Deposit premiums have plummeted recently, but banking companies in the market for money might want to wait for even better pricing.
Since federally assisted deals have led to a glut of deposits on the market, banks are paying sharply lower prices even for attractive deposits that have not benefited from federal assistance, industry experts said.
"The value of deposits is temporarily under siege," Christopher Marinac, an analyst at FIG Partners LLC, said. "It's just a supply-and-demand thing."
The fourth-quarter median deposit premium on unassisted deals dropped by more than a third from a year earlier, to 5%, according to data from SNL Financial LP.
Analysts say premiums are falling largely because of the 34 bank failures in the last 14 months. Last year buyers paid deposit premiums of 3% or less for 17 of the 25 banks sold by the Federal Deposit Insurance Corp., according to data from the New York law firm Jones Day. That includes five deals where no premium was paid.
There were only nine unassisted deposit deals in the fourth quarter, compared with 21 in the third quarter and 24 a year earlier, SNL Financial said. The fourth quarter was the slowest for deposit deals in at least five years, the firm said, and for a variety of reasons, the slowdown is unlikely to change soon.
"Some of these deposits are outstanding, but there are just so many deals out there right now," said Matt Olney, an analyst with Stephens Inc. "The expectation is if there is a lot more [failed bank deals] coming down the supply chain, that is going to affect how much you are going to pay."
Andrew M. Senchak, vice chairman and president of KBW Inc.'s Keefe, Bruyette & Woods Inc., said that before the recession it was not unusual for "core" deposits — sticky money in places like checking accounts — to fetch premiums of 15% or more.
But in November, Old National Bancorp in Evansville, Ind., paid a 4% premium for 65 Indiana branches of Citizens Financial Group Inc., a Providence, R.I., unit of Royal Bank of Scotland Group PLC. Stephen Geyen, an analyst at Stifel, Nicolaus & Co. Inc., said about half those deposits were core — a proportion considered attractive in a deposit deal.
Last month First California Bank in Camarillo paid a premium of just 6.1% for the core deposits of 1st Centennial Bank of Redlands after regulators closed it and sold its assets.
"The markets are changing like mad," Mr. Senchak said. "A year ago we would have said a deposit premium that came with loans might be in the mid-teens. Now I think the high single digits sounds like a high premium."
The premiums in many of the most recent cases have been depressed by the fact that the buyers were purchasing less-than-stellar deposits, including a high percentage of brokered accounts and high-rate certificates of deposit.
For instance, BB&T Corp. in Winston-Salem, N.C., paid a premium of less than 1% — $112,000 — for $515 million of deposits from Haven Trust Bank in Duluth, Ga. But now BB&T is paying another kind of price for the cheap deposits; they have proven to be "about as sticky as clean water," Kelly S. King, the Winston Salem, N.C., company's chief executive, said in a fourth-quarter earnings call last month.
According to observers, the FDIC's participation in deposit sales is complicating matters. Mr. Olney said the rapid-fire nature of its auction process — bids are submitted about three days before a bank is closed — tends to foster low bids.
Ironically, though low deposit premiums have created a buyer's market, most banks are too mired with their own problems to take advantage of the problems of others.
Stephen Steinour, Huntington Bancshares Inc.'s CEO, said last month that the Columbus, Ohio, company would like to acquire some failed banks, though it is waiting to improve its own performance first.
Charles Wendel, the president of Financial Institutions Consulting Inc. in New York, said that most banks are paring down their locations, not adding new ones."In this interesting environment, it's going to be more difficult to make money from branches," Mr. Wendel said. "There has been a massive increase in the number of branches" in recent years. "That's going to stop. People don't have as much money to put in banks as they did [before] in a down economy."
