It’s good to be among the favored few, those blessed by the Federal Deposit Insurance Corp. to scoop up the remnants
of failed banks.
Because it was on the FDIC list of approved buyers, Cincinnati-based First Financial Bancorp was able to acquire Columbus, Ind.-based Irwin Financial Corp.’s banking operations under terms that would make any deal-maker proud.
Here’s the upshot: First Financial scooped up $2.1 billion in deposits at a mere 1-percent premium. Meanwhile, it bought performing loans at a 25-percent discount and saddled the FDIC with the scary stuff—all construction loans, non-performing loans and real estate Irwin owned.
Better yet, the FDIC is taking much of the risk for the loans First Financial put on its balance sheet. Under a loss-sharing agreement, the FDIC is shouldering 80 percent or more of losses on those loans.
The FDIC has offered similar terms to buyers of many of the 100 or so U.S. banks that have failed this year. It does so not out of generosity, of course. It wants to entice buyers to the table. And it wants to ensure those buyers don’t put themselves at risk of financial ruin.
But it’s no wonder shareholders and analysts are giving First Financial execs a pat on the back. The deal was announced Sept. 18. Over the next two trading days, First Financial shares spiked 45 percent.
“First Financial’s acquisition of Irwin’s subsidiaries is a major win for shareholders that significantly enhances the company’s presence in Indiana,” Stephen M. Moss, an analyst with Janney Montgomery Scott, said in a report.
It’s not clear how many banks the FDIC has on its list of approved buyers; the government doesn’t make that public. But the ingredients for winning a spot—strong management and a strong balance sheet—are no secret.
The investment firm Keefe Bruyette & Woods lists two dozen U.S. banks “with sufficient capital, credit quality and management talent” to roll up failed institutions. First Financial is on that list, as is Evansville-based Old National Bancorp.
Both banks have similar stories. They made tough decisions a few years ago to sharpen performance, putting them in a stronger position than most of their brethren when the recession set in.
For its part, First Financial cut back on risk by shrinking its mortgage and auto-lending businesses. Old National installed new management and reduced credit risk.
Both had stock offerings this year that gave them the firepower to make acquisitions. Old National raised more than $200 million last month—money analysts expect the bank eventually will be able to deploy.
“It is wise for Old National to think of expanding. Its existing geography in central and southwest Indiana has held up through the downturn, with relatively minimal dents to credit quality,” Jason Ren, an analyst with Morningstar Inc., said in a report.
“Although expanding in and around this area won’t confer tremendous growth prospects, attractive opportunities could still arise.”
Appetite for growth
First Financial entered the Indianapolis market by opening a commercial lending office here in mid-2008 and already had been planning to establish a branch-banking presence before the Irwin opportunities arose.
In August, it bought three Irwin branches—in Carmel, Greensburg and Shelbyville. When the FDIC seized Irwin’s banking units last month, it acquired 12 more Indiana outposts.
“We felt it was a good time competitively to enter the market because, based on our research, we found some of the Indianapolis-based banks had pulled back on their lending activities and their expansion plans,” said Claude Davis, First Financial’s CEO.
The bank already had offices in the northwest, north central
and southeast parts of the state. The addition of the Irwin branches gives it 49
Don’t expect First Financial brass to stop there. Davis said First Financial plans to add Indianapolis branches next year. In a PowerPoint investor presentation, First Financial notes that the population in Indianapolis is expected to increase 8.6 percent by 2013, one of the best growth rates among its Midwestern markets.
Davis, 48, knows the strengths and weaknesses of this market firsthand. He’s a Butler University graduate and a Butler trustee and worked for Irwin from 1987 to 2004, spending seven years as president of its commercial bank. He was living in Carmel when he joined First Financial.
Now, he finds himself mining opportunities on his former home turf.
“This deal made us a very large player in Indiana, and we view it as a strategic market for us,” he said. “You will see us continue to grow and expand.”•