Two Florida banks have found a way around squabbling over the value of troubled credits: let the seller keep them.
1st United Bancorp (FUBC) in Boca Raton agreed to do just that in a creative deal for the $233.4 million-asset Enterprise Bancorp in North Palm Beach.
Enterprise shareholders would receive $6 million in cash, $24 million in nonperforming and underperforming assets and $15 million in impaired investments.
The structure is noteworthy because fights about the value of sellers' portfolios end a lot of merger talks. Sellers play up the intrinsic value in the problem credits, while buyers seek low price tags to offset the risks they say they would assume.
"This structure was likely done because Enterprise's ownership had a more optimistic view of the classified and nonperforming assets," says David Tobin, a principal at Mission Capital Advisors, a New York loan advisory firm. "It sounds as if they are willing to put their money where their mouth is."
The deal is just another example of dealmaking structured in a way to avoid the buyer's uncertainty. Bond Street Holdings in Weston, Fla., priced potential shareholder litigation into its $13 million deal for Atlantic Coast Financial (ACFC) in Jacksonville, Fla., last month. Last year BB&T (BBT) in Winston-Salem, N.C., bought the banking operations of BankAtlantic in Fort Lauderdale, Fla., and let the seller's holding company keep more than $400 million of distressed assets.
Such structures are facilitating more M&A, especially in places like Florida where deals have been tough to do because of the severity of the downturn, observers say.
"The creativity is positive for deal flow," says Brady Gailey, an analyst at KBW. "There is no doubt about it; we've seen a pickup in activity in the area say south of Virginia and east of Mississippi."
According to the press release for the deal, the troubled assets will be based on their carrying value at the time of the closing, which is expected to occur in the second half of the year. Loan-sale experts like Tobin say that distressed assets often perform better outside of a bank because their holders can be more creative with restructuring.
"You have $39 million of assets here that they are likely thinking they can get an outsized return on equity by owning them and continuing to work them out," Tobin says. "It sounds to me like they are strong asset guys. My guess is that these are assets that they know well and borrowers that they know well."
The problem assets will be transferred to Enterprise's majority shareholder, who owns more than 90% of the company, while the minority shareholders will receive the $6 million in cash, 1st Bancorp President and Chief Financial Officer John Marino said Monday. Warren B. Mosler, an Enterprise board member who formerly worked at Bankers Trust and William Blair & Co., is Enterprise's majority shareholder, according to a Securities and Exchange Commission filing Monday.
The solution reached by negotiators was probably the only one that would have worked, Marino said.
"We were looking for a structure that would make the deal happen," he said. "We were two groups who wanted to get to a good end result. We knew what assets we would want and what assets we didn't want."
Enterprise officials did not return calls for this story.
For the $1.56 million-asset 1st United, the deal is the first since it acquired Anderen Financial nearly a year ago. It also acquired three failed banks from 2009 to 2011.
The Enterprise deal would strengthen its presence in Palm Beach County. It is expected to include a lot of cost savings and puts 1st United's excess capital to work.
"We believe this acquisition allows us to leverage our strong capital base and excess liquidity, giving rise to earnings accretion consistent with our business strategy," Rudy Schupp, the chief executive of 1st United, said in a press release.
The transaction would push its tangible common equity ratio down to 10% from 11.7%, Gailey says.
Analysts consider 7.5% to 8% to be ideal. 1st United like others raised a lot of capital to buy troubled banks during the downturn, but competition for failed banks has been fierce and the pace has slowed considerably. The Enterprise deal is relatively small and won't take 1st United out of the market for other deals, Gailey says.
Ultimately, he says, 1st United will likely deploy its capital through organic growth and acquisitions until the tangible common equity ratio reaches a normalized level. Then it will likely move to the other side of the bargaining table.
"Once the capital is fully deployed I think they will spend a couple of quarters increasing the profitability of the bank and then look to sell themselves," Gailey says. "Not immediately, but I think that will happen in the next year or two."
1st United's Marino agreed that the company would have the ability to pursue other deals and declined to comment on speculation whether it would become a seller.