Failed Banks Keep Allure Despite Smaller Upfront Reward

Bank failures are no longer the sweetheart deals they were a few years ago, but they still whet the appetite of plenty of buyers.

Great Southern Bancorp (GSBC) in Springfield, Mo., bought Valley Bank from the Federal Deposit Insurance Corp. last week after the Moline, Ill., bank failed. The deal is the fifth failed bank pick-up for Great Southern, one of the more prolific bidders of failed banks in recent years.

The acquisition brings in a pool of mostly performing loans, doubles Great Southern's presence in Des Moines, Iowa, and expands it into the Quad Cities, a region along the Illinois-Iowa border.

The deal, however, did not include a large bargain purchase gain, an upfront accounting treatment that made earlier failed bank deals crowd pleasers.

"This is a strategic deal," says Joseph Turner, Great Southern's president and chief executive. "This acquisition isn't as financially attractive as the earlier deals from a one-time gain perspective. But we think it is still awfully good when you consider the future financial impact."

The earliest failed-bank bidders were essentially rewarded for their willingness to take on risk. But big bargain purchase gains, based on things like the discount on the loans and coverage of loss-share agreements with the FDIC, began dwindling as more banks began to aggressively bid on failed banks.

Such gains have gotten even smaller as the loan books at failing banks have mostly stabilized. At the same time, bidding remains intense and loss-sharing agreements with the FDIC are largely nonexistent.

"Five years ago, it was like asking banks to catch falling knives," says Damon DelMonte, an analyst at Keefe, Bruyette & Woods. "There's much greater clarity now and bankers can get comfortable, but that is why the bargain purchase gain is modest."

Still, failed bank deals are more shareholder friendly than open-bank deals, Turner says.

"Open-bank deals get measured by how quickly the dilution is paid back — a three- or four-year [earnback] is reasonable," Turner says, adding that the latest failed-bank deal is accretive to earnings and equity. "We're obviously interested in open-bank deals, but we aren't going to find an open-bank deal with economics like this."

Though Turner says he is interested in open-bank deals, industry observers say such transactions are unlikely. The stream of failures may have slowed, but Turner is still interested in those.

Great Southern is also cautious about diluting existing shareholders. The company's stock, which trades at roughly 130% of tangible book range, could make open-bank deals more challenging as prices creep up.

"The currency holds them back a bit, and they're cognizant in preserving tangible book value," DelMonte says.

With Valley, Great Southern gained $356 million of deposits without paying a premium. It also brought on $211 million in loans, bought at a $40 million discount.

Valley had $456.4 million in assets at March 31. The FDIC said on Friday that it will hold on to the balance of those assets for later disposition.

The FDIC says it received five bids for Valley. (Regulators on Friday also closed a Valley Bank in Fort Lauderdale, Fla., that belonged to River Valley Bancorp.)

A "high percentage" of the loans Great Southern bought are performing. While loss sharing is largely a thing of the past, Turner says the ability to bid only on specific assets is attractive.

Valley had 13 branches, including a dozen in Iowa. Seven of Valley's branches are in Des Moines, where Great Southern has operated six branches since its 2009 purchase of Vantus Bank in Sioux City, Iowa, from the FDIC.

Valley also had six branches in the Quad Cities area, which represents a new market for Great Southern.

"The greater presence in central Iowa and the expansion into the Quad Cities is consistent with their strategy of using failed bank deals to set them up to have more organic opportunities," DelMonte says.

Robert Barba is one of American Banker's community banking reporters.

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