Private-equity firms willing to fund cash-strapped banks are snatching opportunities from more traditional consolidators.
Cascade Bancorp, for example, last week salvaged a $177 million investment from three PE investors — meaning the struggling institution won't need to sell itself to another banking company.
Unfortunately for banks waiting for others to fail, analysts said they see fewer chances, particularly in the Pacific Northwest, where Cascade is headquartered. This further restricts companies' ability to boost revenues at a time when banks desperately need avenues for growth.
Brett Rabatin, an analyst with Sterne, Agee & Leach Inc., said the $500 million recapitalization of Sterling Financial Corp. in Spokane, Wash., in August should have put growth-minded banks on alert: Opportunities to buy big failed banks through the Federal Deposit Insurance Corp. are now few and far between.
"Once that happened, essentially it should have been obvious to everyone involved that the FDIC was not going to have to close anything else of substantive size, given that there was so much private-equity money out there," Rabatin said. "These deals were going to get done; they were big enough that essentially there would be a way for them to get capital."
Private equity's confidence in the $2 billion-asset Cascade in Bend, Ore., was enough to spark an analyst downgrade of Glacier Bancorp. It has been pursuing traditional and failed-bank acquisitions for months, with nothing to show for its efforts but a mountain of excess capital.
Michael Zaremski, an analyst at Credit Suisse, wrote to clients Tuesday that the Kalispell, Mont., company's near-term opportunities have diminished as regulators keep giving struggling banks time to raise capital — including several Glacier could have bid on.
Glacier's "FDIC-related M&A prospects may not come soon enough … to offset fundamental earnings pressure that we see building into" the first half of 2011. Zaremski cut his rating for the $6.3 billion-asset Glacier to "neutral" from "outperform."
A Glacier spokesman did not return a call seeking comment.
Glacier, with a total risk-based capital ratio of 19.2% at Sept. 30, is not the only well-funded banking company mostly sitting idle as private equity makes its moves. Washington Federal Inc. in Seattle, which has bought a failed bank, had a total risk-based capital ratio of 23.4% at Sept. 30.
The ratio at Columbia Banking System Inc. in Tacoma, Wash., was 24% at Sept. 30, even after it repaid $77 million under the Troubled Asset Relief Program. Umpqua Holdings Corp. in Portland, Ore., which has bought four failed banks since early 2009, had a total risk-based capital ratio of 17.52%.
Most of those companies raised capital in the past two years to pursue FDIC-assisted deals and to position themselves for more-traditional acquisitions. Some of them now acknowledge the best targets may be taken.
"Out here in the West, there's still going to be FDIC-assisted deals," Ray Davis, Umpqua's chief executive, said on a conference call last month to discuss quarterly results. But "I think most of those are going to be fairly small transactions."
Melanie Dressel, Columbia's CEO, similarly said during her company's quarterly call that "we've probably seen a lot of the activity that we are going to see. It just continues to be much slower than we had anticipated."
Michael Blodnick, Glacier's CEO, said during its quarterly call last month that "it's going to be a late 2011 before much really happens out here in this part of the country" when it comes to traditional M&A.
Analysts said bankers must rely on internal growth or return capital to investors through dividends or share-repurchase programs. The latter option may smart, though. "Most of these banks had aspirations to grow much bigger in size," Rabatin said. "So buying back stock would essentially be to some degree admitting that you really can't grow that much."