Capital City Bank Group Inc. in Tallahassee, Fla., says it has looked at about eight acquisition targets in recent months but found that most have credit issues that could make them more trouble than they are worth.
So the $2.6 billion-asset company has adopted a new acquisition strategy: It is betting that regulators will shutter one or more banks in Florida or Georgia, and that it could step in and buy the failed bank's deposits and branches on the cheap.
Other potential buyers also are thinking this way, according to industry observers.
Mark Muth, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp., said a number of banks are waiting for "opportunities to expand either by acquiring through a government-assisted transaction through the FDIC or in a fire-sale transaction where an institution is in trouble and needs to sell at a discount price."
Seven banks have failed this year, and the Federal Deposit Insurance Corp. has said that it expects more will follow. Potential buyers are keeping especially close tabs on Florida and Georgia, which analysts and bankers say could experience the most failures over the next few quarters.
Matt Olney, an analyst with Stephens Inc., said buyers are looking for bargains like the one Iberiabank Corp. of Lafayette, La., found when the $1.9 billion-asset ANB Bancshares Inc. of Bentonville, Ark., failed in May.
The $5.3 billion-asset Iberiabank bought ANB's nine branches and about $200 million of deposits for a deposit premium of just 1.01%. The purchase brought Iberiabank into Bentonville, a market it had coveted since it entered Arkansas last year.
"I think people who may have been thinking about acquiring at some point are saying, 'If we wait a few more months, maybe we can get some sweetheart deal like Iberia got with very little risk and not a whole lot of capital,' " Mr. Olney said.
William Smith, Capital City's chairman, president, and chief executive officer, said in an interview last month that it is keeping an eye on one particular bank (which he would not name) that by all accounts "has the characteristics that might lead one to believe it's headed" into FDIC receivership.
Capital City has bought 16 banks since 1985, but Kim Davis, its chief financial officer, said has not bought any since 2005 because "the sellers' expectations were too high."
Mr. Smith said he has two acquisition proposals on his desk, but he plans to pass on them, because there are too many problems in the sellers' loan portfolios.
"We just don't want to divert management's attention to working on somebody else's problems," he said.
According to Mr. Olney, Capital City fits the criteria of a company in position to buy banks through the FDIC. It has "excess capital," very conservative underwriting, and has made many acquisitions in the past, he said.
Capital City has had its problems. Its second-quarter earnings declined 39% from a year earlier, to $4.8 million, because of a spike in delinquent loans to residential real estate developers. But its capital ratios remain strong; as of June 30 its Tier 1 capital ratio was 13.15%.
"Most banks are still busy trying to work out their own mess," Mr. Olney said. "Their mess is pretty small, and they can afford something like that in terms of time and resources."
Some at-risk banks are hoping to sell themselves at discount prices before their situations get worse.
The $261 million-asset First Priority Bank in Bradenton, Fla., is among those struggling to stay afloat. It has not made money since the second quarter of 2006, and the losses have nearly wiped out its capital.
According to local news reports, a spokesman for First Priority has said it is looking to sell itself.
The Office of Thrift Supervision has ordere the $673 million-asset Federal Trust Corp. in Sanford to find a buyer if it cannot raise capital by Sept. 30. Losses caused it to dip below well-capitalized status in the first quarter.
The challenge for banks in this situation is to find a buyer willing to take on troubled loans.
The $3 billion-asset Superior Bancorp in Birmingham, Ala., has been eager to bulk up in Florida, where it has nearly half its branches. However, C. Stanley Bailey, its chairman and CEO, said at an investor conference in May that it passed on several deals in Florida last year after doing its due diligence.
Right now Superior is interested only in buying deposits and branches of failed banks, Mr. Bailey said. "The failure opportunities will have to be in-market, and they will have to be pure giveaways of core deposits, or I'm not interested. I don't need any loans."
Mr. Bailey also said he expects "a bunch of opportunities" in Florida, "if the inbound phone calls I've gotten — the last-gasp efforts by the investment bankers — are any indication."
David Barr, a spokesman for the FDIC, said that when there is a failure, the regulator could contact up to 400 potential buyers, but generally around a half-dozen banks actually submit bids.
There is a risk in waiting for a coveted bank to go into FDIC receivership, according to Mr. Barr, because it is a sealed bidding process, so banks do not know what others are bidding.
"Just because you want to buy a bank from the FDIC doesn't necessarily mean you're going to come out on top," he said. "Whereas if you go it alone — if you knock on the door of a bank — you might have a little more luck than buying it from the FDIC."
David Zalman, the chairman and CEO at Prosperity Bancshares Inc. in Houston, said that even though buying deposits and branches of failed banks can be a low-cost way to build market share, the transactions are not without their complications.
From 1988 to 1992, Prosperity bought five Texas banks that were in receivership, and Mr. Zalman said buyers of such banks need to put in a lot of "sweat equity" to make them work.
Employee morale at these banks is often poor, and many customers "are disenchanted," he said. "You get the bank at a lot better price, but your team has to work so much harder than if you went out and purchased a straight-up good bank."
That is not to say Prosperity would not consider buying more failed banks.
To date it has acquired banks only in its home state, where there are not expected to be many failures. But it would look at an acquisition opportunity beyond Texas "if it made a whole lot of sense," Mr. Zalman said. "It would have to be very compelling."