How Bank M&A is Reshaping the South

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Johnny Allison cashed in big on the Texas banking crisis of the 1980s, acquiring some $2 billion of bad assets from the old Resolution Trust Corp., and parlaying it into $30 million a year in income after the sector recovered five years later.

So when the chairman of Home Bancshares in Conway, Ark., sees what has happened in the Southeast over the past five years, he can't help but feel like it's déjà vu all over again.

"This is my second bite at the apple," says Allison, who has acquired five failed banks and one ongoing concern in Florida, and now boasts about $1.7 billion in assets and 40 branches there. "I have no reason to believe it won't be as successful as the first."

In the stretch run of a financial crisis that has spawned upwards of 200 bank failures in the southeast and left hundreds more struggling to stay afloat, there's a less talked about story of rebirth, growth and opportunism bubbling beneath the surface.

A handful of strong mid-cap regional banks, most of them based in what has long been viewed as the dull patch between still-high-in-the-saddle Texas and the heretofore-dynamos of Florida and Georgia, is capitalizing on the carnage.

They've survived the crisis in relatively good shape and have lots of capital. Now they're moving east, buying banks, opening de novo offices, stealing customers from crippled rivals and building share in areas hit hard by the crisis, betting on a rebound down the road. In doing so, they are changing the competitive dynamics of the region, along with some long-held perceptions.

"Before the downturn, the banks in Louisiana, Arkansas and Mississippi were criticized for not growing fast enough, while the ones in Florida, Georgia and the Carolinas were the high-multiple, growthy banks that everyone wanted to talk about," says Kevin Fitzsimmons, an analyst with Sandler O'Neill and Partners.

"Now, with all the stress and failures in those states, it's those banks from safer, slow-growth markets that are emerging as the new mid-cap class of the Southeast," Fitzsimmons adds. "It's very ironic."

The protagonists in this redemption tale include the likes of Iberiabank of Lafayette, La., Hancock Holding Co. of Gulfport, Miss., Trustmark of Jackson, Miss. and Little Rock-based Bank of the Ozarks-all solid, if uninspiring, regional banks whose home markets lie firmly in the Southeast, yet west of devastated Florida and Georgia.

They aren't huge, at least not yet. Hancock, at $19 billion in assets, is the largest.

None are household names outside of their home markets. Even today, most bankers in Florida or Georgia don't know very much about them. But they've been relatively strong performers through the crisis, and now live in a bizarre, parallel universe where capital is plentiful, allowing them to bulk up on the cheap.

"A lot of banks got hurt because they showed up in Florida near the end of the cycle. Instead of buying low and selling high, they bought high and got hammered," says Daryl Byrd, Iberiabank's CEO since 1999. "We waited for the cycle to completely end, which has enabled us to buy low."

Bill Valenti, chairman and CEO of Florida Gulf Bancorp in Ft. Myers, Fla., remembers the day in November 2009 when Iberiabank bought the failed Orion Bank, based a half-hour south in Naples. "We all kind of looked each other and said, 'Who is Iberiabank?'" he recalls with a chuckle.

Today, Valenti knows plenty about the $12 billion-asset Iberiabank, including its developing taste for the Sunshine State's banking market. In March, he agreed to sell Florida Gulf, one of the few southwest Florida banks to survive the crisis intact, to Byrd's bank for $44.5 million.

"These guys are at a sweet spot in the market," Valenti says of the mid-caps. "They have enough size so that they can get some genuine efficiencies, but they're not so big that they're constantly up in Washington testifying before a House subcommittee."

Many of the more ambitious regionals are run by folks like Allison, who not only survived a devastating energy and real estate bust in the late 1980s but learned from the experience that once-in-a-generation opportunities come along when the environment is at its toughest.

"If you look over our 115-year history, we've always grown the most during the worst of economic times," says Carl Chaney, CEO of Hancock, which recently doubled its assets with a $1.8 billion deal for New Orleans-based Whitney Holding Corp. "By operating on a conservative basis and maintaining what some people think is a larger-than-necessary capital base, you can take advantage of the opportunities when difficult times arrive."

