Banks catch merger wave

A spurt of local bank merger activity has some industry pros wagering that a long-awaited wave of post-financial-crisis bank purchases is upon us.

Karen Grandstrand, a prominent banking lawyer at Fredrikson & Byron in Minneapolis, said she's seen a significant uptick in sales of community banks around the region in the last six months. She closed more than 10 deals last year, she said, and expects 2013 to surpass that.

Where she was spending all of her time on regulatory issues, she said 80 percent is now on mergers and acquisitions.

"We closed more deals last year than we've closed in many years," Grandstrand said in an interview. "Just in the last few days I've gotten three more calls on bank transactions for 2013, so we have a number of deals in the works in various stages."

In normal times, that volume wouldn't be noteworthy. But there's been a drought in bank M&A activity, and the uptick signals a shift that, if sustained, could alter the region's banking landscape.

Minnesota has one of the largest concentrations of community banks in the country, though the count has shrunk considerably since the 2008 financial crisis.

"We've moved beyond the M&A purgatory we saw in 2008-2010 into a more normalized flow," said Dwight Larsen, a vice president at United Bankers' Bank in Bloomington.

Larsen said he thinks most of the activity is in rural banks, which had fewer troublesome commercial real estate loans and more agricultural loans, a sector that's shown strength.

Grandstrand and other bank experts point to a host of factors driving the increase: generally tough banking conditions due to ultra-low interest rates and slack loan demand, optimism in farm country on strong commodity prices, greater certainty there are no monsters hiding in bank loan portfolios and, finally, the rising cost of complying with heavier bank regulation.

The sales are distinct from those of belly-up banks shut down by government regulators.

Several community bankers in the buyer's seat said they think the growing regulatory burden is motivating sellers to sit down at the table in earnest.

"The regulation has finally got to the point where I think a lot of folks have gotten tired," said Mark Bragelman, president of Liberty Savings Bank in St. Cloud.

Most of the deals are fairly small, Grandstrand said, though she said some of the mergers she's working on are larger than the high-profile sale in October of Western Bank in St. Paul to Omaha-based American National Corp., a sale her firm handled.

The purchase price of Western Bank was never disclosed. The St. Paul institution had about $420 million in assets and a book value, or total equity capital, of about $53 million. The deal was something of a watershed.

"I think it has spurred things," Grandstrand said.

Grandstrand's transactions have included the December purchase of Citizens State Bank of Waverly Inc. by Cattail Bancshares Inc. in Atwater, the December sale of Integrity Bank Plus in Wabasso's Sartell branch to St. Cloud-based Liberty Savings Bank and a late November sale of the State Bank of Richmond to Centra Ventures Inc., a bank holding company in Foley, Minn., that owns Foley's Falcon National Bank.

In August, Chippewa Valley Bank in Winter, Wis., bought select assets from Superior Bank, a small bank in Superior, Wis.

According to Grandstrand, many bids have been in the range of 120 percent to 140 percent of a bank's book value, with some going over 150 percent. Her conversations with investors, accountants and others who monitor M&A pricing indicates prices will get into the range of 170 to 180 percent.

Buyers financed some of the most recent purchases with bank stock loans, she said. That's a practice of bank holding companies getting loans using stock in their banks as collateral.

Larsen at United Bankers' Bank, a major bank stock lender, said it's the most popular way to finance community bank purchases because trust preferred securities fell out of favor during the 2008 financial crash.

Not that it's smooth sailing.

Ben Crabtree, senior adviser at investment bank Oak Ridge Financial in Golden Valley, said he thinks financing will remain a hitch in the equation for buying larger banks. Nonetheless, he sees the much-anticipated uptick as a harbinger of things to come.

That's a good thing, he said. "I think we'd be better off if we had a bunch of banks in the $1 billion to $5 billion range," Crabtree said. "They'd be big enough to be able to afford broad product lines."

Several bankers involved in recent sales cite rising costs for regulatory requirements as a key motivator.

Rick Gerber, CEO of Chippewa Valley Bank, said that at $300 million in assets now, his bank is large enough to absorb increased regulatory costs.

"The big rule of thumb in banking is that you really need to be above $250 million to really make a good run of it," he said. "These banks that are under $100 million, I'm not quite sure how they're going to do it."

Bragelman, at Liberty Savings Bank, said he thinks consolidation is natural and there are economies of scale, but that he doesn't think consumers are necessarily better served by it: "Any time you're getting further and further away from the customer it's not a good thing."