In the last two weeks of January, two failed banks did not garner a single bid.
Though it is still early in the year to declare a trend, the two failures — along with a third in October that also resulted in a payout to depositors — hint at tougher struggles to market banks on the brink and could mean higher costs for the Federal Deposit Insurance Corp.
"You have most of the big bank failures out of the way, with a whole lot of less attractive banks, and I am not sure who the buyers are going to be," said Chip MacDonald, a partner at Jones Day, a law firm in Atlanta. "I think we are going to see more payouts this year."
Nearly all failed banks found a buyer in recent years. Since 2008, 333 banks have failed, with only 22 resulting in the FDIC's cutting checks to depositors or, in the cases of FirsTier Bank in Louisville, Colo., and Enterprise Banking Co. in McDonough, Ga., the agency's creating a deposit insurance national bank, a temporary setup that allows depositors to move their money.
However, failure experts said that the inventory is evolving. The pool of well-established community banks that were imperiled by credit problems has shrunk, as many have either failed or been recapitalized. Their exit has left behind many small banks with little franchise value and not enough appeal to draw a group searching for a charter.
"Typically, when we have a payout, it is because the bank lacked franchise value. Maybe it was started relatively recently and didn't have the ability to establish core deposits," said Pamela Farwig, deputy director of the FDIC's division of resolutions and receiverships. "For the potential acquirers, they have to ask: 'Am I willing to pay a premium to assume this?' "
A high percentage of noncore deposits, which include brokered deposits, is a good indicator that a bank could prove difficult to sell, experts said.
The $100 million-asset Enterprise Banking, which failed Jan. 21, counted 35% of its funding as noncore and its sole branch was 125 miles away from its headquarters.
Though FirsTier was a larger bank, with assets of $781 million, experts said it likely was unable to attract a single bid when it failed, on Jan. 28, because noncore deposits made up 60% of its deposits.
Data from Foresight Analytics, a division of Trepp LLC, shows that 144 of the 556 banks on its own problem list had noncore deposit percentages of 30% to 50%. The data, based on Sept. 30 numbers but adjusted for failures since then, also shows that 23 banks had noncore deposits exceeding 50%.
"Not all of these banks will necessarily fail, but it looks to us that as many as 30 banks that have a high likelihood of failure could be difficult to market, based on the higher proportions of noncore deposits," said Matthew Anderson, managing director at Foresight, said by e-mail Tuesday.
Payouts also tend to be more expensive. On average, the estimated failure cost as a percentage of the bank's assets was 25% for 2009 to the present, according to DD&F Consulting. Payouts ranged from 11% to 55% of assets during that same time frame, with most of those failures costing about a third of assets.
Farwig declined to speculate about how many banks would be problematic in resolution this year and said the FDIC is able to spot potential problems early on. The FDIC begins marketing failures online four to six weeks before the expected shutdown and can track interest.
"We monitor how many are actively looking at it and get a pretty good picture about any potential issues with a transaction," Farwig said.
From there the FDIC can modify the transaction. For instance, it can offer a clean purchase-and-assumption agreement or try to pair the failed bank with other institutions in the area that are facing failure.
Still, since the regulator is required to use the least costly solution, sometimes a payout is the appropriate method. That, too, can take many forms. Sometimes the FDIC mails checks to depositors, in other situations it partners with another bank to serve as a paying agent. With the failure of New Frontier Bank in Greeley, Colo., in April 2009, the FDIC revived the deposit insurance national bank, which had sat in its toolbox for 27 years.
J. Brennan Ryan, a partner in Nelson Mullins Riley & Scarborough LLP, said the inventory isn't the only thing changing; so are buyers' preferences. He said that though banks like Enterprise likely would have never attracted buyers out to enhance their franchises, it could have appealed to buyers seeking asset plays earlier in the cycle when loss-sharing agreements with the FDIC were more attractive.
"In those situations, the buyers are looking to liquidate and make money on working out the assets," Ryan said. "But these banks are small, and it takes a lot to manage that process, and the buyers can't find a way to make money from them."