Some of the country's healthier midsize banks are losing interest in buying failed institutions, contending the deals are costly, time-consuming and in some ways not worth the trouble.
At least one banker — TCF Financial Corp. Chairman and Chief Executive William A. Cooper — said he is skeptical the Federal Deposit Insurance Corp. will be able to afford to stick to its agreements to share losses on failed-banks assets.
At other regionals, like SunTrust Banks Inc. and Zions Bancorp., a growing distaste for federally assisted deals could mean that more failed banks will fail to find buyers or will fetch lower prices, industry experts said. At least eight of the 94 bank failures so far this year went unsold, according to law firm Jones Day.
"A lot of people are going to be more choosy," said Rick Maples, head of the financial institutions group of Stifel, Nicolaus & Co. "You'll see the strategic buyers still showing interest overall, but they are going to be somewhat picky. And to be honest with you, a lot of these little de novos that started in the last five to eight to 10 years that didn't get any size or scale aren't going to have any interest — in general — from people."
A large number of large and small banks have said throughout the recession that they are interested in expanding by buying failed banks, and many are still committed to the idea.
Community banking companies certainly could help the FDIC with some deals. For example, several recent winning bidders — including the $8.4 billion-asset MB Financial Inc. in Chicago and the $3.8 billion-asset First Financial Bancorp in Cincinnati — have said they would be interested in buying more once they finish integrating their September purchases. MB even raised $201.3 million of capital last week so it could keep shopping.
Still, Ralph "Chip" MacDonald, a partner with Jones Day, said regional players' waning interest in assisted deals could be troublesome for regulators, because only the larger banks have the scale to bid on institutions with assets of $500 million to $1 billion.
The large regional banks "have historically been big players in failed-bank acquisitions," MacDonald said. If they start pulling away, "it is going to continue to dampen the number of bidders and bidding enthusiasm for these failed institutions."
Jason Goldberg, an analyst at Barclays Capital who covers large banks, said he is hearing more of his companies talking about shying away from assisted deals, for a number of reasons. Some have simply had their fill after buying failed companies and finding that "deposit retention has been a challenge," he said.
Others have found it a chore to absorb failed banks' troubled assets. Though the government has agreed to share some of those assets' losses, the buyers still have to put the infrastructure in place to service bad assets, Goldberg said.
A handful of executives publicly aired their gripes about assisted deals at a conference Barclays Capital hosted last week in New York. Cooper was among the most vocal, saying he was "not optimistic" that the $17.5 billion-asset TCF would close an FDIC-assisted transaction, after looking at a number of opportunities.
He said most of the Wayzata, Minn., company's prospects have had "crummy branches and crummy deposits." His acquisition team has also had a tough time doing due diligence on failed banks. And he is wary of striking any loss-sharing agreements with the government, given how FDIC reserves are running low.
An FDIC spokesman did not comment.
Executives with SunTrust and Zions said during the same conference that, for other reasons, they are through with assisted deals for the time being.
James Wells, SunTrust's chairman and CEO, said the $176.7 billion-asset Atlanta company is "focused on our own organic growth at this point" after doing three FDIC deals. The transactions required a lot of heavy lifting, Wells said.
"They are difficult to do," he said. "They are expensive in terms of time and teammate devotion."
Failed banks also tend to have unattractive deposits — brokered deposits and high-priced certificates of deposit.
"Most of the banks that have failed so far are relatively undesirable, as far as I'm concerned," Wells said.
Doyle Arnold, vice chairman and chief financial officer of Zions, said the Salt Lake City company is done doing assisted deals "for a while," after winning bids for four failed banks.
"We have a fair amount of problem assets of our own to work out," Arnold said. "We've acquired in three transactions over $2 billion of additional loans, most of which are troubled in one fashion or another. While we think the downside risk is very well protected, [and] the financial terms are attractive, it's still a lot of work."
MacDonald of Jones Day recommended that to entice more potential buyers, the FDIC should consider loosening restrictions on the bidding process for failed banks. He said the FDIC should make it easier for banks to make joint bids with other parties, enabling them to assume the deposits while another investor acquires the target's real estate.