BankNotes ...

While the current economic and regulatory environment poses challenges for start-up banks, it also creates some unique opportunities for bank acquisitions.

A few years ago, comparing the potential of bank start-ups to that of bank acquisitions might have quickly led an investor to believe that de novo was the way to go. But as desperation and uncertainty in the industry rise, seller price expectations have fallen. Combine this trend with regulators’ increased scrutiny of new bank applications, and the scales are tipping in favor of buying a bank, rather than starting a new one.

Selective purchase, short timeline

Investing groups have two ways to go in a bank purchase: participate in an FDIC-assisted transaction or buy a bank without the government’s help. In an FDIC-assisted transaction, the buyer can acquire deposits, branches and, maybe most importantly, customer relationships, without getting stuck with bad assets. This is an advantage, but the buyer must also contend with public opinion related to the former bank’s failure. Once the transaction becomes public, those purchased deposits may shrink as customers head elsewhere.

Assisted transactions also present a very short window of opportunity. The FDIC notifies and collects blind bids from suitors within just a few weeks. Further, due diligence and negotiations occur before any public announcement is made.  

Trends in the FDIC’s “Problem List” indicate that the availability of FDIC-assisted transactions will likely increase this year. As of the end of the first quarter, the problem list included 305 banks and thrifts. That’s up from 252 at the end of the year and 171 in September of 2008.

Taking the bad with the good

Many insured institutions will remain off the problem list, but will seek a change in ownership or additional capital anyway. Opportunistic organization groups that are willing to dig in and evaluate asset quality, stability of deposits, and the competitive landscape, among other things, could turn up some workable deals. Unlike the assisted transaction, the unassisted deal rarely presents the chance to buy assets selectively. But, if the publicity is properly managed, buyers can minimize customer defections related to the “failed bank” stigma.

Clearly, due diligence in these transactions must be extensive. In the current environment, pricing cannot be justified by multiples; buyers are tasked with looking beyond book value and earnings to evaluate a bank’s incremental earnings power. This is no small task, given the uncertainty about economic conditions, collateral values and the regulatory environment. Since due diligence may actually lead to more questions than answers, buyers must be highly disciplined in valuating their prospective targets and ready to walk away from deals that don’t make sense.

FactSet Mergerstat LLC has reported that at least 285 U.S. financial institutions were sold last year, which is just 54 percent of the number of transactions reported in 2007.

First Georgia Community Bank, Jackson, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Bank, Zebulon, Georgia, to assume all of the deposits of First Georgia Community Bank.

The four branches of First Georgia Community Bank located in Jackson, Covington, Griffin and Locust Grove will reopen on Saturday as branches of United Bank. Depositors of the failed bank will automatically become depositors of United Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of the failed bank should continue to use their existing branches until further information is received from United Bank.

Over the weekend, depositors of First Georgia Community Bank access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of November 7, 2008, First Georgia Community Bank had total assets of $237.5 million and total deposits of $197.4 million. United Bank agreed to assume all the deposits for a .811 percent premium. In addition to assuming all of the failed bank's deposits, United Bank will purchase approximately $60.6 million of assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll-free at 1-800-930-5172. This phone number will be operational this evening until 9 p.m., Eastern; on Saturday from 9 a.m. to 6 p.m., Eastern; and on Sunday 12 p.m. to 6 p.m., Eastern; and thereafter from 8 a.m. to 8 p.m. Interested parties can also visit the FDIC's Web site at http://wwwdev/bank/individual/failed/firstga.html.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $72.2 million. United Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. First Georgia Community Bank is the 23rd bank to fail in the nation this year, and the fourth in Georgia. First Georgia Community Bank, the failed bank, is not affiliated with First Georgia Banking Company. The last bank to be closed in the state was The Community Bank, Loganville, GA, on November 21, 2008.

U.S. Bank, National Association, Minneapolis, MN, acquired the banking operations, including all the deposits, of Downey Savings and Loan Association, F.A., Newport Beach, CA, and PFF Bank & Trust, Pomona, CA, in a transaction facilitated by the Federal Deposit Insurance Corporation.