Another way to view things: banks in slow-growth states like Louisiana and Mississippi didn't fetch the stock multiples needed to buy into then-white-hot markets where some banks traded hands for more than four times book value.

But there's no escaping that their home markets lack the glamor, growth and long-term demographics of Florida or Georgia. As smart as their management teams were in not pursuing an expansion there in the last decade, they're even smarter to pursue one now, analysts say.

"These banks are in better shape because they were lucky" in terms of geography, Fitzsimmons explains. "But they are also in better shape because they're good.

"If your core market is slower-growth, you have to be better to make money," Fitzsimmons adds. "You tend to be a little more conservative, because you can't afford the losses. You tend to be more focused on pricing and margins, because there isn't growth to offset it. You tend to be more vigilant about expenses."

The recession has caused pain, of course, but it's been muted. While Hancock and Iberiabank both saw earnings drop between 2009 and 2010, they remained profitable throughout the crisis. Trustmark's earnings grew in each of the last three years.

That relatively strong performance has won bankers the confidence of investors, while their growth plans have captured imaginations. "Raising additional capital isn't an issue with the right story, and these guys have good stories," says Chris Marinac, managing partner at FIG Partners in Atlanta.

When Hancock went to the Street to raise funds for its live-bank acquisition of Whitney, the offering was oversubscribed fourfold. Even after the deal, Hancock has a tangible common equity-to-assets ratio of 8.27 percent.

Indeed, some of these banks might have too much capital. Iberiabank and Allison's Home have TCE ratios above 9.6 percent. Bank of the Ozarks' TCE ratio is a whopping 11.26 percent. Investors would like to see some of that capital put to work, but that's a tall order in the current environment.

"There isn't much loan growth, and there are only so many loans you can steal from each other," Marinac says. "In many cases, the best way to deploy it is on acquisitions."

In total, banks from Arkansas, Louisiana and Mississippi have purchased 23 failed southeastern banks from the FDIC, and have done 24 live-bank deals, in this cycle. That's less than 20 percent of the region's total transaction tally, according to figures from SNL Financial of Charlottesville, Va.

But the numbers belie these banks' aggressiveness in seeking out opportunities. Allison, for example, says he's reviewed more than 40 potential failed-bank deals in Florida alone, bid on 22 of them and won six. He presently is discussing 14 potential live-bank deals.

The Southeast, of course, remains dominated by Bank of America, JPMorgan Chase and Wells Fargo, along with superregionals such as BB&T, Regions Financial and SunTrust Banks. Versus any one of these players, the Iberiabanks and Hancocks of the world don't have nearly as much weight to throw around in terms of assets, capital or physical presence, even on a combined basis. Nonetheless, they have had an impact.

There's a psychological lift to seeing outside bankers show interest in the region's weaker spots. Iberiabank paid 1.4 times book value for Florida Gulf, the first bank in the state to sell for more than book in three years. When Valenti attended a recent banking conference, he got some backslaps from colleagues who are eager to escape the toxic mix of a stuck-in-the-mud real estate market, shrinking margins and rising regulatory costs.

"They said, 'Gee, Bill. We hope this primed the pump,'" he recalls.

But the mid-caps' presence also adds competition to markets such as Florida, which already is dominated by big out-of-state players. For now, the pie isn't getting any bigger, which leaves stealing customers as the preferred way to grow.

Winston-Salem, N.C.-based BB&T, one of the only big banks in the region to stay profitable throughout the crisis, is perhaps the primary driver of the price competition in Florida. "BB&T has decided that it will take market share while the other big banks look weak, because it can," Fitzsimmons says.

BB&T made a splash with its 2009 acquisition of the failed Colonial Bank of Montgomery, Ala., which brought about $19 billion in deposits and 346 branches, most of them in Florida, Alabama and Georgia. It has announced only one live deal, the pending acquisition of BankAtlantic in Ft. Lauderdale for about a $300 million deposit premium and the assumption of some debt. More deals could come. "Virtually any midsized bank that gets mentioned as a target in the southeast, BB&T is on the list of potential buyers," Fitzsimmons says.

Regions continues to trade at a discount to book value and still has elevated levels of problem assets. But it recently bought its way out of TARP and remains a major presence in the Southeast. It, too, could emerge one day as a big consolidator in the region.

