Lets face it. This is a great time to own a bank provided you arent saddled with old, lousy non-performing loans. Borrowing costs are virtually nil, just look at the recent rates you are receiving on your money market funds or certificates of deposit. And bank depositors are known for their inertia.
So, if a buyer of a bank can work through these loans or buy them for pennies on the dollar, they are golden. This is apparently what many private equity firms are thinking.
According to PitchBook Data, which tracks the PE world, 75 commercial banks have received investments from PE firms since the beginning of 2008. However, activity is surging this year, as already there have been 21 completed deals with 12 deals still in play with four months left in the year. There were 23 completed deals in all of 2008 and 21 in 2009. The median deal size this year has climbed to $100 million from $79.55 million last year.
The PE firms believe they can turn around and recapitalize struggling banks. With rates low, banks are very attractive, says Adley Bowden, managing editor of PitchBook. The most active investors include Stone Point Capital (seven deals), Lightyear Capital (five deals) and J.C. Flowers (four deals).
One of the most recent deals: Thomas H. Lee Partners, L.P. and Warburg Pincus Private Equity X, L.P. each agreed to invest $171 million in Sterling Financial, the bank holding company of Sterling Savings Bank. Under the deal, the two PE firms would each purchase nearly 68.4 million shares of common stock and 1.7 million shares of Series B preferred stock, given them each a 22.6 percent stake. The investments are part of $730 million in total capital raised by the company.
Following the closing of the capital raise, Sterling will be well-capitalized and well-positioned to build on its foundation as a commercial and consumer lending leader in the Pacific Northwest, said THL managing director Scott Jaeckel, in a statement.
Most of the bank deals, however, have been much smaller than this one. Typically, the PE firm would make an initial investment, and then build out a banking platform, adding more smaller banks to the mix. A good example is Los Angeles-based Grandpoint Capital. In June it launched Grandpoint Bank when it acquired Santa Ana Business Bank, with a total capital investment of $75 million.
Grandpoint subsequently completed a deal whereby another small banking company, First Commerce Bancorp, would merge with Grandpoint Capital, and First Commerce Bank would merge with Grandpoint Bank and become a wholly owned subsidiary of Grandpoint Capital.
Earlier this month, Grandpoint agreed to acquire the Bank of Tucson and Southern Arizona Community Bank from Capitol Bancorp. The two entities will have total assets of about $270 million and conduct business under the Bank of Tucson name. When the deal is completed later in the year, Grandpoint Capital will own 80 percent of the bank while a group of local Arizona investors will own the remaining share.
Grandpoint Capitals strategy is to build strong banks around strong management in markets where we can make a difference, said Don M. Griffith, chairman and chief executive officer of Grandpoint Capital, in a press release. This acquisition is an opportunity to build on a well established banking platform in a market we believe has tremendous long-term value.
Especially if deposit rates remain close to nil.