A pair of Southeast banks beaten down by bad real estate loans recently met vastly different fates, as one failed and the other was rescued by outside investors.

There were several similarities between the two. Both had recapitalizations in the works and each had planned to merge with another bank. But the divergent outcomes for Florida's Old Harbor Bank, which failed Friday, and a revived FNB United Corp. in North Carolina show a shift among investors in community banks.

They're becoming even more cautious and picky, especially for investing in the smallest community banks.

"Investor sentiment …has turned decidedly negative on banks," said Joe Thomas, a managing director at Hovde Private Equity Advisors LLC. There are considerable "questions about where we are in the cycle and how we can make money in bank investments."

Due to increasing uncertainty, interest is waning for banks with less than $1 billion in assets. Instead, the focus is shifting to unique structures such as FNB's purchase of Bank of Granite that created a bank with nearly $3 billion in assets.

Investors believe bigger banks will be better equipped to withstand a prolonged period of low interest rates and higher regulatory costs. As a result, the smallest banks are repeatedly losing deals, with some failing.

"Smaller institutions are unlikely to get investors unless it's in a small funds or a roll-up strategy," said a bank investor who asked not to be identified.

Brian Simpson, brought in to become FNB United's chief executive, agreed that there is growing sentiment that investors are skeptical about banks' ability to grow.

"It is harder to make net interest margins grow in a low loan rate and flat yield curve environment, which became very apparent shortly after we completed the capital raise," he said. "That has made it tougher for investors to get comfortable with companies to generate strong earnings."

Before failing, the $216 million-asset Old Harbor in Clearwater, Fla. was set to benefit from a $25 million recapitalization and buyout from CBM Florida Holding Co., a group formed in 2008 in Lakewood Ranch and backed by Brazilian investors to buy community banks. CBM called off the deal in August, citing "circumstances beyond our control." CBM's chief executive did not phone calls.

Observers say Old Harbor's case mirrors a problem with other failed attempts to recapitalize small distressed banks. Interested investors quickly find out after marking down the loan book that the investment would not be enough to fix the bank and grow.

Old Harbor's failure cost the Federal Deposit Insurance Fund $40 million. "Even a $30 million recapitalization would not have been enough," said Ken Thomas, an independent bank consultant and economist in Miami.

Analysts voiced similar concerns during a conference call Tuesday with 1st United Bancorp Inc. in Boca Raton, Fla., which bought Old Harbor and then agreed Monday to buy Anderen Financial Inc. in Palm Harbor for $37 million.

Executives at 1st United estimated a $6-$10 million mark up on Anderen's loan book — the first open-bank deal it has announced since 2008. But Rudy Schupp, 1st United's CEO, told investors that half of its own loan portfolio is covered by the Federal Deposit Insurance Corp., and $35 million raised earlier this year leaves plenty of capital.

"Our consolidated leverage capital ratio is generous" and is key to "making further acquisitions," Schupp said during a conference call Monday.

Observers say the success of bigger banks like 1st United and FNB to attract capital and make deals is also due to skilled managers. "Management credibility and integrity is critical, said Bob Reid, who was recruited by FNB's private equity investors to become the Asheboro, N.C., company's president.

FNB received $310 million in a recapitalization led by Carlyle Group and Oak Hill Capital Partners.

1st United's "management team is pretty skilled at acquisitions" with its three senior leaders having collectively made 35 acquisitions, said Michael Rose, an analyst at Raymond James & Associates. "If I was going to put stock in anybody it would be in them."

This is good news for the well-capitalized Anderen, which industry sources said tried to sell itself three times since last year.

Observers warn it will be even harder for under-capitalized banks. For small banks, "if they haven't raised capital and they've been in a stressed position for a number of years, their livelihood is more so with the FDIC than a recapitalization," said Brett Schnieder, an analyst at FBR Capital Markets.

Investors say a big deterrent for smaller banks is the 24.9% limited ownership threshold. Private equity and institutional investors want to invest at least $25 million without hitting that mark, so a bank must to have a market capitalization of at least $200 million, said Joe Thomas, who is not related to Ken Thomas.

Against such challenges, smaller banks that fail to raise capital may also find it hard to sell.

"All the cross-currents and uncertainty" over the economy and capital markets is stalling acquisitions, Joe Thomas said. "It probably just puts a pause on the whole thing where everyone is saying 'let's wait a quarter or two.'"

Still, Ken Thomas said a few recapitalizations in Florida could occur by yearend. "There are at least two dozen banks actively looking for capital injections" in the state, he said. "We will see some announcements …and some of them will be pretty big."

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