really need to focus on strategic planning in the big picture sense.”  Are you large enough to handle the acquisitions you want to do? If you double in size, how many people on your team have ever worked at a bank that size? “You can see banks struggling with the staffing issue two years out,’’ Moeling says. He also tells bankers to communicate regularly, or start networks, with other bankers who have done FDIC-assisted deals. If you run into a problem, they might have advice. Also, remember that communication isn’t great between all the different regulatory agencies. Don’t assume your regulator knows what the FDIC knows, and vice versa.

Jeffrey Brand, principal and an investment banker at Keefe, Bruyette & Woods, says figure out what the costs of bidding for a bank will be, emotionally and financially, and develop a team with clear responsibilities. “It’s a very intense, two-week period,’’ he says. “You get very invested in the process. You might not win (the bid), and you need to be prepared if the wind comes out of the bag.”

Rick Bennett, a partner at accounting firm PricewaterhouseCoopers, tells bankers that FDIC-assisted deals continue to be highly accretive to bank balance sheets. The more acquisitions a bank makes, the easier the process becomes. But some bankers underestimate the amount of people and resources needed to acquire failed banks. “Ask yourself, if I am successful, what does that mean for me from a resource perspective as well?” he says.

It’s not over ’til it’s over

FDIC contractor says more bank failures on the way

closed-sign.jpgMichael Sher has a first-hand view on the nation’s bank failures. He is managing director of RSM McGladrey, which has various contracts with the Federal Deposit Insurance Corp., including assisting the FDIC in shutting down banks, and assisting them with managing and selling the assets. He discusses where FDIC-assisted deals go from here, and what mistakes bankers make when buying failed banks.

What do you do for the FDIC?
To date, we and our strategic partner The Corvus Group, Inc. have assisted the FDIC in shutting down 59 failed financial institutions. Additionally, we are a contractor to the FDIC providing due diligence services to assist them in disposing of the assets that have been retained from the failed financial institutions. The first large deal was a $1.7 billion structured sale involving substantially non-performing acquisition and development loans. With a structured sale, the FDIC enters into a partnership with the buyer of the assets and typically, the FDIC retains a 60 percent ownership interest. The other transaction that we were involved with was a securitization backed by approximately $394 million of performing commercial and multi-family mortgages from 13 failed banks.

Do you think the FDIC will do more securitized asset sales in the future?
As we move ahead, I think that the FDIC will focus more on securitizations. The cost of due diligence for buyers on a structured sale is substantial and the size of the loans pools historically have exceeded a billion dollars in unpaid principal balance. It is apparent that the interest in such large transactions has waned.  The pricing received from the securitization sales is potentially higher than the other methods that the FDIC uses in disposing of assets from failed financial institutions. In addition, with a securitization, the FDIC does not retain an ownership interest that requires on-going monitoring. With structured sales, there is speculation that the size of the transactions will get smaller to encourage more participation.

Where do you think we’re headed in terms of bank closures?
I don’t believe it’s over. If you look at the number of banks on the watch list, it’s roughly 10 percent of the banks in the country. How can this crisis be over when we have not seen an overall increase in real estate values? That being said, in my opinion, the number of banks going into receivership will decrease as I think that the FDIC will encourage banks to merge prior to a failure. A benefit to this is that the directors and officers may avoid being investigated by the FDIC subsequent to failure, and may avoid possible legal ramifications.

What’s really the demand for banks in hard-hit areas such as Georgia and Florida and Illinois?
This is no different than the savings and loan crisis in the late ’80s and early ’90s. A lot of individuals and organizations made plenty of money buying distressed assets when others thought it was ludicrous to do so. I think that those who are not taking advantage of the distressed times now will be kicking themselves in the coming years because they missed the opportunity. Yes, you have to be cautious about what you buy, but those who get involved have the potential to make a lot of money.

How does the FDIC view the community banks who want to buy these failed banks, versus the big institutional investors?
In my opinion, the FDIC views this banking crisis as the banking industry’s problem and is looking to the healthy banks to resolve it. Most of the institutional investors don’t have the experience or the know-how that the FDIC is looking for. I think the FDIC is somewhat reluctant to get these money players involved. The key is to have the right team in place to manage and dispose of the assets.

What sort of mistakes do buyers make in buying failed banks?
I think one of the biggest mistakes made is buyers not having a full understanding of their rights and obligations under the loss share agreements that they have entered into with the FDIC. The acquiring banks have a short time-frame to truly understand what they have acquired and their reporting responsibilities under the loss share agreement. This results in the acquirers not fully understanding how to manage and/or dispose of the assets that they acquired.