The combined 213 branches of the two organizations will reopen as branches of U.S. Bank under their normal business hours, including those with Saturday hours. Depositors will automatically become depositors of U.S. Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Customers of both banks should continue to use their existing branches until U.S. Bank can fully integrate the deposit records of the organizations. Over the weekend, depositors can access their money by writing checks or using ATM or debit cards.

As of September 30, 2008, Downey Savings had total assets of $12.8 billion and total deposits of $9.7 billion. PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion. Besides assuming all the deposits from the two California banks, U.S. Bank will purchase virtually all their assets. The FDIC will retain any remaining assets for later disposition.

The FDIC and U.S. Bank entered into a loss share transaction. U.S. Bank will assume the first $1.6 billion of losses on the asset pools covered under the loss share agreement, equal to the net asset position at close. The FDIC will then share in any further losses. Under the agreement, U.S. Bank will implement a loan modification program similar to the one the FDIC announced in August stemming from the failure of IndyMac Bank, F.S.B., Pasadena, CA.

The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship.

Customers who have questions about today's transactions can call the FDIC toll free. Customers of Downey Savings should call 1-800-930-5169, and for PFF Bank 1-800-930-6827. The phone numbers will be operational this evening until 9:00 p.m. pacific; on Saturday from 8:00 a.m. to 6:00 p.m. pacific; and on Sunday noon until 6:00 p.m. pacific and thereafter from 8:00a.m. to 8:00 p.m. pacific. Interested parties can also visit the FDIC's Web site. For Downey Savings they can visit http://www.fdic.gov/bank/individual/failed/downey.html and for PFF Bank http://www.fdic.gov/bank/individual/failed/pff.html.

U.S. Bank currently has 353 offices in California. Downey Savings and PFF Bank are not affiliated with each other. Downey Savings has 170 branches in California and five in Arizona, and PFF Bank has 38 branches in California.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for Downey Savings will be $1.4 billion and $700 million for PFF Bank. U.S. Bank's acquisition of all the deposits of the two institutions was the "least costly" option for the FDIC's DIF compared to alternatives.

These were the twenty first and twenty second banks to fail in the nation this year, and the fourth and fifth banks to close in California. The last bank to be closed in the state was Security Pacific Bank, Los Angeles, on November 7, 2008.

The Community Bank, Loganville, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, to assume all of the deposits of The Community Bank.

The Community Bank's four branches will open on Monday, November 24, 2008 as Bank of Essex. Depositors of the failed bank will automatically become depositors of Bank of Essex. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of The Community Bank can access their deposits by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 17, 2008, The Community Bank had total assets of $681.0 million and total deposits of $611.4 million. Bank of Essex purchased approximately $84.4 million of The Community Bank's assets, and did pay the FDIC a premium of $3.2 million for the right to assume the failed bank's deposits. The FDIC will retain the remaining assets for later disposition.

Customers with questions about today's transaction may contact the FDIC toll-free at 1-800-930-1904. This phone number will be operational this evening until 9:00 p.m. eastern; on Saturday from 9:00 a.m. to 6:00 p.m. eastern; on Sunday noon until 6:00 p.m.; and from 8:00 a.m. to 8:00 p.m. Monday and thereafter. They may also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/community.html.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be between $200 million and $240 million. The Community Bank is the twentieth FDIC-insured institution to be closed nationwide, and the third in Georgia, this year.

Security Pacific Bank, Los Angeles, California, was closed today by the Commissioner of the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Pacific Western Bank, Las Angeles, California, to assume all of the deposits of Security Pacific.

The four branches of Security Pacific will reopen on Monday as branches of Pacific Western. Depositors of the failed bank will automatically become depositors of Pacific Western. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Pacific Western can fully integrate the deposit records of Security Pacific.

