Regionals on the look out for failed banks; cheap deposits main draw - analysis30 May 2008

Stable regional banks are hoping to take advantage of regulators' increased scrutiny of small community banks by picking up failed and troubled institutions, industry executives said.
At the same time, after months of denial, some targets appear to be starting to acknowledge the limited choices they face in the jaws of regulators who demand a quick resolution to their credit problems. "This could be a 'come to Jesus' moment with banks," said an executive at a larger institution on the prowl.
While the FDIC does not make predictions on how many banks will fail, spokesperson David Barr said 90 banks are on the regulator's troubled banks list, compared to 76 at the end of 2007 and 50 in 2006. Three have failed so far this year, according to Barr.
Daryl Polenz, a managing director in Deloitte's corporate finance division, said by some estimates, 100 to 200 banks could fail in the coming years, though he said those predictions are a worst-case scenario.
In a healthy M&A market, community banks often expect to sell for valuations of between 6% to 8% of their core deposits. In one recent deal, core deposits of a failed bank sold for around 1%.
IBERIABANK acquired USD 200m in deposits from a failed institution in Arkansas that had been taken over by the FDIC. It paid USD 2m for ANB Financial's deposits last month. CEO Daryl Byrd said the acquisition provided Iberia with an opportunity to expand the Northwest Arkansas franchise of a subsidiary at a significant discount.
Iberia's success has piqued the interest of other regional banks looking to take advantage of a buyers' market. At a recent investor conference, several bank executives reported they were watching for failed and troubled banks and positioning themselves to be ready when the FDIC dangles the prey.
Las Vegas, Nevada-based Western Alliance is considering how it might raise capital to fund acquisition opportunities that might emerge in the coming months, this news service previously reported. "This is an opportune time to pick up deposit franchises cheaply," CFO Dale Gibbons said.
Jim D'Agostino, CEO of Encore Bancshares in Texas, said his bank is also interested in looking at deposits the FDIC may auction. He predicted there will be more auctions in the coming months, and that many banks will line up to buy them.
While a troubled bank goes through a usual M&A process, failed bank sales are conducted by the FDIC. Once regulators decide to shut down a bank, the FDIC runs an auction process. The FDIC contacts institutions - sometimes as many as 300 - from its pre-approved bidder list and selects the bid that will be the least costly to the FDIC, Barr said.
A failed bank may be sold in whole or in parts. "What we're trying to do is protect the depositors and also maximize the value of the assets for the creditors, so {the} winning bid will do that," Barr said. Bidders often are most interested in deposits, according to D'Agostino.
Cheap deposits alone, though, are not a reason for doing an acquisition, executives said. They pointed out that the target has to fit with a bank's overall strategy and geography.
Prosperity Bancshares executives said the Houston-based bank has considered looking at government assisted transactions outside the state of Texas, but such a transaction would have to present a compelling reason for the bank to expand beyond its branch network in the Long Horn state. "We want to do things that are smart," CEO David Zalman said.
Another Texas-based institution, Texas Capital, is on the list of banks the FDIC contacts when it tries to find a buyer for a failed bank, but CEO George Jones pointed out that even with government assistance, acquiring a damaged institution can be a distraction. As a commercially focused bank, Jones said a branch retail deal may not be a smart move for Texas Capital.
Polenz added another issue for bidders is that sometimes post-acquisition they fail to follow through on integration. "If you buy something and do such a terrible job integrating it that all the customers leave, you didn’t get anything," he said. "Now can these things be a good deal? Absolutely. It's an inexpensive way to get some significant additional scale in a particular geography."

by Jay Antenen and Hana Askren

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