Opportunity knocks, but there are drawbacks

The mess in banking isn’t over yet.That means hundreds of banks, most of them small, community organizations, likely will fail in the years to come. The flip side of all that carnage is an opportunity for bankers to buy troubled institutions, grow balance sheets during tough economic times and let the Federal Deposit Insurance Corp. take most of the bad assets of the failed bank.
The investment bankers and attorneys who attended Bank Director’s May 2nd conference in Chicago agreed on one theme: There are still plenty of deals to be had for banks looking to buy failed institutions from the FDIC, as long as they work hard, fast and smart to do the deals right. 
“There is ample opportunity,’’ said Jeffrey Brand, managing director at investment bank Keefe, Bruyette & Woods. “The FDIC will allow you to bid as many times as you like and they will let you be as creative as you like.”
There were more than 523 banks with $318.3 billion in assets at the end of last year that had Texas ratios topping 100 percent, said Brand, using SNL Financial data. The Texas ratio is commonly used to predict bank failure, and is the amount of non-performing assets and loans, plus loans delinquent for more than 90 days, divided by tangible equity capital and loan loss reserves. If it’s more than 100 percent, that’s trouble.
The number of troubled banks also appears to be increasing. The number of banks with Texas ratios above 100 percent increased 4.5 percent from the third quarter.
The FDIC’s “problem” bank list also appears to be growing. It reached a record high for this cycle of 884 banks at the end of last year, more than 10 percent of the total banking system. That number was up from 860 the quarter before.

Louis Dubin, president of Resolution Asset Management Co., said the states with the most number of troubled banks are Georgia, Florida, Illinois and Minnesota.

Troubled Bank Map: 2010 Q4


CRITERIA: Texas ratio > 100%, Leverage ratio <9%

Picking up failed banks from the FDIC offers some benefits: the FDIC can take on as much as 80 percent of the failed bank’s losses, using a tranche system based on the size of the losses. Plus, the acquiring bank can cherry pick the assets, locations and employees it wants. The failed bank’s pre-existing contracts are automatically voided on the sale.

And bankers can get creative in terms of how they structure deals. Brand recommended making several bids, including one that follows traditional FDIC deals and one that doesn’t. For instance, banks can price bids to take into account future risk, instead of using a loss share agreement, avoiding the hassles of regular audits from the FDIC to make sure they comply with the loss-share agreement.

“The FDIC is discovering the costs of auditing all these banks to see what their losses are,’’ Brand said. “Now they’re doing deals without loss share (agreements). You don’t need that expensive accounting system. But they are taking away that safety net, too. If losses are worse than estimated, that’s 100 percent coming out of your pocket.”  

One of the drawbacks of FDIC deals is the possibility that the government could change the rules at any time. The loss share agreement lasts a decade for single-family housing assets; five years for commercial properties.

Buyers also don’t have much time to do due diligence. The entire process, from expressing an interest in acquiring a bank, to closing, can take about 90 days, less if the failed bank’s situation is dire.

“They don’t let you wander around the bank talking to all the lending officers,’’ said James McAlpin, an attorney and partner at Bryan Cave in Atlanta.

Bank employees will have to work quickly to make a bid and conduct due diligence. Plus, they must be able to reopen the bank on the Monday after the bank’s Friday closure, and follow timelines to transition the acquired bank and dispose of its assets.

“It is a tremendous strain on your organization,’’ Brand said.

Teaming Up on FDIC-Assisted Deals

Resolution Asset Management Co. L.P. was formed in 2010 to assist healthy banks acquire failed institutions from the Federal Deposit Insurance Corp. with loss-sharing agreements where the agency provides some measure of protection against losses. A subsidiary of Cantor Fitzgerald, RAM will provide capital to support the transaction, and has a dedicated team of professionals with real estate, asset management, banking and regulatory experience that can help banks bid for failed institutions and manage the acquired assets. Recently, Bank Director talked with Managing Director Rodney A. Montag about the outlook for FDIC-assisted deals, and how the RAM structure works.

What’s the outlook for FDIC assisted deals in 2011?

The outlook is pretty good, or bad, depending how you view it. We’ve had 322 failures since the current crisis began and we are projecting an additional 300 plus failures over the next few years. Looking forward, one of the big differences will be the average size of the bank failures, which we believe will get smaller.

Has the failure rate of banks peaked or do you think the situation will continue to worsen given the industry’s on-going asset quality problems?

I think that’s more of a regulatory policy question than anything else. There is a backlog of troubled banks to deal with and they’re only closing the worst of the worst, which is to say the banks that have diminished liquidity. They seem to be focused on banks with serious liquidity issues as opposed to those banks with operational or other asset problems.

