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For even the healthiest of community banks looking to buy a failed peer, wishing won't necessarily make it so.
Community banks face a fair number of obstacles, observers say. They must prove to skeptical regulators that they're qualified, have enough staff and expertise to beat out bigger rivals and be able to afford prices that are rising because of competition from private-equity firms.
Qualifying for the transactions with the Federal Deposit Insurance Corp. is difficult in and of itself, said John Ziegelbauer, the national managing partner of Grant Thornton LLP's Financial Institutions practice.
To participate in an FDIC-assisted deal, Ziegelbauer said, banks must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a Tier 1 leverage capital ratio of at least 4%, and a Camels rating and management rating of 1 or 2, among other qualifications.
"I'm sure half the banks in the country don't fit this category," Ziegelbauer said.
Ralph "Chip" MacDonald, a partner with the law firm Jones Day in Atlanta, said the lack of highly rated, well-managed and well-capitalized banks has led to a scarcity of bidders — and that situation may continue. "I don't think you're going to see a vast number of newly qualified existing bank bidders, because they're still undergoing their own credit problems, and a lot of them aren't going to be qualified by the FDIC to bid," he said.
Of the banks that do qualify, bigger ones have an advantage, Ziegelbauer said. "It's just easier for them to put together the teams they need to evaluate these deals and put things together if they're successful."
Once qualified, many community banks then lack experience at bidding. Only 2% acquired a failed bank last year, while 7% bid unsuccessfully, according to a recent Grant Thornton and Bank Director magazine survey of 246 executives.
The survey showed that 42% of banks were interested in bidding on a failed institution. For banks with assets of less than $500 million the response was even greater: 46% said they were interested in bidding. (Nearly all of the banks represented have assets of less than $5 billion.)
Rick Maroney, a managing director at Austin Associates in Toledo, said community banks must invest in the human resources required to implement an FDIC-assisted acquisition, including dedicated teams who can handle the huge administrative load and manage the loss-sharing agreements. Going into a bid with a strong capital position and good relationship with a regulator is also essential, Maroney said.
"It's one thing to be the winning bidder," Maroney said. "It's another to effectively execute and integrate the transaction."
Randy Dennis, the president of DD&F Consulting Group in Little Rock, said the biggest nightmare for the FDIC is a small-bank acquirer whose "CFO/COO/chief-cook-and-bottle-washer" is responsible for overseeing its end of a loss-sharing agreement. Duties include valuing assets, using proper accounting methods, servicing the assets and answering to auditors.
"They're going to have to outsource some of that help on managing loss share, and it's going to reduce their profits," Dennis said.
Ralph Fatigate, a managing director with BDO Consulting's Financial Institutions Practice, said that while failed-banks deals are an attractive and efficient way for a small bank to boost deposit share and expand its network, it is crucial to take a careful look at the failing bank's loan portfolio.
"Sometimes, the banks will buy without really doing their due diligence on who the person they're dealing with is," he said.
Meanwhile, community banks could be hurt by increased bidding from private-equity investors. MacDonald said the heavier competition could drive up prices and diminish returns.
The only new community banks jumping into a deal with the FDIC will be the ones that partner with other sources of money, including private-equity bidders, he said.
Qualified community banks, many of which have fewer resources to bid on multiple institutions, will have to pick their targets wisely and bid higher to make sure those efforts pay off, MacDonald said.
