Bank Failures in the U.S.

Healthy Banks Gear Up to Buy Weaker Rivals

March 24, 2010

breakingviews.com - As the list of America’s problem banks balloons, healthy institutions are gearing up to capitalize on the misfortune of others.

Just look at First Interstate BancSystem, the first bank to begin an initial public offering since before the financial crisis. It may use the proceeds to pick off failed rivals. The bank, based in Montana, raised about $130 million of capital after fees. While not a big public offering, it is rare — no other bank has done so since 2007 — and shows that distress in the sector may be creating opportunities for the healthy.

With the Federal Deposit Insurance Corporation expecting at least as many bank seizures this year as last year’s 140, the supply of carcasses seems endless for canny vultures.

First Interstate’s chief executive, Lyle R. Knight, salivated over the prospect during a recent investor presentation, saying he was “particularly excited” about F.D.I.C.-assisted transactions. And after the public offering raised his bank’s tangible common equity 30 percent, to 6.4 percent of tangible assets, the 42-year-old family-owned lender has fresh capital to pounce.

It may not seem like a lot of firepower. But First Interstate’s low-risk, low-cost financing model, combined with its conservative approach to lending, means it probably has plenty of room to keep regulators comfortable. The IRA Bank Monitor, which rates all F.D.I.C.-insured institutions, grades the bank “A plus” based on low loan default rates and high risk-adjusted returns on capital, among other metrics.

True, at $14.50 a share, the offering was priced near the low end of the range and below the preoffering book value of $16.73 a share. The discount could reflect the bank’s relatively high level of good will and its Class B shares, which give control to the bank’s family owners. But the 8.3 percent gain on the first day of trading means investors see some opportunity.

First Interstate may appeal to those interested in the bank failure trade. Shares of other publicly listed institutions that bought collapsed banks from the F.D.I.C. also have jumped. Those of Ameris Bancorp, for one, have surged 86 percent since it announced a second acquisition of a banking carcass in November. To the victors go the spoils.