NOVEMBER 30, 2009, 4:04 P.M. ET
By MATTHIAS RIEKER, Wall Street Journal
People's United Financial Inc. wanted to buy failed banks on the cheap. Instead, it struck a deal to buy a healthy equipment-leasing company.
Last Monday's change of plans by the Bridgeport, Conn., bank-holding company underscores a problem with the growing pile of terminally ill U.S. banks being wrestled with by the Federal Deposit Insurance Corp.
Some are in such bad shape that potential buyers won't touch them at any price, even if the government agrees to eat losses on the failed bank's bad loans. In addition to their depleted capital, many seized banks operate in areas with sluggish growth prospects, are puny and are loaded with expensive deposits gathered through brokers that are likely to leave when the acquiring bank reins in interest rates, some bankers complain.
Philip Sherringham, chief executive of People's United, said it is getting harder to find the dream deal that bank officials hoped to hatch from a wrecked bank. The supply of ideal targets—sensible deposit-gatherers that fatally "overextended" their loan portfolio—is slim and the competition fierce, he said.
The company's roots go back to 1842. Its biggest deal was the 2008 purchase of Chittenden Corp., including six banks owned by the Burlington, Vt., company. The financial crisis has given People's United an appetite for dying banks that nevertheless might have some valuable pieces.
But of the 124 banks to fail so far this year, many of those put up for sale by regulators as part of the seizure process "are of very poor quality," said Norm Skalicky, chief executive of Stearns Financial Services Inc. "It's not as if you can walk in and you are in business."
The St. Cloud, Minn., bank has bought five failed banks since the financial crisis erupted, including two in Florida and one in Atlanta, where soured real-estate loans are piling up and deposits are expensive.
Fifth Third Bancorp CEO Kevin Kabat complained at an investor conference recently that the "relative quality…of available FDIC transactions have really not been very attractive from our perspective."
The Cincinnati bank bought failed Freedom Bank of Brandenton, Fla., in October 2008 and is looking mostly for FDIC-arranged deals in geographic areas where Fifth Third already has branches.
Sluggish interest in doomed banks could push the FDIC's losses higher at a time when the agency's fund to shield depositors is in negative territory for just the second time in its history.
Kevin L. Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP, said FDIC officials might be forced to bundle some small banks together in order to lure potential buyers.
An FDIC spokesman said the agency isn't having trouble lining up buyers. About 95% of banks seized by regulators have been sold. While some attract few bids, the FDIC has "had tremendous success in finding buyers," the spokesman said. Two of the nine banks that failed this month were sold without loss-sharing agreements.
People's United, the largest bank based in New England, has been hunting all over the U.S. for attractive acquisition targets. The bank has relatively few problems compared to the overall banking industry and $2.6 billion in capital to spend.
Last month, regulators notified People's United that its bid for FBOP Corp., the battered Illinois owner of nine banks, wasn't chosen by the government, according to people familiar with the matter.
U.S. Bancorp bought the banks and reopened the branches as part of the Minneapolis-based regional bank.
Financial Federal Corp., the leasing company that People's United agreed to buy in a stock-and-cash deal valued at $738 million, is a move to expand some loan businesses rather than gain more overall heft.
Still, People's United hasn't entirely soured on the bad banks being shopped around by the FDIC. "In difficult times, bad banks will fail and good banks will fail," Mr. Sherringham said in an interview.
In many cases, though, "there are fewer bidders" and "the folks that are bidding realize that," lowering their offers, said Mr. Petrasic, the banking lawyer.
As a result, said Kip A. Weissman, a partner at Luse Gorman Pomerenk & Schick PC, there are "probably going to be more liquidations and high-loss deals."
Write to Matthias Rieker at firstname.lastname@example.org