What are the greatest challenges in doing an FDIC assisted deal?

The first is the availability of capital. Even if a healthy bank has sufficient capital, most banks are in a capital preservation mode and don’t want to spend it, including for an acquisition. The second challenge is working out the good and bad assets that are acquired from the failed institution. The third is the bidding process, which is competitive whether in or outside of your marketplace.

How does Resolution Asset Management work with a participating bank?

The bank will form an operating subsidiary of which RAM will be a non-voting minority member. The bank itself will acquire the failed bank’s deposits and liabilities, while the assets of the failed bank that are covered by loss share will be transferred to the operating subsidiary at a value agreed upon by RAM and the bank. A RAM affiliate will use its real estate, valuation and asset management expertise to manage these covered assets. RAM will provide to the operating subsidiary capital necessary to support the acquisition, which is usually a non-dilutive way for the bank to raise capital. The bank will hold a preferred equity ownership position in the op-sub and all of the voting portion of the common equity. In other words, RAM is a passive investor in the operating subsidiary with no interest in the bank or holding company.

What is your exit strategy once the bank’s loss-share agreement with the FDIC has been concluded?

Our equity interest is solely in the operating subsidiary; once all the covered assets have been resolved either through liquidation or modification, the subsidiary itself will be liquidated and RAM will no longer have any equity interest. And of course we never had any ownership interest in the bank parent or the bank holding company, which is a big difference between our structure and a private equity investment in the bank.

Are there steps that a bank should be taking even before they contact RAM?

It’s important to understand that a bank has to have our structure in place before they can bid on a failed bank, though we can also participate with a bank on a transaction they have already closed upon. We spend as much time underwriting the participating bank to confirm its health for our structure as we do reviewing the failed bank. The participating bank also has to submit our structure to its primary regulator for approval, which takes added time.

Two banks tell different tales. The case of Premier American Bank and Cole Taylor Bank.

Would you rather be Mark Hoppe, the chief executive officer of a Chicago-area bank struggling under the weight of bad residential construction and development loans, charged with refocusing the bank on an entirely new strategy?

Or how about Daniel Healy, the chief executive officer of Premier American Bank in Miami, who has raised $700 million in the last few years, mostly from institutional investors interested in buying failed banks from the FDIC?

The two laid out their strategies and challenges to a crowd at Bank Director’s Acquire or Be Acquired Conference in Scottsdale, Arizona this week, giving two very different scenarios of banking in a downturn.

“(Healy) is definitely one of the haves, not the have nots,’’ said Robert Monroe, an attorney for Stinson Morrison Hecker in Kansas City, Missouri, who was in the crowd.

Healy’s biggest challenge is making good use of all his cash. He has an ambitious plan of going public in the second quarter of this year.

His bank holding company, Bond Street Holdings, was chartered in October of 2009 by the Office of the Comptroller of the Currency. It was founded primarily to buy failed banks, but also to negotiate traditional acquisitions. It bought Premier American Bank in Miami and later, Florida Community Bank and Peninsula Bank, all of them taken over by regulators as they sunk under the weight of the real estate market in Florida.

The bank now has $2.5 billion in assets, $2.1 billion in deposits, 350 employees and 28 branches in South Florida. And it’s still looking for banks to buy.  Since Bond Street Holdings was founded in late 2009, many competitors have entered the market for FDIC deals. The agency has realized it doesn’t have to give as good a deal anymore to acquirers, Healy said.

“The pricing on these transactions has gotten very key,’’ he said. “But it’s still a good deal.”

A lot of banks don’t want to compete anymore for FDIC-assisted deals, though.

It’s hard to go up against all the institutional money flowing into companies like Bond Street Holdings.

Instead, a lot of bankers are in the position of Mark Hoppe, trying to execute a totally new strategy for an institution hurt by the crash in the real estate market.

Hoppe left Bank of America to turn around Cole Taylor Bank, which had lots of exposure to construction and development loans.

But the going has been rough. The bank’s holding company, Taylor Capital Group, announced a fourth quarter loss of $38.5 million to shareholders, compared to a profit of $30.7 million in the third quarter, after it beefed up its loan loss provision. It also said Friday it would raise $25 million from existing shareholders for added capital.

“I wish I could say we’ve reached the promised land but we haven’t,’’ he told the crowd at the banker’s conference.

Hoppe said he still is working to increase the $4.5-billion bank’s commercial and industrial loan portfolio, which has grown from 40 percent of the mix when he took his job to 55 percent today. He also is hiring teams for mortgage lending and focusing on growing a national portfolio of asset-based lending. Both businesses have added 500 new clients since Hoppe came on board.

