To capitalize on consolidation, a longtime Tennessee banker has set up a fund to invest in start-up banks aiming to capture runoff from merging banks.
Jim Ayers, the chairman of the $1.6 billion-asset FirstBank in Lexington, launched First Financial Investors LP in May with his son, Jon, and a Nashville lawyer, Clay Petrey. By June 30 it had raised $10 million from 25 individuals.
Mr. Petrey said interest was so high that First Financial will probably do a secondary offering.
First Financial will invest only in Tennessee banks to start, but eventually it will expand to neighboring states, Mr. Petrey said. It will not be a primary investor in any new bank, he said; its maximum investment in any bank will be 10% of its own value or 5% of a start-up's offering, whichever is lower.
Mr. Petrey said the expected return, once all of the money is invested, is a compound annual rate of 12%.
The fund's investors are betting these banks will prosper from further consolidation. Though Tennessee is now the home state to only one large banking company - First Horizon National Corp. of Memphis, with roughly $35 billion of assets - half a dozen Tennessee banks with $700 million to $1.7 billion have attracted interest from active buyers.
The rationale for the fund, Mr. Petrey said, "is that the value is in growth, however it occurs - whether it is internal growth, competing directly with the large banks, or market runoff because of customer dissatisfaction."
Though Mr. Ayers is overseeing First Financial, the fund is not affiliated with his bank, the largest privately held bank in Tennessee. (He is the lone shareholder.) However, many of the investors are acquaintances or associates of Mr. Ayers, who also has holdings in manufacturing and health-care businesses.
Two of the state's largest banks, Union Planters Corp. and National Commerce Financial Corp., were acquired by larger regional rivals last year. Since October, when SunTrust Bank Inc.'s deal for National Commerce closed, four banks have started up in Tennessee, Mr. Petrey said.
According to the FDIC, Tennessee is home to 208 banks, down from 220 five years ago. Sixteen have been in business less than three years.
