First Midwest Bank in Itasca, Ill., approached its first failed-bank acquisition cautiously.
The $7.6 billion-asset bank scooped up First DuPage Bank in Westmont, Ill., a tiny bank only a half-hour drive away. The Oct. 23 deal allowed First Midwest to learn the ropes of failed-bank purchases by taking over a small institution in its own backyard.
"It's kind of like walking before you run," CEO Thomas Schwartz said in a recent interview.
Small banks face myriad and often frustrating obstacles to acquiring failed banks. But some smart strategies have separated the successful bidders from the rest, including raising excess capital well before a bid, targeting fewer and smaller banks, tracking enforcement actions of potential failures and bringing in well-seasoned management to see a deal through.
When Stearns Bank of St. Cloud, Minn., started noticing cracks in the nation's financial system in mid-2006, CEO Norman Skalicky said, it pulled back from aggressive lending and boosted its capital ratios to more than 20%. This positioned Stearns to make its first failed-bank acquisition — it took over the deposits of Alpha Bank and Trust in Alpharetta, Ga., on Oct. 24, 2008 — after the Federal Deposit Insurance Corp. approached Stearns about bidding.
The $1.4 billion-asset bank has since bought four more failed institutions and continues to maintain capital ratios above 13% to be ready for more deals, Skalicky said in an interview.
"We're well positioned now, and we have pretty good control of the banks that we've now acquired," he said.
Like Stearns, Stonegate Bank in Fort Lauderdale, Fla., benefited from a strategic capital-raising effort. It was still digesting its first purchase when it raised another $14.3 million through a private offering in September, President and CEO David Seleski said.
The bank also had what Seleski said was a big advantage — already having done a failed-bank acquisition.
"We didn't raise the capital saying, 'Look, we're going to do FDIC deals,' but it certainly helped in terms of getting money to the table," Seleski said. "Clearly, the capital is chasing banks that are going to be doing deals."
With competition among bidders growing, some community banks are focusing on smaller banks that are closer to home. Bankers see two clear benefits to this strategy: Larger banks often are not interested in such deals, and a hometown bidder knows the market well.
First Midwest's purchase of the $257 million-asset First DuPage Bank is one example.
Though the Westmont, Ill., bank was much smaller than First Midwest and had only one branch — compared with First Midwest's 100 offices in three states — it allowed the bank to enter DuPage County for the first time, Schwartz said.
In addition, he said, the bank was one First Midwest could easily swallow.
"It was a combination of geography, which was important, but the other was, this is a new phenomenon, and we wanted to make sure we knew what we were doing," he said.
Umpqua Bank in Portland, Ore., also eased into the bidding process, waiting more than a year after its first failed-bank acquisition before going after another.
In the first deal, the $9.4 billion-asset Umpqua took over the deposits of the failed Bank of Clark County in Vancouver, Wash., a $446 million-asset bank just across the Columbia River from Portland.
On Jan. 22, Umpqua bought the assets and deposits of the failed Evergreen Bank in Seattle, just a few hours away, allowing Umpqua to expand its network in the area near Puget Sound.
"That's how we look at the transaction: Is there strategic rationale?" said Ray Davis, the president and CEO of Umpqua Bank. "We'll bid when it makes sense."
This requires Umpqua, along with other potential bidders, to keep a close watch on struggling banks that may end up being taken over by the FDIC, Davis said. Bidders "know who's weak and who's got the potential to get in trouble," he added.
The biggest challenges, bankers say, often come after they have won a bid. Hiring experienced management and consultants is crucial for small banks, whose internal resources are often limited.
Schwartz said First Midwest had the benefit of acquiring a strong team with First DuPage. It also hired an outside consultant to help with loan servicing and relied on investment banking counsel to navigate the bidding.
"If you don't have the right resources, you will probably mess it up," he said. "The FDIC was very helpful, and their staff was very good, but they expected to get answers to their questions."
Some banks have recruited big-name executives well-schooled in acquisitions.
First Southern Bancorp in Boca Raton, Fla., recently hired former Hibernia National Bank CEO J. Herbert Boydstun, with an eye toward dealmaking.
At Stonegate, Seleski's team came with him from South Trust Corp., which acquired Home Savings of America in 1997.
Some bankers preparing to jump into the bidding process say they are doing so with caution. Mark Hoppe, the CEO of Cole Taylor Bank in Chicago, said he is approaching any potential deal as a business decision, not a potential accounting gain.
"At the end of the day, you're buying a business, and you've got to be really, really comfortable with the business that you're buying," he said.
And other banks are finding that, in pursuing a specific opportunity, the necessary work might not pay off.
Malaga Bank in Palos Verdes Peninsula, Calif., has not bought another bank in its 25-year history, said Randy Bowers, the president and CEO. Yet the management team has been hustling to prepare for the expected failure of a nearby competitor.
"If we didn't do this one, there's probably not another one out there that we would have an interest in," Bowers said.