Hibernia Ripe for Takeover as Nonperforming Assets Climb

The bank's second-quarter results disappointed analysts, and some estimate that nonperforming assets could rise further.
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Hibernia

(HIB)

, limping deeper into the Louisiana bayou, looks once again vulnerable to predators.

The New Orleans-based bank reported a sharp rise in nonperforming assets Monday that was worse than analysts and investors had predicted, increasing speculation that the bank will soon become the subject of a takeover bid.

Nonperforming assets totaled $100.5 million at the second quarter's end, up substantially from $38 million in the year-ago period, and higher than the $76.3 million reported at the first quarter's end.

"A takeover of Hibernia is almost inevitable. The bank can't disappoint like this," says Mark Davis, head of research at

Banc Stock Group

, a brokerage and asset management firm. "It could happen by year-end." The

(BANCX)

Banc Stock Group mutual fund holds Hibernia. The firm's brokerage arm has no investment banking relationship with Hibernia, which it rates a hold.

"Few of us thought that nonperforming assets would go up this much," says Carole Berger, a manager at

Berger Jackson Capital Management

. Berger Jackson doesn't disclose its holdings.

Also disappointed was

Merrill Lynch

banking analyst Bill Katz, who had predicted nonperforming assets would be around $80 million in the second quarter instead of the actual $100.5 million. Katz rates Hibernia a hold, and his firm has no underwriting relationship with the bank.

In a press release Monday, Stephen Hansel, Hibernia's president and CEO, said: "We still have asset quality work to do. Nonperforming assets have risen since the first quarter, as we predicted, but nothing in the increase is new or surprising."

In an interview, Hibernia spokesman Jim Lestelle says the decrease in asset quality "would not affect our independence" and he stresses that the deterioration was not endemic to the bank, since it has taken place among a small number of large corporate borrowers. (Asset quality problems aside, the bank's second quarter net income of $47.4 million, or 29 cents a share, was actually 7% up over the year-earlier's $44.3 million, or 27 cents a share.)

And don't forget that Hibernia has periodically been the subject of takeover talk for the better part of a decade. The most recent wave of speculation began in the first quarter when the bank first revealed a big drop in asset quality.

But Davis at Banc Stock Group says Midwestern banks aiming to gain exposure in the South could be interested in Hibernia. They include

Fifth Third

(FITB) - Get Report

and

National City

(NCC)

. Fifth Third declined to comment on Hibernia while National City didn't return calls.

Davis thinks Hibernia, which has $14.7 billion in assets, could sell at a 30% premium to Monday's closing stock price of 15 7/16, which was down 2.4%.

Berger names

Union Planters Bank

(UPC)

and

Regions Bank

(RGBK)

, both Southern institutions, as possible acquirers. Neither Union Planters nor Regions returned calls seeking comment.

Berger says that a buyer would want to determine the true scope of asset quality problems before acquiring Hibernia.

And there are signs that nonperforming assets may swell still further. Hibernia's second-quarter loan delinquency rate (0.83% of loans) suggests that as much as an extra $30 million could be added to the nonperforming assets number in the coming months, according to Peter Kuper, an analyst at

Keefe Bruyette & Woods

. Keefe Bruyette & Woods has no investment banking relationship with Hibernia.

"If nonperforming assets do go up from here, Hibernia has huge problems," Kuper says.

Davis says that a buyer will probably step in once nonperforming assets appear to have reached a peak. "They'll move once it becomes apparent that the bleeding has stopped."

A potential acquirer also could exploit the asset quality stigma in a bid to get Hibernia at a low price. In doing so, it could pick up Hibernia's more effective units on the cheap.