The bank, meanwhile, has been reducing its exposure to consumer finance lenders and the $200 million portfolio of unsecured loans to corporations and individuals. Hoppe didn’t feel comfortable or knowledgeable enough to succeed in those businesses.

Pros & Cons of Traditional M&A vs. FDIC-Assisted Transactions

handshake.jpgWith the financial industry cautiously anticipating a recovery from the dramatic economic crisis that resulted in increased regulations and scrutiny for banks of all sizes, many are hoping to see increased activity from traditional M&A transactions. Although the number and size of bank failures is slowing down, FDIC-Assisted deals should not be discounted as a viable growth opportunity in 2011.

As part of our Inside the Boardroom interview series, Rick Childs, a director in Crowe Horwath LLP’s financial advisory services group, outlines below the pros and cons of traditional M&A vs. FDIC-Assisted transactions, and what today’s boards should know before considering these two options.

What are the pros & cons of traditional M&A vs. FDIC-Assisted deals?



  • There is more time to perform due diligence and to understand how the organization fits your culture and business plan.
  • Traditional M&A deals are usually negotiated with a single buyer. If a potential acquirer can negotiate and improve its chances of winning the transaction. In an FDIC-assisted transaction, the agency is required by law to select the bid that entails the lowest cost to the FDIC insurance fund. As a result, competition for the bid can decrease the odds of the bidders being successful.
  • In 2010, there were still a number of deals where the target’s earnings were positive. In approximately 42 percent of the traditional M&A deals the target had positive earnings and approximately 26 percent had ROAs in excess of 50 percent. Institutions with positive earnings provide growth opportunities at attractive prices.


  • The level of non-performing assets in some of the deals may still make the transaction prohibitive without FDIC loss protection. While bidders for FDIC-assisted deals are able to bid the assets acquired at a discount, the traditional M&A buyers cannot bid less than $0. Or, to put it another way, the sellers of whole institutions are not in a position to pay the buyer to take over the institution while the FDIC-assisted transaction is able to absorb the negative bids.
  • With prices for healthy institutions still depressed, there are fewer healthy sellers. Likely these institutions are waiting for prices to return to historical—which is to say higher-levels, although it’s unclear whether that will every happen.



  • The protection afforded from loss sharing has been a catalyst for getting bidders to participate in the bidding process and makes the transaction palatable on a prospective basis as the future losses are covered by loss sharing.
  • For many acquirers, it has offered a unique growth opportunity and there have been a number of serial FDIC-assisted transaction acquirers who have been able to raise capital and build long-term franchise value.
  • Buyers have been able to acquire assets and liabilities but leave behind unfavorable contracts and any potential litigation risks that would be associated with a failed institution.
  • The potential for bargain purchase gains can provide capital for the acquiring institution. However, those institutions should expect the regulatory agencies to exclude capital arising from a bargain purchase until the valuations have been finalized and then validated through examination or external audit.


  • The loss sharing contract requirements can be time consuming and expensive to comply with, including reporting, systems and the required loan modification commitments.
  • Limited due diligence and a compressed time frame for the transaction translate into the bidder needing to make a significant number of material estimates to arrive at the bid with limited information. This can lead to unexpected results post transaction.

What is the outlook for both types of deals?

Trends in acquisitions of both types of deals increased in 2010 compared to 2009. On September 30, 2010, the FDIC reported 860 troubled institutions, up from 720 at December 31, 2009. If only 10 percent of those institutions ultimately fail, then 2011 will still see a significant number of transactions.

The total assets of troubled institutions are actually lower than at December 31, 2009, so the transactions likely will be of smaller sized institutions. Traditional M&A transactions also appear to be ready for an increase in activity in 2011, although still tempered compared to more recent history before the current financial crisis.

Are the FDIC-Assisted deals still attractive, or have they lost their allure since the FDIC is providing less loss protection?

The deals are still attractive and what the bidders appear to be doing is considering the level of expected losses including the revised coverage into their bids. In the 4th quarter of 2010 the asset discount on the deals with loss sharing increased over the prior quarters. Further, about 15 percent of transactions in 2010 didn’t include a loss sharing agreement, and in those transactions the asset discount was approximately twice as much as the loss sharing transactions. Our experience with bidders has been that they adjust to the changes in the FDIC structures.

Is this change in loss protection making traditional deals more competitive?

The changes in the loss sharing agreements do not appear to be changing the landscape. Bidders adjust their bids to encompass the expectations of losses. At the same time, buyers in traditional deals are including contingent payments, escrows and other holdbacks tied to credit performance as ways of providing some protection against future losses.

