Spotting opportunity where bankers do not, acquisitive outsiders are moving in on targets in the financial services industry.
Frank A. Chapman 2nd's decision to buy a rural Alabama thrift company is a harbinger, investment bankers say. The real estate lawyer from Boca Raton, Fla., formed Palm Financial Inc. with his wife to buy the $134 million-asset SouthFirst Bancshares in Sylacauga, and possibly other thrifts, because they see bargains in the downturn.
"I don't think this is the Great Depression by any means," said Chapman, 44. "A lot of what we have right now is hysteria."
He is not alone in his willingness to bet on banking. Despite all the turmoil — or, rather, because of it — observers said more interested buyers from outside the industry are emerging for community banks.
Last month an investor group led by businessmen with experience in the office supply, agriculture and technology industries announced they had struck a deal to buy a 51% stake in the $2 billion-asset New Frontier Bancorp in Greeley, Colo. The $30 million deal, which hinges on a loan review, is still pending.
Gary Kennedy, the director of advisory services for Sheshunoff & Co. Investment Banking, represented SouthFirst in the deal with Palm Financial and said he is working with other groups from outside banking that are scouting for acquisition targets.
"I'm talking to some with no experience and some with limited experience," he said. "A larger percentage of the buyers are people who have been on the sidelines or haven't been in it previously."
Palm Financial said last week that it had agreed to pay $8.5 million in cash, or $12.15 a share, for SouthFirst. That works out to slightly less than the thrift's tangible book value.
"There is definitely opportunity in the current cycle," said Chapman, who has not decided whether to move to Sylacauga. "If you step back and look at this situation levelheadedly, it is a good opportunity for my family and the town."
Clark Locke, a vice president and the head of Texas investment banking operations for Hovde Financial Inc., said lower prices are piquing the interest of outsiders, though an overnight flood of deals is unlikely.
"There are a lot of folks doing the research now and doing the groundwork to be able to participate," he said. "It will take time for them to get comfortable with putting a team together and feel comfortable with making that investment."
Historically, the emergence of new players is part of a down cycle, Locke said. Prices become depressed as traditional acquirers pull back, because they might be hoping to scoop up failed institutions, or they might need to preserve capital to sop up their own loan problems.
Removing that competition from the industry puts downward pressure on prices, he said, and the more prices decline, the more interest comes from outside the industry.
"That's the point in the cycle we are getting to," Locke said. "A lot of people I talk to are nonindustry people who are asking, 'How do I get into this?' "
Several groups have approached him about starting a bank, and he pointed them to acquisitions instead. That is because new banks typically lose money for several years as organizers build the business, and there are healthy banks available at a discount to book value, he said.
At Palm Financial, the plan is to expand SouthFirst's three-branch thrift possibly through acquisitions. Chapman said he would not rule out buying in Florida.
The thrift also would add government-backed lending lines, specifically Fannie Mae, Freddie Mac, Small Business Administration, Federal Housing Administration and Veterans Affairs mortgages, he said. "If something makes sense, we are going to do it."
Acquiring a thrift 665 miles from home made sense to Chapman: He said the thrift model fits with his real estate expertise; regulations for thrifts allow them to expand beyond state borders easily; and Alabama's economy is doing better than those of other Southeast states. Also, he fell in love with SouthFirst's Mayberry-like hometown, with its population of 12,616.
The deal for SouthFirst Bancshares is expected to close this summer. Chapman said he would infuse the company with more capital over the next 18 months, though he is unsure of the amount.
He would become SouthFirst's chairman, and his wife, Ann, would have a board seat, but the current management team would continue running the thrift, he said.
Still, his experience in real estate should come in handy, he said. "I have been doing title work forever. I know a lot about underwriting of loans and the process."
Sandra H. Stephens, SouthFirst's chief executive officer, said being acquired by Palm would allow her company to grow.
"We wanted to expand into some areas we are not in, and we needed some investments from another group," she said. "Our decisions, as far as lending, will remain local, and we think that is very positive."
SouthFirst hit a rough patch with its construction loan portfolio about a year ago, largely because of problems with speculative real estate in the Birmingham area, Stephens said, but the company has worked through the bulk of those problems.
The thrift subsidiary had a noncurrent loan ratio of 0.77% at yearend, versus 1.36% a year earlier, according to data from the Federal Deposit Insurance Corp. Its total risk-based capital ratio was 11.22%.
As of December the thrift had reported six consecutive quarterly losses totaling $1.9 million, largely because of the construction portfolio.
