K.H. Thomas Associates - BranchLocation.com

Want to Buy Failed Bank? A Ga. Town Offers Plenty
By Robert Barba
Wednesday, October 29 2008

What persuaded Stearns Financial Services Inc. of St. Cloud, Minn., to reach across the country and buy a failed bank in Alpharetta, Ga.?

Despite three bank failures in about a year, Alpharetta, in the northern suburbs of Atlanta, remains one of the state's most affluent communities.

"These are high-buck towns of decent size. We think it will be a good place to be, and we will see how it fits us," Norman C. Skalicky,Stearns' chairman and chief executive, said in an interview Monday from Alpharetta. "We think the opportunity was good enough to take therisk."

His $1.1 billion-asset company had never considered expanding its banking operations into Georgia, he said, but after it told regulators it would be interested in failed banks, the Federal Deposit Insurance Corp. approached it about taking over Alpha Bank and Trust.

The $354 million-asset Alpha Bank presented Stearns a chance to get into a fundamentally strong community going through a rough patch, Mr. Skalicky said.

The FDIC did not respond to a request for comment, but regulators likely had to search far and wide for a buyer after being unable to find a closer one to take on the failed bank.

"Georgia is one of the most troubled banking markets, and this deal suggests that none of the area banks were interested or capable to take it over," said Ken Thomas, the Miami branching consultant who operates the Web site BranchLocation.com. "I would imagine that they shopped this around everywhere except eBay."

Slightly more than a quarter of the nation's 101 troubled institutions are in Georgia, according to a report issued last month by Foresight Analytics LLC., a market research firm in Oakland, Calif. Many banks are weighed down by residential development loans.

Alpha Bank's failure last week followed Integrity Bank's failure in August.

Both banks were aggressive lenders that experienced massive growthduring their short existences.

Integrity's assets grew 4,500% in its eight-year history, to $1.1 billion, and in two years Alpha's asset grew 700%, to $354.1 million.

The third institution to fail in Alpharetta was NetBank, a $2.5 billion-asset thrift that went under in September of last year.

Unlike Integrity, whose deposits and five branches were absorbed by Regions Financial Corp. of Birmingham, Ala., Alpha did not present much value to acquirers with its headquarters in Alpharetta and branch in Marietta. (Regions has roughly 70 branches in the Atlanta area.)

"Alpha didn't offer a lot," said Walter G. Moeling 4th, a partner in the Atlanta office of Powell Goldstein LLP. "Anybody that wanted to be in those markets was already there, and Alpha had no real core deposits."

Like many banks scrambling to preserve liquidity, Alpha was payingtop dollar for its deposits. As of June 30 its interest income as a percentage of average assets was 4.29%, compared with the 2.73% average for banks of similar size in Georgia, according to data from the FDIC.

That percentage has been at similarly high levels for Alpha over the last year.

Mr. Skalicky said bringing the pricing down and stabilizing the deposit base is the "first order of business" for Stearns. "It's going to be a lot of work," he said. "It's going to be risky ... but we arehere trying to see what we can make of it."

On the loan side, Mr. Skalicky said his company would likely be looking to make commercial loans or conduct "proper real estate lending, nothing with high risk" in the market.

Stearns has had its own issues with credit quality recently. According to FDIC data, its noncurrent loans as a percentage of total loans rose 69 basis points from a year earlier, to 1.49% as of June 30. Its loan-loss provision rose 197%, to $7.6 million.

However, Mr. Skalicky said his company is still solid, with a 23% risk-based capital ratio before taking on Alpha.

In this environment, "capital is king," he said.

With that much capital, Mr. Skalicky said, Stearns will take a look at other acquisitions, but it is working on "digesting this one first."

Mr. Thomas said buying other banks would be the best way for Stearns to make this cross-country deal worth the trouble.

"They will really need to expand their market share to make this long-distance deal work," he said. "Being a cross-country bank is niceon a map or in an annual report, but it's difficult to make profitable."

Outside Minnesota, Stearns also operates a bank in Phoenix, a nationwide small-ticket leasing company, and an accounts receivable business based in Utah.

Stearns agreed to absorb $343 million of deposits without paying apremium, and it bought a small fraction of Alpha's assets, $38.9 million. The FDIC said the Alpha failure is likely to cost the Deposit Insurance Fund $158 million, or nearly 45% of the bank's assets.