Gene Taylor put on a clinic in investor relations Monday.
The head of Capital Bank Financial (CBF) in Coral Gables, Fla., knows shareholders must be getting restless. The private-equity-backed company was built to buy other banks, but it hasn't done a deal in more than a year after having made eight in the previous two years.
Other would-be acquirers who are mired in a similar lull and there are plenty of them might want to borrow from Taylor's two-part call for investor patience at a financial services conference in New York hosted by Barclays.
Step No. 1: try to show them you are making good use of your down time.
Capital Bank has been shrinking its balance sheet, writing off bad loans and getting rid of "dormant and unprofitable" deposits, explained Taylor, the president and chief executive. Though total loans fell 1% at June 30 compared with March 31, the $7 billion-asset Capital increased originations by 20% in the second quarter, according to his presentation, entitled "The Path to Performance."
Step No. 2: make it clear you remember the original mission.
Management remains focused on finalizing an acquisition by year end, Taylor and one of his colleagues said.
"You can't be a growth bank unless you build your assets," said Christopher Marshall, Capital's chief financial officer. "We've been operating our bank with far too much capital. We fully expect to execute on additional acquisitions that meet the criteria of the previous banks we have bought."
Capital, backed by Crestview Partners and other private-equity players and run by former Bank of America executives, announced its first bank acquisition in 2010. Its most recent acquisition, Southern Community Financial in Winston-Salem, N.C., was announced in March 2012 and completed in October. The company's territory resembles a triangle that runs from Miami up to the North Carolina coast and then west to Nashville, Tenn.
"We are in discussions with multiple banks," Marshall said, adding that he'd be "disappointed" if Capital failed to announce a deal by the end of this year.
"We've been actively looking," Marshall added. "We know the space very well and we know the banks that we want to buy. The Southeast is still a target- rich environment and there are dozens of banks that have to do something."
Taylor underscored that point. "You can assume that we have had conversations with anything that trades. There is no shortage of targets."
Capital is also finding the acquisition game less crowded now, in terms of aspiring consolidators, compared with 2011, executives said. The company is just having a hard time finding attractive banks that are ready to sell, Marshall said. "As the 2014 outlook becomes clearer, boards might be more willing to bite the bullet and get some things done," he said.
Balance sheet management is often viewed as more mundane than bank acquisitions, but Capital's management team said efforts to purge assets and deposits will also help it achieve its goal of having a 1% return on assets. Its ratio stands at 0.64% and trails behind other Southeastern banks such as BankUnited (BKU), Trustmark (TRMK) and United Bankshares (UBSI).
Much of that cleanup is a result of the earlier acquisitions. Capital bought distressed banks that had high concentrations of commercial real estate loans and often paid the highest deposit rates in their markets. Commercial real estate now makes up less than 30% of total loans compared with 42% of the portfolio at its peak.
Capital is spending upwards of $50 million annually to manage its $854 million portfolio of criticized and classified assets, Marshall said. Management has been cleaning out an average of $100 million in distressed assets each quarter, including $133 million in the second quarter, which puts it on pace to eliminate those assets within two years.
About 80% of those annual costs, or roughly $40 million, should "be permanently eliminated," Marshall said, which would boost annual earnings per share by 40 cents.
Another big reason for Capital's lagging return on assets, as well as tangible common equity, is its stockpile of capital, executives said. The company went public a year ago.
While acquisitions are a priority, management said they are also in discussions about buying back more stock. "If we're able to deploy this capital in a thoughtful, nondilutive manner we should be able to close a large portion of the valuation gap," Taylor said.