Florida Deal a Microcosm of New M&A

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When a group of would-be bank organizers recently landed a small Florida institution, they were foreshadowing the near-term future of industry M&A.

Frustrated by a wait for a charter, Apollo Bancshares went hunting for a small bank in its target market of south Florida. It found such a launch vehicle in Miami, where Union Credit Bank was willing to give up a controlling stake in return for a recapitalization. Apollo agreed to buy that stake in the $154 million-asset Union Credit for $15 million.

The Apollo team had formed early last year to start a south Florida bank from scratch and applied for a license in mid-2008. But federal regulators made obtaining deposit insurance too difficult, and in March of this year Apollo started shopping for small acquisitions.

"The opportunity changed — the de novo scenario became less attractive. To work with the regulatory process was longer, which meant more expensive, and the requirements laid out once we open were a lot more complicated and going to affect our investment. The opportunity to acquire a bank became more attractive," said Eduardo Arriola, Apollo's chairman and chief executive.

Industry watchers said they expect more of the same in the coming year.

"We are not going to see a lot of traditional M&A," said Rusty LaForge, a lawyer at McAfee & Taft in Oklahoma City.

"As bank failures come along, we are going to see traditional buyers are going to sit and watch for those failures," LaForge said.

"But these organizing groups can't get into a failure as easily, and those organizing groups know they can't get FDIC approval for new insurance. So they are who we see buying banks. That is their only way to get a hold of a charter, and I don't see anything that would cause it to change for next year."

As for true start-ups, "I think they are going to get to the point that I doubt we see any in the next year," said Byron Richardson, the president and CEO of Bank Resources Inc., a consulting and investment banking firm in Atlanta.

"If you see one or two new banks in the coming year, they will be the exceptions. More often, individuals who want to get into the banking business are going to buy control or 100% of existing banks."

Usually these erstwhile start-ups look for targets with few credit problems, investment bankers said.

"They tell us, 'We want the smallest, cleanest bank you can sell us,' " said Wes Brown, a managing director for St. Charles Capital in Denver.

The smaller the bank, he noted, the less risk associated with the loan portfolio that is acquired with it.

"They are willing to pay a premium for that. They plan to branch from that initial market into their market. Generally, they want to buy a bank in the state they are going to operate in, but not necessarily in the area they are going to operate in."

Union Credit, founded in 2001, may have been the cleanest bank Apollo could find, given that it was looking in troubled Florida. But the bank is not quite pristine. Its net loss swelled to $3.8 million in the third quarter from $94,000 a year earlier.

Union Credit's total risk-based capital ratio dropped over the same period from 21.59% to 9.55% — 45 basis points below the threshold regulators consider well capitalized.

Nonperforming loans jumped from 1.81% of the bank's portfolio to 6.88%. The average for Florida banks with assets of $100 million to $300 million was 6.04% at the end of the third quarter.

Arriola said Apollo talked to more than 30 banks in the southern Florida market that were interested in selling, before deciding on Union Credit.

"They weren't truly a troubled bank," he said. "They weren't on the FDIC watch list. The capital came down, but it was a yellow light, not a red light. They had just come under the well-capitalized ratio … and our coming in with capital addresses that immediately."

Around the country, other organizing groups have been making decisions similar to the one the Apollo group made. For example, organizers of what would have been the biggest start-up bank in Virginia, Xenith Corp. in Richmond, struck a deal instead in May to acquire the $175 million-asset First Bankshares Inc. in Suffolk, Va., after they couldn't get over regulatory obstacles. And Austin Bancshares Inc. agreed to buy La Grange Bancshares Inc., the parent of the $29 million-asset Colorado Valley Bank, for similar reasons.

Roughly 25 banks have opened this year, versus 95 in 2008, according to Federal Deposit Insurance Corp. data.

(The agency has repeatedly said there is no moratorium, formal or otherwise, on new deposit insurance.)

Overall, bank merger and acquisition activity has also slowed considerably this year.

According to the investment bank Carson Medlin Co., 139 bank deals have been announced this year, down from 179 in all of last year and 322 in 2007. (The tally includes recapitalizations and excludes deals that were later canceled.)

Recapitalizations are hardly confined to Union Credit or south Florida — or to investors that shelved start-up plans.

Other recent examples include a $40 million infusion that a group of private-equity firms made in Three Shores Bancorp., the parent company of Seaside National Bank and Trust in Orlando, in central Florida; and Ohio Legacy Corp.'s deal to sell a majority stake to Excel Financial LLC for $15 million.

Besides returning Union Credit to well-capitalized status, its seller, a wealthy Chilean family, also wanted to find a partner so it could resume growth after several years of stagnation, Arriola said.

The deal was announced last week and is expected to close in the first quarter.

Charlie Crowley, a managing director in investment banking at Stifel, Nicolaus & Co. Inc., said there was a similar lull in traditional M&A during the savings and loan crisis in the late 1980s and early 1990s.

A rebound followed, and the same could happen after this slow period, Crowley said. "What we saw 20 years ago is once the FDIC had done a fair amount of the cleanup and after the healthier part of the industry became stronger, there was a little bit of pent-up demand among both buyers and sellers, and that led to a fairly prolonged period of M&A activity," he said. "We wouldn't be surprised to see that again, but it will be a while."

Before M&A activity picks up, Crowley said, bank valuations will have to increase — both for the stock that buyers use as currency and the prices sellers expect.

Also, overall confidence in loan portfolios will need to improve before buyers are willing to take on other companies' loans, Crowley said.

"It is better than it was six or nine months ago, but we still need a fair deal of healing in the real estate environment and the industry, and then it will pick up a lot," he said.

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