ABA Banking Journal - July 2008 - (Page 22)

Community Banking Investment Banking, Austin, is the demise of trust preferred stock offerings, which had been the method of choice for many steady acquirors. Hurt by the collateralized debt obligation debacle, trust preferred is showing some signs of waking up again, but the return of a pulse is not going to do much, experts concur, for the M&A market for some time. Contrarians and the future One expert tells of an investment banking firm so anxious to look like it was still in the game that it offered to do a recent deal gratis, just to generate a tombstone ad. While the field has been thin, it hasn’t been vacant, however, and some players say they have deals in the hopper. Jeffrey Gerrish, attorney and consultant at Gerrish McCreary Smith LLC, Memphis, Tenn., says a great deal is beginning to develop among banks in the $500 million-assets category. His firm, by itself, has eight different deals in various stages, and he thinks more will be coming. Pricing has been an issue, but he adds that “sellers are getting a little more reasonable.” And there is a school of thought, expressed by David Baris, with the Washington, D.C., office of Kennedy & Baris LLP, that suggests some sellers will take the stock of solid acquirors whose shares are suffering merely because of the market’s current distaste for bank. Such sellers, he explains, will be anticipating a bounceback in the acquiror shares’ price. Election-year spoiler? Another argument being made for a buildup in merger action is the strong possibility that the Democrats will control the White House and Congress after the election. The Democrats have made it clear that the Bush tax cuts—in this context, favorable treatment of capital gains— won’t be renewed if they hold all the keys. At present, the favorable gains treatment expires at the end of 2010, notes Curtis Carpenter of Sheshunoff. If rates simply reverted back to what they had been, he says, sellers would be looking at a rate of 25% instead of 15%. “This is motivating a number of sellers 22 JULY 2008/ABA BANKING JOURNAL to consider offers sooner, rather than later,” says Carpenter. And he says a key demographic evolution also applies. “The majority of community banks are now being run by Baby Boomers, who are near retirement age, and often there is no management succession plan in place,” says Carpenter. Put these two factors together and the urgency to do some kind of deal looms large, if you buy the tax argument. Under this scenario, given regulatory steps and other built-in time constraints, Carpenter says the latest a deal could start and be reasonably assured of the superior tax treatment would be mid2009. That leaves a year for buyers and sellers to do their mating dances. “It’s a very healthy penalty,” says Musso. “An investment bank was so anxious to look like it was still in the game that it offered to do a recent M&A deal gratis, just to generate a tombstone ad” Some players do buy the argument— Gerrish says some deals that are teetering between “yes” and “no” could tip to the affirmative because of tax treatment. Others scoff. “You’ve been talking to investment bankers,” says attorney Walt Moeling. “That’s their story. We have plenty of sellers right now, but few buyers. And the buyers don’t care what the capital gains tax rate is.” For one part of the industry, the capital gains issue is a moot point on nearly any level. These are the Subchapter S banks, which now account for nearly one in three institutions. FinPro’s Don Musso points out that these institutions actually face their own tax “incentive”—more of a reverse incentive—to not do deals. In the first ten years after conversion to Sub S form, an organization that sells must give back part of the tax break that it was enjoying as a Sub S. Outlook: a gradual return of volume In forecasting the future of community bank M&A, the impact of anticipated slashes in CAMELS ratings and associated regulatory orders can’t be ignored. Some institutions will simply see the writing on the wall, and before the regulators begin to push them towards a merger, will decide to seek a buyer on something like their own terms. Attorney David Baris suggests that some institutions, for instance, that need to raise more capital will be put on the block, instead. Jeff Gerrish sees some of the de novos of the Southeast, in the five-to-eight-yearold range, as willing targets. Some will be in difficulty, having not achieved the core deposit bases that they had hoped for. Gerrish also sees some troubled states as a source for strategists seeking living banks that can be recapitalized as a base for further acquisitions, rather than using the time-consuming de novo approach. “Michigan is a poster child for such opportunities,” says Gerrish. In other cases, there will be mergers done at the behest of regulators, where institutions are told to find a buyer. One way or another, “they will be motivated deals,” says FinPro’s Musso. And then some deals will be situations where buyers wait until a bank with troubles fails. This will enable them to pick up what they want, and to leave the rest to FDIC. Pointing to the takeover of ANB Financial, N.A., closed by the Comptroller’s Office in May, Carpenter says “we’ll see dozens more such deals in the year ahead.” While some of the de novos that will be up for sale will be healthy ones, David Baris says that opportunities for healthy, long-established banks to sell should also come back. They may prove more attractive than some of the newer banks because they did not have to buy their way into the local credit markets, as did some de novos. On balance, Carpenter predicts that the return to a more “normal” M&A pace— meaning 60 or more community bank transactions per quarter—will begin in the first quarter of 2009. BJ Subscribe at www.ababj.com http://www.gerrish.com http://www.kbbanklaw.com http://www.kbbanklaw.com http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - July 2008

ABA Banking Journal - July 2008 Contents Editor’s Column Searching for New Paradigms at BIS Snapshot: C&I Asset Quality 100th Anniversary: Then & Now BofA "Event Concept" Wins Awards, and Customers ABA Resources ABA Chairman’s Position M&A: Beat Today's Market Blues Pass the Aspirin Cover Story: Workout Time Correspondent Banking: No Longer Just a Handshake Business Getting IT Right By Thinking It Through Webnotes Are You "Red Flag" Ready? Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - July 2008

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