Merger Momentum

REVIEW SUMMARY

Industry. Banking

Trend. Banks that struggle with capital issues have become targets for potential acquisitions.

Key. A bank bought at a bargain price still poses risks.

The consolidation era for community banks, considered a potential developing trend for most of 2010, might be a reality for the rest of 2011.

“I think you will see a lot of consolidation,” says David Seleski, president and CEO of Fort Lauderdale-based Stonegate Bank, which recently closed on a deal for Southwest Capital Bank in Fort Myers. “There's very little capital out there for the banks that are struggling. There are just not that many options.”

Several other bankers from Tampa to Naples see the same industry blueprint. “The talk is out there,” says Parrish-based 1st Manatee Bank President and CEO Thomas Hodgson. “As things get tougher, mergers and consolidations will certainly be an option.”

Stonegate's acquisition of Southwest Capital is the most recent example of the trend, which doesn't include purchases triggered by bank failures. Stonegate completed two of the latter acquisitions in the 2009 fourth quarter, when it signed purchase agreements with federal regulators for Hillcrest Bank and Partners Bank, both based in Naples.

Another example of the consolidation trend occurred in February. That's when the holding company behind Lakewood Ranch-based Community Bank agreed to buy Pinellas Park-based First Community Bank of America for $10 million in cash. The deal for FCBA, which had been struggling, is expected to close later this year.

Stonegate paid $9.4 million in an all-stock transaction for Southwest Capital. The deal closed March 18. Stonegate was more than five times bigger than Southwest at the time of the deal, with $636.8 million in assets compared to Southwest's $114.9 million in assets.

“We really wanted to get more of a presence on the (Gulf) Coast,” says Seleski. “We felt this was the quickest and safest way to do it.”

Seleski came to that conclusion based on Stonegate's experience buying assets and deposits of the failed Hillcrest Bank and Partners Bank, both in Naples. The lesson learned there, says Seleski, is turning failed institutions into viable extensions of a bank can be a costly and time-consuming project.

“There's a reason why the bank has failed,” says Seleski. “I'm not saying we wouldn't do another one like that, but it's a lot of work.”

Stonegate officials project the Southwest Capital purchase will save the bank $800,000 in annual expenses by the third quarter of 2011. Both banks focus on business clients, Seleski says.

Superior issues

The consolidation trend looms over the Gulf Coast's 63 community banks that scored either high or low on the Business Review's quarterly analysis of local institutions. The analysis is based on quarterly and annual data banks report to the Federal Deposit Insurance Corp.

For one, banks with low scores in several categories, such as Bank of Naples or Tampa-based Superior Bank, could be enticing acquisition targets. Banks that scored well in multiple categories, meanwhile, such as Largo-based USAmeriBank or Florida Shores Bank - Southwest in Venice, could be in a good position to acquire other lenders.

USAmeriBank made the top six in all five categories analyzed by the Business Review. The bank, founded in 2007, surpassed $1 billion in assets earlier this year — a feat CEO Joseph Chillura attributes partially to the timing of not having to participate in the boom-and-bust cycle. “As many banks focus on internal issues,” Chillura says in a release that celebrated the $1 billion mark, “we have found tremendous opportunities to responsibly expand our customer base.”

One bank in particular that stood out as a leader in several categories is Port Charlotte-based National Bank of Southwest Florida. The bank has since been renamed Encore National Bank and rose to the top because of a one-time gain related to its acquisition by a group of investors from Ohio and Naples. Encore National is now based in Naples.

Still, the Encore National figures are startling.

For example, the bank's return on equity rose 40.3%, from -8.31% at the end of 2009 to 32.32% in 2010. Return on assets were up 6.99%, from -2.05% in 2009 to 4.94% last year. The bank was No. 1 on the Gulf Coast in both those categories.

Encore National also grew its assets 533.09% per the transactions, from $37.5 million in 2009 to $237.9 million in 2010, a gain of $200.28 million. That growth dwarfed every other bank on the Gulf Coast.

The gains at Encore National are a complete contrast to the losses at Superior Bank.

Superior suffered the largest quarterly and annual losses in net income of any Gulf Coast community bank. On an annual basis the bank posted a loss of $232.19 million in 2010, significantly worse than the loss of $15.27 million it reported in 2009. The quarterly loss followed the same pattern, going from a $10.23 million loss in the 2009 fourth quarter to a $43.9 million loss in the 2010 fourth quarter.

More problems: Superior was the fourth-worst on the Gulf Coast in return on assets, with a 6.72% fall, from -0.48% through 2009 to -7.2% through 2010.

The issues at Superior, which is owned by a Birmingham, Ala.-based holding company, aren't new. It has 10 offices in five Gulf Coast counties and has operated under regulatory orders to improve capital ratios since last year. The holding company operates 67 offices between Alabama and Florida and it recently replaced its CEO and president, who retired.

Bargain hunters

Two banks in the same local market as Superior, St. Petersburg-based Raymond James and Tampa-based American Momentum, have fared much better of late.

Raymond James, for instance, led Gulf Coast banks in assets with $7.5 billion; quarterly net income with $29.17 million; and year-to-date net income with $84.15 million.

Moreover, Raymond James ranked fourth on the Gulf Coast in return on assets, with 1.02% and third on the Gulf Coast in return on equity, with 10.24%.

American Momentum is also on the upswing. The bank made the top 10 in each of the Review's five categories and the top five in four categories. The bank was second to Raymond James in both quarterly net income and year-to-date net income.

On the quarterly side, American Momentum turned a slight loss in the 2009 fourth quarter into a $7.86 million gain in the final quarter last year. The bank also turned a $6.6 million year-to-date loss in net income in 2009 into a $9.73 million gain in 2010.

Another bank that scored well in the Business Review's analysis was Parrish-based 1st Manatee. While the bank's total assets tally is still low, at $83 million through 2010, it did grow 35.31% in that category. The bank improved significantly in the four other categories, including a 9.47% rise in return on equity.

Most importantly, 1st Manatee has been profitable for the last seven months, says Hodgson, the president and CEO.

Hodgson attributes the gains to several factors. A primary reason is the spread in federal interest rates, which helped the bank increase margins. “That has allowed the bank to reach profitability even faster than the regulators said we would,” says Hodgson.

Renewed interest in second homes and vacation properties has also picked up, says Hodgson, which has led to an increase in residential loans. “That's where the bargains are,” says Hodgson. “It's not great, but it's steady.”