The Ravenous Banks

by: Stephen Rosenman

Some banks can't get enough. They keep devouring other financial institutions on the cheap. In case you haven't been following along, the Regional banks Eating other Banks, (REBS) as I call them, have been feasting on failed institutions for 2 years now. You can find the list of these hungry tyrannosaurus rex at the "failed bank FDIC list." They're the strong banks, the ones you don't hear much about. They have the FDIC seal of approval, the capital goods to bid on the banking detritus. In doing so, they build their deposit base on the cheap. The FDIC assists them, capping any downside of the deal at 20% in an 80/20 split. What's that mean? If the bank acquires loans that fail, the FDIC takes 80% of the losses. However, the bank gets to keep 100% of the profits on those loans that perform.

In essence, your downside is capped while your upside isn't. Imagine buying ten companies on condition that you get to keep all the profits on the ones that succeed while being liable for just 20% of the losses on those that don't. If you're good at managing these assets, you can do very well. In a time of weak net interest margin and generally sluggish loan demand, these acquirers have a full plate of business, that the FDIC has "tenderized" to make easily digestible.

I've been most interested in particularly ravenous REBS, those that keep coming back for more helpings of failed banks, companies like NYB, VLY, or UMPQ.

This month, two banks came back for more.

Ozark (NASDAQ:OZRK) took over failed Oglethorpe Bank of Georgia with $193 million in assets and loans. OZRK is a bank gobbler. To date, the company has snared 5 banks from the failed bank list and is growing its regional base.

Under the terms of the Agreement, the Bank acquired approximately $193 million of Oglethorpe Bank assets which excluded approximately $25 million of assets and approximately $4 million of allowance for loan losses retained by the FDIC. Assets acquired include approximately $162 million of loans, approximately $15 million of other real estate owned by Oglethorpe Bank and approximately $16 million of other assets. The Bank also assumed approximately $195 million of deposits and other liabilities. In connection with the Acquisition, the FDIC paid the Bank $40.5 million.

The assets were purchased with a $38 million discount and no premium on the deposits. FCNCA, not to be outdone, swallowed Denver based, United Western Bank, its fifth FDIC purchase in the last 2 years. United Western Bank has a deposit base of $1.7 billion. FCNCA is a $21 billion asset bank, majority owned by the Holding family. Their CEO trumps it all: he's been buying shares all year long, making 18 separate purchases. (When isn't he taking in stock?)

These 2 serial acquirers did these deals days before delivering earnings. FCNCA yesterday earned $2.88 a share, a 56% increase over last year's quarter. Its tangible book rose from $139 to $155.30, tier 1 capital ratio from 13.34 to 14.86%, and total capital ratio from 15.59 to 16.95%.

OZRK earned $0.99, a 74% rise, blowing way past analyst expectations. Net Interest Margin rose to 5.35% (who else is able to get these kind of margins?). Nonperforming assets dropped from 1.24% to 0.75%.

These two banks have the luxury of going dining over and over. There are plenty of failing banks. Expect to see OZRK and FCNCA acquiring assets from the FDIC all year long, and, thereby, growing with little cost.

Disclosure: I am long NYB, FCNCA, OZRK.