What are the impediments to getting traditional M&A deals done?

Capital is clearly an issue for many acquirers in traditional deals, and because the discounts on traditional deals are limited by the level of capital, some deals actually produce goodwill once the purchase accounting adjustments are all recorded. Regulators are expecting higher levels of capital and as a result the available buyer pool may be limited. Additionally, many potential sellers may be waiting until prices rebound and the returns to shareholders are maximized.

Potential acquirers are also weighing the ongoing costs of acquiring an institution with significant credit problems. The time and expense related to working out a significant number of problem credits can be prohibitive for some institutions. Finally, activity in certain states has been nominal in the last several years, so for buyers in those states, a potential transaction may be well outside their market area and that can be an impediment.

Opportunity is Knocking in Bank M&A

If there was one compelling theme at Bank Director’s “FDIC-Assisted Bank Deals: Opportunity Knocks” one-day seminar, which took place on Oct. 22 at the Four Seasons Hotel in Las Vegas, it’s that acquiring a failed bank from the Federal Deposit Insurance Corp. is one of the best growth options available to banks and thrifts today.
Although the actual structure may vary from one transaction to another, the typical FDIC-assisted deal involves a loss sharing arrangement where the agency agrees to reimburse up to 80% of losses incurred by the acquirer on “covered assets” up to a certain amount. The bank acquirer would be responsible for 20% of the losses up to the agreed upon ceiling – and 100% of the losses thereafter.

Non-Traditional Growth Opportunity

While FDIC-assisted deals offer tremendous opportunities for growth in a banking market where traditional M&A volume is at historically low levels, and where organic growth has been limited by a lackluster economy, they are a demanding and extremely complex undertaking. Interested banks are not told how many competitors are bidding for the failed institution, due diligence is limited and all deals are final – which places tremendous pressure on participants not only to submit competitive bids, but also to avoid missing something that could have serious financial ramifications later on. These are high stakes deals that place considerable pressure on the bidding institutions and their financial and legal advisors.

Not just any bank or thrift can bid on a failed bank, either. Qualified bidders must have at least a CAMEL I or II rating for capital adequacy and management. (So-called CAMEL ratings are used by federal banking regulators to assess the condition of a financial institution, with I being the highest.) And according to experts at the seminar, it also helps if the bidder has a proven track record at acquiring and integrating banks.

Future of Bank Earnings

John Duffy, CEO of investment bank Keefe Bruyette & Woods Inc. in New York, kicked off the seminar with an extensive overview of the banking industry. According to Duffy, the industry’s profitability (defined as earnings prior to taxes and loss reserve provisions) bottomed out in the second quarter of 2009, but any growth since then has been modest at best. One important bright spot is that the three-year rise in non-performing assets finally peaked in the second quarter of this year, which holds out hope that a somewhat stronger rebound in bank earnings may be in the offing.

Jeff Brand, a KBW principal who has worked on several FDIC deals in the past year, pointed out that as of Oct. 22 there were 829 banks on the FDIC’s trouble bank list. And with the agency expected to spend an estimated $60 billion over the next four years to clean up after failed banks, the market for FDIC-assisted deals should remain strong for the foreseeable future.
The regions of the country with the most failures (and therefore the greatest opportunities), according to Brand, are the Southeast, upper Midwest and West.

Tips on Making a Bid

Jim McAlpin Jr., a partner at the law firm Bryan Cave in Atlanta, advised the directors in attendance to contact the senior FDIC officials in their region even before making a bid on a failed bank. Although the FDIC is required by law to seek the lowest cost resolution when a failed bank has been placed under its control through receivership, it’s still beneficial for the agency to have had personal contact with the management team at an institution prior to the submission of a bid.

Surprisingly, McAlpin also advised that prospective bidders should attempt to talk with trouble banks in their region before they fail and are placed in receivership. The FDIC’s own watch list, as well as other easily obtained analyses that are based on public data, can help identify troubled banks that are in danger of failing. Because FDIC restrictions make it next to impossible to perform a thorough due diligence prior to submitting a bid, any insight that the bidder can glean by talking to the management team of the troubled bank beforehand can prove to be invaluable.

The bidding process is quite complex, and Rick Bennett, managing partner and leader of the bank integration practice at the New York-based consulting firm PricewaterhouseCoopers, said that bidders will need to build a sophisticated data model that will enable them to consider a variety of economic and deal structure scenarios when developing their bid. And because all FDIC-assisted deals are final, it’s crucial that potential acquirers base their bids on solid analytics.

As the old saying goes, caveat emptor!