Maximizing Value in a Highly Complex Auction

American Bancorporation, Inc. was the bank holding company (BHC) for American Bank of St. Paul, a community bank based in Saint Paul, Minnesota. The bank held approximately $310 million in assets, $155 million in loans and $280 million in deposits. Unlike more traditional banks, American Bancorporation offered a broader set of financial services capabilities through a wholly owned mortgage servicing subsidiary company.

American Bancorporation was notably the first community bank to involuntary file for Chapter 11 bankruptcy by its creditors following the financial crisis of 2008. After a five-year window of suspended dividend payments closed, trust-preferred securities (TruPS) holders filed petition for bankruptcy. This was the first instance of investors using involuntary bankruptcy as a strategy to enhance leverage and recovery in distressed BHC scenarios.

Based on deep investment banking expertise, as demonstrated by a successful track record of restructuring both community banks and a variety of other financial services organizations, Carl Marks Advisors was engaged as investment banker and exclusive financial advisor to sell American Bancorporation.

To maximize value for a BHC with such an unconventional operational structure, the sale of American Bancorporation required an innovative approach. Because the two divisions of American Bancorporation operated as independent entities, the company was marketable to a wide variety of strategic buyers with varying interests. The creative auction strategy developed by the team at Carl Marks Advisors allowed potential buyers to bid on the entire company, or bid on the community bank and mortgage services divisions independently.

Carl Marks Advisors negotiated an initial stalking horse bid in which Deerwood Bank, a Minnesota based community bank, agreed to purchase either the community bank alone for $10 million or the entire company for $15.7 million. The dual stalking horse bids laid the foundation for a highly competitive auction process during which Carl Marks Advisors marketed the opportunity to nearly 175 potential buyers.

Carl Marks Advisors conducted a highly complex, and successful auction. As bids were being placed for the bank, the mortgage services company and the company as a whole, detailed calculations and ongoing communications were required to ensure all parties were informed of the status of bids in the process. The Carl Marks Advisors team worked closely with bank and mortgage regulators to ensure the necessary approvals were in place on the sell and buy sides throughout the auction.

Ultimately, the sale of American Bancorporation was broken into two transactions. Deerwood Bank purchased the community bank for $7.3 million, while the mortgage services division was purchased by OSP, LLC, a local investment management firm, for $15.2 million. The combined value of the sale totaled $22.5 million, which represented a 40% increase on the stalking horse bid. The successful completion of both transactions allowed the client to receive near book value despite expectations that the company would trade significantly below.

• The motivations of buyers and sellers are unique and nuanced across the spectrum of sectors in the financial services industry. When divisions of a bank or services company are sold separately, it takes deep M&A and financial services expertise to ensure optimal outcomes for each individual entity.
• It is important to have a deep understanding of the advantages, disadvantages and regulatory issues tied to TruPS when selling a bank holding company. Dodd-Frank provisions post 2008 have largely excluded TruPS from regulatory capital. However, there are key exceptions and compliance allowances that a financial advisor must be familiar with in order to conduct a successful auction of a BHC.
• Effective communication with regulators is crucial to ensure the process of selling a BHC runs smoothly and results in an optimal outcome. Especially when there are various regulations to comply with, being proactive and facilitating open dialogues can eliminate many of the roadblocks that may potentially hinder transactions.