Over the weekend, depositors of Security Pacific can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 17, 2008, Security Pacific had total assets of $561.1 million and total deposits of $450.1 million. Pacific Western agreed to assume all the deposits for a two percent premium. In addition to assuming all of the failed bank's deposits, Pacific Western will purchase approximately $51.8 million of assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll free at 1-866-934-8944. This phone number will be operational this evening until 9 p.m. pacific; on Saturday from 9 a.m. to 5 p.m. pacific; and on Sunday noon until 5 p.m. pacific and thereafter from 8 a.m. to 8 p.m. pacific. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/securitypacific.html.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $210 million. Pacific Western's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Pacific is the nineteenth bank to fail in the nation this year, and the third in California. The last bank to be closed in the state was First Heritage Bank, National Association, Newport Beach, on July 25, 2008.

Franklin Bank, S.S.B., Houston, Texas, was closed today by the Texas Department of Savings and Mortgage Lending, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Prosperity Bank, El Campo, Texas, to assume all of the deposits, including those that exceeded the insurance limit, of Franklin Bank.

Franklin Bank's 46 offices will reopen as branches of Prosperity Bank under their normal hours, including those with Saturday hours. Depositors of the failed bank automatically become depositors of Prosperity Bank. Customers of both banks should continue to use their existing branches until Prosperity Bank can fully integrate the deposit records of Franklin Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

As of September 30, 2008, Franklin Bank had total assets of $5.1 billion and total deposits of $3.7 billion. Prosperity Bank agreed to assume all the deposits, including the brokered deposits, for a premium of 1.7 percent. In addition to assuming all of the failed bank's deposits, Prosperity Bank will purchase approximately $850 million of assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll free at 1-800-591-2845. This phone number will be operational this evening until 9 p.m. central; on Saturday from 9 a.m. to 6 p.m. central; and on Sunday noon until 6 p.m. central and thereafter from 8 a.m. to 8 p.m. central. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/franklinbank.html.

It is important to note that neither the FDIC as receiver nor Prosperity Bank as the acquiring institution will e-mail customers of Franklin Bank asking them to validate their deposits or to request personal, confidential information, such as account numbers, Social Security Number, driver's license number, etc. If customers receive e-mails asking for such personal information, they should consider them to be fraudulent in nature and should not respond.

The FDIC estimates that the cost of today's transaction to its Deposit Insurance Fund will be between $1.4 billion and $1.6 billion. Prosperity Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Franklin Bank is the eighteenth bank to fail in the nation this year, and the first in Texas since Bank of Sierra Blanca, Sierra Blanca, Texas, on January 18, 2002.

Freedom Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Fifth Third Bank, Grand Rapids, Michigan, to assume all of the deposits of Freedom Bank.

The four branches of Freedom Bank will reopen on Monday as branches of Fifth Third Bank. Depositors of the failed bank will automatically become depositors of Fifth Third. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Fifth Third can fully integrate the deposit records of Freedom Bank.

Over the weekend, depositors of Freedom Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 17, 2008, Freedom Bank had total assets of $287 million and total deposits of $254 million. Fifth Third agreed to assume all the deposits for a premium of 1.16 percent. In addition to assuming the failed bank's deposits, Fifth Third will purchase approximately $36 million of assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll free at 1-800-591-2767. This phone number will be operational this evening until 9:00 p.m. eastern; on Saturday from 9:00 a.m. to 5:00 p.m. eastern; and on Sunday Noon until 5:00 p.m. eastern and thereafter from 8:00 a.m. to 8:00 p.m. eastern. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/freedom.html.

The FDIC estimates that the cost to the Deposit Insurance Fund will be between $80 million and $104 million. Fifth Third's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. The last failure in Florida was First Priority Bank, Bradenton, which was closed on August 1, 2008. Freedom Bank is the seventeenth FDIC-insured institution to be closed this year.

Alpha Bank and Trust, Alpharetta, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Stearns Bank, National Association, St. Cloud, Minnesota, to assume the insured deposits of Alpha Bank & Trust.

The two branches of Alpha Bank & Trust will open on Monday, October 27, 2008 as Stearns Bank, N.A. Depositors of the failed bank will automatically become depositors of Stearns Bank, N.A. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of Alpha Bank & Trust can access their insured deposits by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of September 30, 2008, Alpha Bank & Trust had total assets of $354.1 million and total deposits of $346.2 million. Stearns Bank did not pay the FDIC a premium for the right to assume the failed bank's insured deposits.

