Capital Battle

REVIEW SUMMARY
Industry. Banking
Trend. Mergers and acquisitions
Key. Investors are scouting the Gulf Coast for bank acquisitions.

At a Christmas party in 2006, Gary Tice, Garrett Richter, C.C. Coghill and Robert Reichert got together to reminisce about the blockbuster bank deal they had made a year earlier.

The quartet sold Naples-based First National Bank of Florida at the peak of the market in 2005 to Fifth Third Bank for nearly $1.6 billion, or an astounding 5.75 times tangible book value. They had started the bank with just $7.5 million in 1989 and turned it into a $5.5 billion franchise with 77 branches from Tampa to Orlando, Sarasota, Fort Myers and Naples.

“We shook hands and said let's do it again,” says Tice.

Their new bank, First National Bank of the Gulf Coast, opened in October 2009 with $32 million in capital and recently won a commitment of $148 million from two investor groups. Donald Marron, the former chairman and CEO of Paine Webber, heads one of these groups, Lightyear Capital.

But First National Bank faces competition from at least two well-capitalized groups scouting for acquisitions in Florida. These include North American Financial Holdings, a group backed by former Bank of America Chairman and CEO Hugh McColl, Jr., and Bond Street Holdings, led by Dan Healy, the former chief financial officer of North Fork Bancorp.

In addition, stronger Florida community banks and well-capitalized super-regional banks from out of state are also seeking opportunities to expand their presence on the Gulf Coast. These strategic buyers may push bank valuations up because their timeframe for returns is longer than it might be for some private investors.

Despite the increased competition for acquisitions, investors say regulators will shut down many more banks and auction them off. Meanwhile, the added regulatory costs of new government legislation may be too much to bear for smaller banks. Indeed, of the 65 banks headquartered on the Gulf Coast from Pasco to Collier counties, just 22 were profitable in 2010, according to a Business Review analysis of Federal Deposit Insurance Corp. data.

However the situation plays out, these investors agree on one thing: Florida banks are on sale, and growth will return as the national economy improves.

The return of FNB
When they formed First National Bank of the Gulf Coast in October 2009, Tice and his three colleagues were careful to temper their enthusiasm for rebuilding their franchise. They raised $32 million through a public offering, suggesting they would limit their territory to Collier County.

But the four men clearly had aspirations to rebuild the storied bank they had sold to Fifth Third. To do that, they needed a lot more capital than they had raised initially. But unlike the previous effort, they didn't want to repeatedly return to the public markets each time they needed capital to grow. “This is not your normal environment for raising capital,” Tice says.

So Tice, FNB's chairman and CEO, and Richter, president and the state senator who chairs the banking and insurance committee, spent a year meeting with private investors in Atlanta, Chicago and New York. The result: $148 million in committed capital, including $40 million immediately, via a private placement from Lightyear Capital in New York City and GMT Capital in Atlanta.

“We've partnered with a great CEO who's done it before,” says Marron of Lightyear Capital, who says he's met with the management of more than 250 banks recently. “Our strategy is to look for good management, and we're looking for areas of the country where there's good fundamental demand and growth.”

Marron says there are going to be plenty of banks for sale, either through FDIC auctions or outside of regulatory actions. To compete and win against rival investors, Marron says it will come down to this: “Management, management, management.”

While Marron doesn't disclose performance targets, he says investors should be prepared to hold for three to five years. “We're taking a very long view on it,” he says.

For his part, Tice is careful not to promise the kind of bonanza that he delivered in 2005. “We don't expect to have that kind of return,” he says, declining to cite specific expectations because of securities regulations. “What we expect is normal growth.”

Tice says his team will focus on building a banking franchise with the same footprint as the previous effort, avoiding the east coast. FNB will focus on the three-county region of Charlotte, Collier and Lee before moving up the coast in about a year. “I'm not going to take $40 million and spend it in two weeks,” Tice says. “Once we hit profitability, we'll head to Tampa.”

