First Post-Crisis Bank IPO Offers Play on Failure

Includes: ABCB, FIBK
by: Rolfe Winkler, CFA

As the list of America’s problem banks balloons, healthy institutions are gearing up to capitalize on others’ misfortune. Such may be the case of First Interstate BancSystem (NASDAQ:FIBK), the first bank to launch an initial public offering since before the financial crisis. It may use the proceeds of its offering to pick off failed brethren.

The Montana-based bank raised about $130 million of capital after fees. While not a big offering, it was the first debut of a U.S. bank since 2007 — demonstrating that distress in the sector may be creating opportunities for the healthy. With the Federal Deposit Insurance Corp (FDIC) expecting the number of bank seizures in 2010 to surpass the 140 seized last year, the supply of bank carcasses seems endless for canny vultures.

First Interstate boss Lyle Knight salivated over that prospect during a recent investor presentation, noting that he’s “particularly excited” about FDIC-assisted transactions. And after the IPO raised tangible common equity 30 percent to 6.4 percent of tangible assets, the 42 year-old family-owned bank has fresh capital to pounce.

That may not seem like a lot of firepower, but First Interstate’s low risk, low-cost funding model, combined with its conservative lending, means it probably has plenty of room to keep regulators comfortable. The IRA Bank Monitor, which rates all FDIC-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, the offering priced near the low end of the range and below pre-offering book value per share of $16.73. The discount could reflect the bank’s relatively high level of goodwill and the fact that the bank’s family owners retain control via super-voting Class B shares. But with the shares up 8 percent to $15.60 in early trading, investors clearly see opportunity.

Indeed, for investors hoping to play the bank failure trade, First Interstate may appeal. Other publicly-listed institutions that bought failed banks from the FDIC have seen their shares jump. For instance, shares of Georgia’s Ameris Bancorp (NASDAQ:ABCB) have surged 86 percent since it announced a second acquisition of a banking carcass in November. To the victors go the spoils.