Capital Bank Financial in Charlotte, N.C., is counting on lingering struggles at other banks to help fuel its M&A strategy.
The $7.3 billion-asset company is heading into a new year with momentum after agreeing last month to buy CommunityOne Bancorp. The company's management, eager to keep buying struggling banks, believes there will be ample opportunities in coming months.
Capital Bank has its critics, who wonder if the company missed out on a chance to pick up troubled banks at cheaper prices while sitting on the sidelines for roughly three years. Concerns still exist that Capital Bank's footprint needs to be filled in, while some industry observers believe the company could sell to provide an exit strategy for its private equity investors.
For these reasons, Eugene Taylor, Capital Bank's chairman and chief executive, was selected as one of American Banker's community bankers to watch next year.
"We expect 2016 to be a good year," Taylor said in a recent interview.
"Most banks we interact with are having issues with net interest margins, growing expenses, increasing regulatory costs," Taylor added. "We see all of that. There are always a number of scratch-and-dent banks, and if we go in with our capital capability and our consistent growth in revenue then we should be able to do acquisitions."
Capital Bank, like several other institutions, was formed in the wake of the financial crisis to buy troubled and failed institutions. However, that strategy hasn't worked as planned, largely because there were fewer failures and other banks were slower to sell.
"If you didn't hit the wave at the right time to get the run-up in your currency at the forefront, then you were stuck," said Stephen Scouten, an analyst at Sandler O'Neill. "You could say that for a number of these stories."
Capital Bank was fast off the blocks, locking down three failed banks and four open-bank deals shortly after its creation, but its activity screeched to a halt after that. The company chose to be conservative, adhering to one of Taylor's key principles – it's easy to spend money but hard to make it.
"We looked at a tremendous number of opportunities," said Chris Marshall, the company's chief financial officer. "We took our time and wanted to make sure we did what we said we would when we raised money, which was be disciplined."
Capital Bank was smart to wait since many sellers were asking too much or didn't provide enough value, said Paul Miller, an analyst at FBR Capital Markets.
The company's management is "really good at fixing bad situations," Miller said. "They have been very conservative with the timing of these deals. They are very thoughtful about what they do, more so than other companies I cover."
Management vowed in October 2014 to avoid discussing deals until it had something to announce, which played out a year later when the company agreed to buy the $2.4 billion-asset CommunityOne in Charlotte for $350 million.
The deal is "financially attractive" and "relatively cheap," but it doesn't "add any true franchise value," Scouten said. Still, it let Capital Bank deploy excess capital and build market credibility that it could make something happen. "It was important for them to get something on the scoreboard," he added.
Though Capital Bank has hit some snags since it was formed in 2010 – its profitability targets became harder to meet after interest rates stayed at depressed levels – the company has ended up where management had hoped, Marshall said.
Capital Bank, for instance, is getting close to its goal of having a 1% return on assets. (The company's ROA was 0.86% at Sept. 30, up 6 basis points from a year earlier.)
The company's stock trades at roughly 1.7 times tangible book value. Similar-sized institutions, however, have stocks that trade at more than 200% of tangible book, Scouten said, which could make it difficult for Taylor to compete on some deals.
Capital Bank has generally looked at banks with $1 billion to $3 billion of assets over a geography that stretches from Florida to Tennessee and North Carolina, and Taylor has expressed an interest in growth markets such as Virginia. Management likes this wide footprint because it helps the company to avoid relying on one industry. For instance, Nashville, Tenn., is heavily involved in the health care sector, while Miami serves as an international gateway.
"We're geographically diverse by design," Marshall said. "One of those markets may turn, but it's unlikely they would all go through a downturn."
It is important for Capital Bank to find deals and put its excess capital to work in 2016, Scouten said. Once the deal with CommunityOne closes, privately equity would hold a roughly 13% stake in the company, with one of the associated funds expiring in 2017. At that point, investors could begin to push for a sale or a secondary offering, he said.
Once Capital Bank closes its acquisition of CommunityOne, it will be on the cusp of $10 billion of assets, the threshold where additional regulatory requirements kick in. The general consensus is that banks must reach at least $12 billion of assets to absorb added compliance costs and caps on interchange fees.
National Penn Bancshares, for instance, agreed earlier this year to sell itself to BB&T after it hovered around that mark and couldn't find the right deal to jump over the asset mark.
It is unlikely Capital Bank would sell because of the $10 billion asset threshold, Marshall said. Management has enough contacts within the industry that it shouldn't have trouble finding deals. Instead, if it ever decides to sell it would be because the company wasn't generating adequate returns for shareholders, he added.
"We'll grow as long as we can do it profitability," Marshall said. "We want to make sure our shareholders are getting a good return on their investment."