Banner Corp. (BANR) executives are bracing for competition in the auction of Idaho Banking in Boise but plan to wield their bidding paddle with restraint.

Banner, in Walla Walla, Wash., announced a stalking horse bid of $2.6 million for Idaho Banking last week. The auction is part of the Chapter 11 bankruptcy proceedings of Idaho Bancorp.

Such auctions are gaining in popularity as troubled, but savable, banks see their problems leveling out even as their holding companies remain overwhelmed by debt.

"Well, we know that this bank spent a lot of time talking to a lot of folks and others did some due diligence," Lloyd Baker, the chief financial officer of the $4.5 billion-asset Banner, said in an interview. "We are pretty sure there is at least one other interested bidder. We're hopeful, but there is a point where the economics no longer work. If the other bidder is irrational, we won't be."

Baker's comments underscore the path that many troubled banks have traveled before landing in bankruptcy. Often times, they have spent the last several years meeting with countless investor groups and other banks in an attempt to survive. Bankruptcy is the last resort, even if it means wiping out the shareholders.

That has been evident in the bankruptcy of another company, First Mariner Bancorp. Investment bank Sandler O'Neill contacted more than 100 potential investors and roughly 35 banks over the course of nearly five years as it sought ways to recapitalize First Mariner's bank unit, according to written testimony by William L. Boyan 3rd, a managing director at Sandler.

Other potential parties that could not make a regular deal work might take a second look once the holding company is in bankruptcy and the bank is being auctioned.

"It wouldn't be a big surprise if others reemerge," Stephen Klein, a partner at Graham & Dunn in Seattle, says about bankruptcy auctions in general. "Everything is out there, and everyone has spent the last few years sniffing around."

However, Idaho Banking is small at $100 million of assets, and outside interest could be limited, Klein says.

The bankruptcy court divorces the bank from its holding company's complex debits like bank-stock loans and trust-preferred securities, which are often roadblocks to a traditional deal. The initial bidder has an advantage over other bidders because it has spent a lot of time in due diligence, likely vetted the deal at length with regulators and has a breakup fee written into the bidding instructions.

Yet, it's not enough to discourage rivals from making a bid, especially since someone else has spared them the front-end work of dealing with the holding company as it prepares to file bankruptcy, other experts say.

"A lot of times, you get parties who will get in the bank and turn around and say, ‘Let someone else bid and maybe we will come in with a topping bid," says Ernest Panasci, a partner at Stinson Morrison Hecker in Denver. In 2012, Panasci represented Big Sandy Holding, the holding company for Mile High Banks, which was sold in a bankruptcy auction with two bidders.

Followers of Banner say they take Baker's word that the company won't get irrational in bidding, pointing to Banner's willingness last year to walk away from its deal with the $1 billion-asset Home Federal Bancorp (HOME) in Nampa, Idaho. Banner's $197 million offer was trumped by a $266 million offer from Cascade Bancorp (CACB) in Bend, Ore.

"It is not apples to apples given the very big difference in sizes, but it shows they've certainly exhibited price sensitivity," says Jeff Rulis, an analyst at D.A. Davidson.

Still, Boise is an important market for Banner, and although Idaho Banking is small it would significantly increase its presence in that area.

"This transaction presents a unique opportunity for Banner to expand our presence in the Boise market, which is the third largest metropolitan market in the Pacific Northwest," Mark Grescovich, Banner's chief executive, said in a press release.

Banner currently has six offices in the Southwest Idaho, which includes Boise. Idaho Banking would add four branches.

"Three of them are a natural expansion of our distribution network," Baker says. "And the fourth one is an obvious consolidation candidate."

Additionally, Baker says Boise is on the upswing. It experienced the economic collapse that started nationally in 2008 later than most of the country and has begun to recover.

"It was hit hard but has rebounded quite nicely. It is experiencing meaningful in-migration. There is affordable housing in a business friendly environment," Baker says. "We are bullish on Boise."

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