Private equity and investor group bank acquisition activity has remained steady amid the ongoing deal doldrums, with current bank valuations and the challenges of starting a de novo bank making this an attractive alternative.
The interest is growing due to lower up-front costs, faster regulatory approval and profitability, as well as better pricing relative to the de novo process, industry experts told S&P Global Market Intelligence. The actual deal volumes have not fluctuated much in recent years, with 10 such private equity and investor acquisitions announced since the start of 2022 and five in all of 2021, according to S&P Global Market Intelligence data. But given the downturn in bank M&A, the private equity and investor transactions are accounting for a larger percentage of the deal activity.
Investor and private equity US bank deals as a percentage of all US bank deals rose to 6% year to date through July 14, from 2% in 2021, according to Market Intelligence data. This is the highest level in a decade. The proportional rise in investor and private equity occurred in a depressed M&A environment, where the actual volume of assets and deposits sold was lower compared to previous peaks since 2012.
An uptick in investor activity
"We find ourselves very busy with people who are looking for small banks because they want to enter banking," president of DD&F Consulting Randy Dennis said in an interview. "In the last two to three years, it's accelerated."
"We are seeing an uptick in interest in small banks," McQueen Financial Advisors President and CEO Charley McQueen said in an interview.
Investor groups acquired Southern Bankshares Inc. in June and Eden Financial Corp. earlier this month, marking the second and third such deals so far this year, according to Market Intelligence data. There were seven investor and private equity bank deal announcements in the US in 2022 and five in 2021.
Finding a bank for such a transaction can be difficult, however, and investors could waste time looking for one, Dennis said.
To avoid this, investors should establish a business plan by identifying directors and lead investors, putting together biographical forms and financial statements as they look for a bank to acquire, Dennis said. That way investors can pave the way to establishing a de novo bank if they are unsuccessful in finding a target in a timely manner, he added.
"Once you're actually pursuing a charter and you're not putting all your eggs in the basket of buying a bank, then it kind of opens up the doors for you," Dennis said.
If a group of investors is able to find a suitable acquisition target, it's an "intuitively" better route into the bank industry than starting a de novo, Dennis said. "If you can find a small bank, then yes, that is by far the best way to do it," he said.
Faster and cheaper
Starting a de novo bank has become increasingly expensive as regulatory scrutiny of new banks intensified. Buying a small existing bank at a lower cost is becoming an attractive alternative, McQueen said.
"The level of capital that has to be raised is substantially larger, which has really slowed down the de novo process," McQueen said.
Another advantage of purchasing a majority stake in a bank is a faster turnaround in processing the application for the transaction, relative to the de novo process, said Jack Greeley, an attorney at bank industry law firm Smith Mackinnon.
Approval for a de novo takes anywhere from 120 to 180 days from the filing date against as little as 75 days for an investor group acquisition with the right team and enough preparation, Dennis said.
Also, because existing banks already have an established franchise it often does not take as long to turn a profit, Greeley said. "It gives you a quicker runway in order to kick it off for greater profitability and, ultimately, greater size," Greeley said.
De novos are also subject to greater scrutiny from regulators and must adhere to a three-year business plan, Greeley said. Investor groups must also have a business plan when acquiring a bank, but there is more flexibility to modify those plans, he added.
Market conditions
Additionally, investors who foresee a recession in the near future could see an opportunity in buying a majority stake in a bank when valuations are low and then scoring from the subsequent growth cycle, McQueen said.
"It makes sense to have ownership in a bank to potentially grow very quickly, like a number of banks did during the financial crisis," he said.
Pricing is also becoming more attractive to buyers as a result of rising Federal Reserve interest rates and the currently depressed M&A environment, McQueen added.
"We're seeing massive unrealized losses in investment portfolios, and we're also seeing loan portfolios at substantial discounts," McQueen said. "You're probably seeing more of the smaller bank transactions, more of the private capital raise transactions because pricing has improved."