Bank Buyouts Are Slow But Not Totally Dead

In recent weeks, PE pros have lamented that, since the FDIC imposed its stringent set of rules for bank buyouts, none have happened.  But a total and complete drought is not necessarily the case.

Yesterday, TPG’s David Bonderman (in a rare public appearance) slammed the FDIC for causing more banks to fail by not making it easier for private capital to invest. “The reason you are seeing so many announced bank failures and no equity coming in is because of misguided policies by the U.S. Government,” he said, via Reuters.

He also said the FDIC is “terrified” of private equity taking control of a bank. Sidenote: He did not mention that TPG is likely terrified of investing in a bank without taking control, a lesson the firm learned the hard way with its disastrous PIPE deal in WaMu.

And he’s right-the fear that buyout firms will mess things up is one I’ve heard echoed by industry bankers. “Public policy consideration is trumping the economics at this point,” one banker said. To put it another way, the government doesn’t want to screw up.

But I think it’s important to point out that, contrary to Bonderman’s comments, buying (and saving) a bank is more complicated than many private equity pros think. For example, while private equity firms typically want to change the asset mix of a failed bank, there are a lot of regulatory hurdles to doing so.

And while we haven’t seen a big, clubby bank buyout in the past six months, there have in fact been (apologies) “green shoots.” According to industry bankers, deals are happening, slowly, on a smaller scale and under the radar.

In early February, for example, Lightyear Capital and Westport Capital invested a respective $52.2 million and $20.8 million into Community & Southern, formerly First National Bank of Carrollton. Former Flag Financial Corp. CEO Joe Evans invested $300 million alongside private equity firms to buy Georgia’s Security Bank Corp. Parthenon Capital Partners, Lovell Minnick Partners, Continental Investors and a group of existing shareholders invested in Seaside National Bank & Trust, based in Florida.

Somewhere between five and 10 bank buyouts have closed in the past six months, one banker estimated. That’s clearly miles below the pace and volume previously expected, but at least capital is being raised and deals are being discussed. Another banker characterized the successful deals as “only certain extraordinary opportunities,” while the “broader, more conventional” auction processes are moving slowly. As a result, some failed banks have been able to “grow out” of their financial troubles under the FDIC’s umbrella, because they can retain their earnings instead of distributing them as dividends, helping to heal the bank’s financial troubles.

Either way, the FDIC’s guidelines may be revisited, even though that promised six-month review is looking more and more like a nice political gesture. Bonderman said, “Sooner or later the Feds will get the idea that the way you get capital into the system is to attract it, not to repel it, and make rules that reward capital and not the other way around.” But for now, the FDIC is merely “having ongoing discussions” with PE groups to help it decide whether to even review the policy.

Previously: Dear FDIC, It’s Been Six Months… How About Those Bank Deals?