Wednesday, September 1, 2010

Failed US Bank Bargains Over?

AUGUST 31, 2010

By DAN FITZPATRICK, Wall Street Journal


Despite the brisk pace of bank failures this year, the bargain bin of financial institutions is a lot pricier than it was a year ago and the pickings are slimmer.

"The juicy deals might be behind us," said Christopher Marinac with FIG Partners in Atlanta.Investors scouring the U.S. for failed financial institutions are taking smaller price discounts and more credit risk, and in some cases paying a premium for deposits. As a result, returns are dropping. The average capital gain booked on these deals dipped this year to 2.5% of assets acquired, down from 4.5% in 2009, according to Keefe Bruyette & Woods Inc.

Higher bids from investors mitigate the costs of each failure for the Federal Deposit Insurance Corp. for the time being. But some industry observers fear a subsequent drop in demand for troubled banks would increase the burden on the FDIC's insurance fund as banking woes continue to accelerate.

"The increases in deposit premiums, decreases in asset discounts and changes in amount of assets subject to loss sharing may all affect the interest of potential acquirers in failed banks," said Jones Day banking attorney Chip MacDonald, and "it may mean the costs of resolutions will go back up."

FDIC spokesman Andrew Gray said the numbers of bidders have generally increased as have prices. "This is a positive sign, as it means that bidders are seeing opportunities with these failed institutions," he said. "Ultimately the greater participation that we have, the lower the loss for the deposit insurance fund."

Some investors are halting efforts to bid on the failed banks, saying the economics no longer make sense. A group led by former FDIC Chairman William Isaac recently ended a push to raise $1 billion for bidding on failed banks in the U.S. Southeast, in part because of lower returns on potential deals, Mr. Isaac said. Another group, of former Wachovia Corp. executives hoping to launch Charlotte, N.C.-based Union National Bank, recently pulled its federal charter application because bank-failure bargains are becoming tougher to find, a spokesman said.

The number of failures since 2007 is now 286, still well below the few thousand banks that went down at the height of the savings-and-loan crisis in the late 1980s and early 1990s. But failures in 2010 are expected to exceed 2009's tally of 140, and hundreds more are expected to fail before the current crisis is over as regional and community banks reel from loan losses on commercial-real-estate projects, regulatory clampdowns and a weak U.S. economic recovery."In the current environment our view is that FDIC-assisted transactions are not really attractive entry points," the Union National spokesman added.

Two of the best deals on failed banks, said investors, were the early 2009 purchases of assets left by seized Florida lender BankUnited and seized California lender IndyMac Bank, both involving private-equity investors as buyers. The discount on the BankUnited assets was 23.6% and the discount for the buyers of IndyMac assets was 22.7%, according to KBW. The average amount acquirers now are paying to the FDIC is a 9.5% discount, down from an average of 14% in 2009, according to KBW.

Texas billionaire Gerald Ford, who made much of his fortune scooping up distressed lenders during the savings-and-loan crisis, passed on BankUnited and IndyMac, and "in retrospect I think it was a mistake," he said.Billionaire investor J. Christopher Flowers was among a large group of prominent investors that purchased the former IndyMac assets from the FDIC and two other seized California lenders in late 2009 and early 2010. But he hasn't used a national charter assumed with the 2008 purchase of rural Missouri-based First National Bank of Cainesville to buy any other failed U.S. institutions, according to KBW assistant vice president in equity research Timur Braziler.

He has since bid on at least six failed banks and hasn't been successful with any, agreeing instead to invest $500 million in a struggling California institution that hasn't been seized. "We seem to be out of sync with competing bidders with our view of the assets," he said.

The willingness of potential buyers to take lower returns began once the FDIC in April said it would offer bidders fewer guarantees for bad loans, meaning less money to the new owners. The FDIC previously had been offering to cover 80% of potential losses up to a certain threshold, and 95% thereafter. But when TD Bank bought three Florida banks in April, including Riverside National Bank of Florida in Fort Pierce, which had $3.42 billion in assets, the FDIC agreed to cover only half of the losses.

After the TD deal in Florida, in which there was no discount for the assets, "pricing went through the roof," said one investor active in bidding on banks in the Southeast. "Anyone sitting on the sidelines trying to make a deal started bidding up."

Loss-sharing costs to the FDIC have since dropped to 22% of assets this year through July compared with 27% in 2009, according to KBW.

But others who were able to grab bargain deals earlier in the crisis say they are done for now. Tiny Sunwest Bank in Tustin, Calif., for example, snapped up assets from three failed institutions with discounts as high as 44%. The deals doubled the bank's assets to $658 million and increased its head count from 68 to 140. Chief Executive Glenn Gray said he doesn't expect to be a bidder anytime soon, acknowledging how the pricing has changed.Now it is difficult to win a bid without giving up sizable returns. When Elmwood Park, Ill.-based Midwest Bank & Trust Co. was seized on May 14, there were 17 bids, and the winner was willing to pay a 2.7% premium on the assets, according to KBW. On Aug. 20, Netherlands-based Rabobank paid a 4.05% premium for the deposits of Butte Community Bank in Chico, Calif., among the highest of any premium paid since 2008. The bank wanted to add to its market share in California, where it now has 120 branches.

Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com