The pressure on directors and officers of struggling banks to sell or implement a recapitalization plan increased exponentially when the Federal Deposit Insurance Corporation (FDIC) announced in December it had authorized lawsuits against 109 former directors and officers of failed financial institutions. The FDIC has filed only two suits stemming directly from bank failures during the financial crisis, but indicates many more are in the works. Since the FDIC attempts to settle with leaders of failed banks before bringing legal action, the number of authorizations suggests that many other claims against individuals may have been settled.
Although bank leaders assume they can exercise business judgment without incurring liability, some industry insiders have noted the FDIC is politically and financially motivated to pursue directors and officers of failed banks who have financial means. There have been a few institutions that have used the chaos of the financial crisis to complete acquisitions and leapfrog their competitors. However, many board members have seen their previously comfortable position as a director of a profitable bank slide into a painful struggle for bank survival. The slide toward failure is every director’s worst nightmare. Struggling to save a failing bank is a physically and emotionally draining experience.
Many directors and officers assume Directors & Officers (D&O) insurance will provide protection in the event of a failure. However, the protection of D&O insurance will depend partially on policy exclusions, which could include the regulatory exclusion added to some policies in recent years. The regulatory exclusion typically precludes coverage for claims brought by any governmental, quasigovernmental or regulatory agency.
Bank directors at these beleaguered institutions may find a sale—even at depressed valuations—a better alternative than a continued struggle that could end in failure, especially when considering that failure might not only wipe out the director’s or officer’s investment in the bank, but also jeopardize personal assets.
Mergers & Acquisitions (M&A) Activity*
There were nine bank/thrift transactions announced in the BKD service area during the fourth quarter of 2010. The valuation data stayed flat from the second quarter, with a median price-to-tangible-equity multiple of 1.22. The median price to 7 percent equity multiple was down slightly during the second quarter of 2010, at 1.70. A summary of this information is provided in Chart 1.
Note: Q3 2010 data not included due to lack of disclosed activity.
Publicly Traded Bank Metrics – BKD Service Area*
All four of the tracked publicly traded bank valuations increased from Q3 2010 to Q4 2010. Price to earnings and return on average equity showed increases—from 10.64 to 10.78 and 4.91 to 5.59, respectively. Chart 2 and Chart 3 provide more detail by month.
*The charts above illustrate recent valuation trends in the BKD service area: Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Mississippi, Missouri, Nebraska, Ohio, Oklahoma and Texas.
Failed Bank Statistics
For more on the bank market and how it could affect your business, contact your BKD advisor or Patrick Hayes at phayes@bkd.com.
About BKD Corporate Finance, LLC
BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including financial institutions, health care, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.
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