At the time of closing, there were approximately $3.1 million in uninsured deposits held in approximately 59 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Alpha Bank & Trust also had approximately $16.8million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.

Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-800-591-2912 to set up an appointment to discuss their deposits. This phone number will be operational this evening until 9:00 p.m. EST; on Saturday from 9:00 a.m. to 5:00 p.m. EST; and Sunday 12:00 EST to 5:00 EST and thereafter from 8:00 a.m. to 8:00 p.m. EST.

Customers who would like more information on today's transaction should visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/alpha.html. Beginning Monday, depositors of Alpha Bank & Trust with more than $250,000 at the bank may visit the FDIC's Web page, "Is My Account Fully Insured?" at http://www2.fdic.gov/dip/Index.asp to determine their insurance coverage.

In addition to assuming the failed bank's insured deposits, Stearns Bank, N.A. will purchase approximately $38.9 million of Alpha's assets. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be $158.1 million. The last bank to fail in Georgia was Integrity Bank, Alpharetta, on August 29, 2008. Alpha Bank & Trust is the sixteenth FDIC-insured institution to be closed this year.

A few weeks ago, a writer from The Atlanta-Journal Constitution interviewed me to obtain some background information on the current crisis in the banking industry. The article, entitled "Several Georgia banks in jeopardy" was published on October 19, 2008.

According to The Atlanta Journal-Constitution, twenty-five percent of Georgia's banks are facing dangerously high loan delinquency rates. Further, the statewide delinquency rate as of June, 2008 has increased six times over since June, 2006-amassing a total of $6.6 billion of past-due debt. The rise is primarily linked to the turn-down in housing, an industry that had formerly been a mainstay of the state's economy.

Even as default rates skyrocket, experts acknowledge that high delinquencies alone won't necessarily cause a bank to fail. Another determining factor is insufficient reserves. The FDIC and the Federal Reserve Bank have been actively consulting with several Georgia banks to address reserve levels, lending practices and the management of non-performing loans.

Click here (http://www.ajc.com/business/content/business/stories/2008/10/19/georgia_banks.html) to read the full text of the article.

Main Street Bank, Northville, Michigan, was closed today by the Michigan Office of Financial and Insurance Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Main Street Bank, by Monroe Bank & Trust, Monroe, Michigan.

All depositors of Main Street Bank, including any with deposits in excess of the FDIC's insurance limits, will automatically become depositors of Monroe Bank & Trust, and they will continue to have uninterrupted access to their money. Depositors will still be insured with the new institution. Therefore, there is no need for customers to change their banking relationship to retain deposit insurance.

The failed bank's two offices will reopen Saturday, October 11th, as branches of Monroe Bank & Trust. Over the weekend, customers of Main Street Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

Main Street Bank had total assets of $98 million in total assets and $86 million in total deposits as of October 7, 2008.

Monroe Bank & Trust has agreed to pay a total premium of 1 percent for the failed bank's deposits. In addition, Monroe Bank & Trust will purchase approximately $16.9 million of Main Street's assets, and have a 90-day option to purchase approximately $1.1 million in premises and fixed assets. The FDIC will retain the remaining assets for later disposition.

Customers with questions about today's transaction or who would like more information about the failure of Main Street Bank can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/mainstreet.html, or call the FDIC toll-free at 1-866-934-8944, today until 9 p.m.; Saturday from 9 a.m. to 5 p.m.; Sunday from 12 p.m. to 5 p.m.; and thereafter from 8 a.m. to 8 p.m. All times are Eastern Daylight Time.

The FDIC estimates that the cost to its Deposit Insurance Fund will be between $33 million and $39 million. Monroe Bank & Trusts' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the failed bank's franchise.

Main Street Bank is the first bank to be closed in Michigan since New Century Bank, Shelby Township, Michigan, on March 28, 2002. This year a total of fourteen FDIC-insured institutions have been closed.