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Gapstow Capital Prefers Boring, But Effective, Organic Growth Investments

Gapstow Capital Partners in New York prefers to zig while other bank investors zag.

During the financial crisis, a slew of private equity firms pumped capital into community banks in hopes of turning them into acquisition machines. Many of those firms have expressed frustration as affordable deals prove elusive.

Gapstow has avoided that issue by investing in banks that mostly focus on organic growth. It seeks out management teams that need capital to make loans and expand, says Chris Acito, Gapstow’s chief executive and chief investment officer.

Indeed, it may seem like a boring strategy compared to wheeling and dealing for acquisitions. But Gapstow’s partners believe they can make a good return investing in slow, but steady, growth.

"We're trying to identify great management teams in areas where — based on assessments — you have a strong competitive advantage," Acito says. "There needs to be an ambition for growth and a desire to attract the best lending officers.... That may seem like an obvious statement, but not everyone in the industry has that ambition."

Gapstow, formed in 2009, invests through hedge funds and private equity with a focus on corporate and consumer debt, commercial real estate and mortgage securities. In banking, its investments have included preferred stock and equity stakes in public and private banks.

Smaller banks often have limited access to capital markets, making it more difficult to raise money. This is unfortunate because those banks have advantages in areas such as small-business lending, says Jack Thompson, Gapstow's head of financial institutions investments.

Smaller banks "with a strong credit culture can make good decisions about creditworthiness on a case by case basis," Thompson says. "We get very excited about this type of focus."

A number of other industry experts place a high value on management. Julie Stackhouse, the head of supervision at the St. Louis Fed, often touts the quality of management as a key indicator of a bank’s success. And a recent paper presented at the Federal Reserve Board’s inaugural community banking conference also backed that premise.

Strong management is essential, but it takes more than metrics to make that assessment. It also requires “a lot of shoe leather” and meeting with dozens of banks, Thompson says. Gapstow looks for executives who have made long-term commitments to their banks and are focused on building their franchises with the right people.

Management at Broadway Financial (BYFC) in Los Angeles, one of Gapstow’s eight community bank investments, seems to fit this criterion. The firm’s holdings also include Golden Pacific Bancorp in Sacramento, Calif.; Oregon Pacific Bancorp (ORPB) in Florence; and Pan Pacific Bank (PPFC) in Fremont, Calif.

The $345 million-asset Broadway is aiming for a comeback. It is operating under a cease-and-desist order and is working through a portfolio of loans made to churches that soured during the economic downturn.
The company has brought in new executives with experience in helping troubled banks, tapping Wayne Bradshaw, who has led two other turnarounds, to become its chief executive last year. It also hired Norman Bellefeuille, who had worked with Bradshaw at another troubled bank, as chief loan officer.

Broadway completed a complex recapitalization in August that simplified its debt structure and made it more attractive to potential investors, Bradshaw says. It raised $4.2 million through a common stock sale to institutional investors, including an entity affiliated with Gapstow.

The deal took years to complete but Gapstow patiently stuck with Broadway, Bradshaw says. The firm’s hands-off, yet supportive approach, makes it an “ideal partner,” he says.

"Gapstow acts almost like a big brother advisor," Bradshaw says. "They bought into the concept that there is a significant untapped value in" community banking.

Getting investors to see Broadway’s potential had its challenges, Bradshaw says. It’s a troubled company that serves low- to moderate-income groups in central Los Angeles. Its core market is "very underbanked," creating opportunities once the company addresses its credit problems, he says.

Gapstow also realizes the company’s potential for long-term growth, Thompson says.

Gapstow prefers to target markets that others overlook. There can be "terrific loan growth even in stagnant markets," but it comes down to a bank’s ability to grow by taking business from competitors, Acito says.
"You can take a small share to make a big difference to your bottom line," Acito says.

Acquisitions can help a bank grow, but mergers are not "central to Gapstow’s thesis," Acito says. The opportunity to buy failed banks with generous government assistance seems to be diminishing as the pace of failures slows. Rolling up banks in a particular market can work, but it takes time and can create distractions for management.

As for generating a return on its investments, Gapstow takes a long-term view and is flexible in its options, its executives say. Gapstow prefers to be hands-off with its investments, instead having faith that management teams will be creative in finding ways to grow. “We like our CEOs to be aggressive on looking for good credits and find solutions to their challenges,” Thompson says.

"You can’t sit at your desk and just build up your securities portfolio," Thompson says. 'You have to hit the bushes. There are things you can do while waiting for generic loan growth to come back."

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