Meanwhile, institutions like Hancock see plenty of opportunity to grow on their own. Hancock's Chaney unabashedly says he's seizing on the frustrations of customers who can't get loans extended without additional covenants and appraisals. "We aren't seeing a lot of new organic growth. It's takeaway business," he says. "Customers are frustrated, and we call on them and let them know we're open for business."

It isn't just the big players who are ceding business as they attend to balance sheet issues and regulatory crackdowns. Community banks are feeling the pinch, too. They're being forced by regulators to beef up collateral standards and, oftentimes, raise more capital. Valenti, who is involved in several state banking groups, says that virtually all the small Florida banks he knows of are operating under confidential memorandums of understanding to raise capital above 8 percent of assets.

For the typical bank today, raising capital is painful. Loans are running off of bank books, and the competition for new earning assets is stiff. Margins are tight, compliance costs are rising due to new regulations and it's getting harder to hold off on discretionary expenditures that may have been delayed during the crisis, such as investments in critical technology systems.

"You need to be able to impress shareholders with earnings so they will buy your stock," says Tony Plath, a finance professor at the University of North Carolina-Charlotte, "and for many banks today, that's almost impossible."

It's hard for stronger banks, too. Florida Gulf was approached several times in recent years about selling, but always declined the offers. The company instead went to existing shareholders for capital three times, and in 2010 did a preferred stock offering.

An MOU to boost capital ratios from 5 percent to 8 percent, combined with some potential growth opportunities, had Valenti seeking more capital, but this last time around investors were skeptical. "Folks either didn't believe the margins were going to be as good as they used to be, or they wanted control, which we weren't willing to give away," he says.

Rusty Cloutier, CEO of the $4 billion-asset MidSouth Bancorp in Lafayette, La., says he's seeing "a lot of bankers who are very, very nervous." Like the other executives interviewed for this story, he says more books from potential sellers are crossing his desk.

"There is a mood to consolidate," says Cloutier, who has yet to acquire any banks outside of Louisiana and Texas but says he's regularly approached with deals. "If a company is positioned right, you have the opportunity to develop a lot of business."

Allison certainly would attest to that. Home Bancshares, which lost money in 2010, earned $1.91 a share last year. It now has more assets in Florida and Alabama than it does in its home state.

"It used to be that Louisiana, Arkansas and Mississippi were the butts of the world's jokes. We were last in everything," Allison says.

No one in the southeast is laughing now.


M&A Hotbed

While merger activity among banks has been slow on a national scale, 268 banks have changed hands in the southeast since 2008. The tally, from SNL Financial, includes 153 failed banks acquired from the Federal Deposit Insurance Corp. and 115 whole-bank deals-many of them distressed sales, but others, such as Florida Gulf, of the healthier variety.

Private equity firms such as the ones that backed John Kanas' purchase of Miami's BankUnited from the FDIC have been among the buyers. Some heavyweights in the region also have made selective purchases. Wells Fargo's takeover of Wachovia and BB&T's winning bid for the failed Colonial Bank, an erstwhile southeastern power, stand out.

Among mid-caps, Bank of the Ozarks has been the most prolific acquirer on the failed-bank side, doing seven government-assisted deals, five in Georgia. Trustmark has completed only one FDIC transaction, but has added more than $4 billion in assets via three live-bank deals, including its $55 million acquisition in May of BancTrust Financial Group in Mobile, Ala.

Hancock has completed just one failed-bank deal-the December 2009 purchase of People's First Community Bank in Panama City, Fla. But it is a completely different, and much larger, company after its $1.8 billion takeover of Whitney. Hancock's earnings jumped 44 percent last year to $2.02 a share.

Iberiabank has picked up nearly $3.4 billion in failed-bank deposits. Nearly 20 percent of its loans are now covered by FDIC loss-sharing agreements. The company also has bought three banks without government help, and opened de novo offices in places like Mobile, Ala. "We're putting flags in markets where we think we can do well, based on the people we can recruit," CEO Daryl Byrd says. 

John Engen is a freelancer in Minneapolis.

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