Small Arizona Bank Thinks Big with M&A Strategy

First Scottsdale Bank is like a child in the midst of a growth spurt.

The Arizona bank ended 2012 with $80 million in assets but has been busy expanding in 2013. It announced an $8.6 million deal for the $224 million-asset CBOA Financial in Tucson in February. It also beat five other bidders to acquire the $45 million-asset Gold Canyon Bank from the Federal Deposit Insurance Corp. this month.

With the CBOA deal expected to close this summer, First Scottsdale is now on the hunt to raise $10 million to demonstrate to regulators that it can handle a big expansion. Existing shareholders have expressed interest in pledging $7 million; it is planning to raise the rest in private placements, and its executives think it could end up with $13 million of new capital. Regulators still have to approve the deal.

With that kind of growth, people are paying attention to the little bank in the desert, says Rich Vogel, the chief executive of First Scottsdale.

"We were able to convince our regulators to do this and we had to grovel a bit, but we are now getting calls from funds that want in," Vogel said in an interview on Monday. "Apparently, we are on the map now. At $80 million, we were not getting that many calls."

That is only partially true. Vogel, who previously served as Arizona market president for BBVA Compass Bancshares, raised $21 million from about 90 investors in late 2010 to buy the bank, then named First National Scottsdale Bank. The seller was First Olathe Bancshares in Kansas, a multibank holding company that later saw its other unit fail in 2011.

First Olathe agreed to take any criticized assets, so the three-year-old bank was left with a roughly $10 million loan portfolio.

"It took about two years to find our bank because we want to make sure we found something that was clean," Vogel says. "We were probably in half a dozen banks."

Vogel says the investors he assembled were keen on Arizona because they live there and saw its upside potential after the downturn.

"Arizona is usually near the bottom in job growth [during economic downturns] but rebounds to be one of the strongest markets," Vogel says. "So we decided to get in at the bottom."

Loan growth has been fairly easy for a tiny, but healthy, bank in a recovering market, Vogel says. It had $52 million in loans at yearend, double from a year earlier. The loans are closely split between commercial and industrial and real estate.

"We were a welcome source of banking," Vogel says. "And we are not afraid to lend in real estate."

It still needs to translate the tremendous asset growth into profits. The bank lost $1.5 million last year, narrowing losses by 27% from 2011. Most startup banks take years to generate profits, Vogel says. Although First Scottsdale is nearly six years old, the change in ownership and improvement in the loan portfolio was a restart for the bank. The acquisitions speed up the bank's likelihood of making money by adding scale and efficiency, he says.

"As we look at each acquisition, we wonder how it is going to impact our bottom line," Vogel says. "With transaction fees, we might have a slight profit in 2013, but will 100% be profitable in 2014."

Long term the bank plans to have $500 million to $1 billion in assets, Vogel says. The bank could look for other opportunities in Arizona or throughout the Southwest. But those are decisions to be made after completion of the CBOA deal and full integration of CBOA and Gold Canyon, Vogel says.

The CBOA deal is structured as a reverse merger, its Commerce Bank of Arizona unit will be the surviving entity and the bank will be rebranded Commerce Bank.

First Scottsdale did not plan to do two deals so close together, says Chris Webster, the president and chief operating officer.

"The [CBOA] deal was always on our whiteboard," Webster says. "We watched it closely, and when their board decided to test the marketplace, we were anxious to deal with them."

With failed banks, potential bidders are typically notified on Monday for a bank set to fail that Friday.

Randy Dennis, president of DD&F Consulting, a bank advisory firm in Little Rock, Ark., says having failed banks and open banks running concurrent to each other is the reality of the current M&A market. "For about three years, failed banks were the only game," Dennis says. "Now, you need a spread offense and have the ability to quickly call audibles at the line as opportunities come up. It all happens so fast."