FNB plans to grow by adding branches and making acquisitions. Tice's team is targeting healthy banks in which the managements and boards are tired of slogging through the recession as well as banks shut down by regulators with FDIC guarantees on bad loans. “It's not our objective to spend this money on bad banks,” Tice says.

Tice says he's not overly concerned that competition will drive up the values of acquisition targets. Tice and Richter have plenty of experience with acquisitions: They acquired 12 banks when they built First National Bank of Florida during the 1990s.

Price-to-book, a common way to value bank acquisitions, isn't what will determine what Tice's group will pay for banks. Instead, Tice asks the same question he posed when he built the previous franchise: “Can we make the transaction accretive to earnings in the first year? That's how we evaluated each and every bank.” He says the group paid from 1.5- to 3.5-times-book for banks, depending on how much they were going to boost earnings in the first year.

What investors will pay
Until now, investors have acquired bank assets and deposits at deep discounts from the FDIC after regulators shut them down. What's more, those deals came with government guarantees on those loans lasting as long as 10 years.

In one of the few non-FDIC transactions, Fort Lauderdale-based Stonegate Bank acquired Southwest Capital Bank in Fort Myers for 62% of book value. David Seleski, the president and CEO of Stonegate, says there's very little competition for non-FDIC transactions. “I think people are more interested in the FDIC deals because the government provides backstops to future credit losses,” he says. “We didn't want to wait two years or maybe never for an FDIC deal.”

Despite the fact that investors have raised millions of dollars, they've remained disciplined about not overpaying. “By and large they've been fairly priced,” says Healy, whose Bond Street Holdings acquired Florida Community Bank from the FDIC in early 2010. But, he adds: “I must tell you that the FDIC has gotten very intelligent. They're smart sellers.”

Healy says his group, which raised $750 million, has looked at acquiring banks without the help of the FDIC, but such “negotiated transactions” have been hampered by the fact that so many banks are saddled with bad real estate loans. “When you dig deeper into the balance sheet, the asset quality is in question,” he says.

As competition has increased for FDIC-assisted deals, Healy says his group is focusing on acquiring smaller failed banks because they have drawn less attention from competitors. “Larger acquirers need more size, but that seems to be our competitive advantage,” Healy says. Recent acquisitions have been Florida banks with less than $500 million in assets.

While Bond Street focuses on smaller banks in Florida, North American Financial Holdings is targeting larger banks throughout the Southeast. For example, the firm recently acquired 90% of Green Bankshares, the parent of GreenBank, a 65-branch network headquartered in Greeneville, Tenn. “This investment helps define NAFH as a broad Southeastern franchise,” says NAFH Chairman and CEO Gene Taylor in a statement. Taylor is the former vice chairman of Bank of America.

Eventually, all the banks that NAFH controls, including TIB Bank, will be merged into a single institution under the Capital Bank banner. Executives say that will make the business more efficient, sound and profitable.

Some of the pressures that could drive up bank valuations may be blunted by the fact that large investor groups have already spent huge sums of money on acquisitions, reducing the sense of urgency to deploy that capital. For example, North American Financial Holdings has spent $700 million of the $900 million it raised on Southeast banks such as TIB. And Bond Street Holdings has $300 million left from the $750 million it raised.

That may enable smaller groups or individual banks to make more acquisitions. For example, a Brazilian investor has backed Lakewood Ranch-based Community Bank, which recently acquired First Community Bank of America in Pinellas Park.

And super-regional banks such as Louisiana-based Iberiabank are scouting acquisitions to boost their presence in Florida. Iberiabank acquired the assets and deposits of two failed banks on the Gulf Coast in 2009: Orion Bank in Naples and Century Bank in Sarasota. Last year, it acquired the failed Sterling Bank of Lantana on the east coast of Florida. “We'd like to continue to fill out the Florida franchise where it makes sense,” says Michael Brown, Iberiabank's chief operating officer, citing Tampa and Jacksonville as two attractive markets.

But Brown says Iberiabank isn't in as much of a hurry to make acquisitions as investor groups that must put their capital to work. “We do not have a time frame to spend our capital,” Brown says. “We are far more interested in an acquisition that fits us strategically.”