On Failure's Brink, Guaranty of Texas Still a Hot Property

Guaranty Financial Group Inc. is the talk of Texas this week.

With the $14.4 billion-asset Austin company warning of its imminent failure, speculation has abounded about who will make the winning bid on its lucrative branches and deposits.

But the wait to find out is apparently going to get a little longer. The Federal Deposit Insurance Corp. reportedly had been set to close bidding this week but extended the deadline. It was unclear why.

Both banking companies and private-equity firms are said to be interested in the fifth-largest institution headquartered in Texas, particularly given the state's attractive demographics and economy.

Guaranty has 103 branches in Texas and 59 in California, according to data from the FDIC. It also had $11.7 billion of deposits at March 31, the data showed.

So if one buyer takes it all, the contenders are few, observers said.

Bidders could include U.S. Bancorp in Minneapolis, BBVA Compass in Birmingham, Ala., UnionBanCal Corp. in San Francisco and Capital One Financial Corp. in McLean, Va. Others might be the private-equity consortium that bought the failed IndyMac, or another consortium with the likes of Blackstone Group LP or J.C. Flowers & Co. LLC.

Some suggested that Gerald Ford could be interested as well. In November, the billionaire investor got a shelf charter from the Office of the Comptroller of the Currency. The charter enables bidding on failed institutions by those without an existing bank.

None of the potential bidders would comment.

Observers said Guaranty is one failure that is unlikely to go cheap. "There is value in Texas and banks like Guaranty that have a good deposit base and a good branch network," said Randy Dennis, the president of DD&F Consulting in Little Rock.

Because two-thirds of its branches are in Texas, the deposit premium could be as much as 3% or 4%, Dennis said. But this might be made moot by loss-sharing.

Whether Guaranty is sold as a whole or in pieces depends on the bidding, said Kevin Jacques, a former official at the Treasury Department and the Office of the Comptroller of the Currency who is now chairman of the finance department at Baldwin-Wallace College.

The FDIC's intent is to minimize the cost to taxpayers and to make the transition seamless for customers, Jacques said. "If they can do that with one bidder … it makes life easier."

As with the failure of the $12.8 billion-asset BankUnited in Florida, private equity could have a good chance at getting Guaranty because of its size, Jacques said.

With so many large banks struggling, few are likely capable of absorbing a $14 billion-asset failure without impairing their own capital, he said. "When you stop and think about what the FDIC's mind-set is, private equity may be the way they go. … It wouldn't surprise me."

But the FDIC has proposed stricter capital requirements and other restrictions on private-equity firms that buy failed banks. Some private-equity firms have criticized the proposal and threatened to hold back on bidding until the issue is resolved.

Guaranty said last month that it had little chance of raising capital. It also said its board had given consent for the Office of Thrift Supervision to move forward with an FDIC seizure.

BBVA Compass in Birmingham is said to be among those most eager to get Guaranty. The $61 billion-asset company, which is owned by Banco Bilbao Vizcaya Argentaria SA, has a large presence in Texas.

Dan Bass, a managing director at Carson Medlin Co., said Guaranty would be a logical buy for BBVA Compass because "it helps them in Texas, their largest market, and then it gets them a lot bigger in California, where they have a small presence."

In November, Manolo Sanchez, the president and chief executive of BBVA Compass, said the company was focused on integrating acquisitions it made in recent years. But he did not rule out more acquisitions.

Capital One has said before that it wants to grow in Texas. But Michael P. Taiano, an analyst at Sandler O'Neill & Partners LP, said, "I'm not sure if they would be willing to absorb California in order to get more penetration in Texas."

The $265 billion-asset U.S. Bancorp is likely to find Guaranty's California branches more tempting than its Texas branches, observers said. Dennis Klaeser, an analyst at Raymond James & Associates, said U.S. Bancorp, which has already taken over the operations of two failed California banks, has the capacity to buy more. However, "they have indicated they would be focused on their primary footprint" in pursuing such opportunities.

Only one of U.S. Bancorp's 2,900 branches is in Texas. So buying Guaranty would be "a geographic extension," Klaeser said. If U.S. Bancorp bids, "I suspect they wouldn't be overly aggressive in the pricing."

Whether all the bidders stand an equal chance is questionable, observers said. "I don't think the private-equity or foreign guys stand much of a chance," said James Gardner, the chairman of the investment bank Commerce Street Capital LLC. "The one thing the regulators don't want is to get criticized by Congress. … It would be better for us if the home team wins and prospers."