A post-crisis spike in foreclosures, the Deepwater Horizon oil spill and recent flooding in Louisiana all shaped the terms and timing of a bank deal struck in Florida.
Gulf Coast Community Bank in Pensacola, Fla., had spent the better part of six years trying to unload foreclosed properties and build capital to comply with a regulatory order. At the same time, the $133 million-asset company had been waging a legal battle tied to losses it claimed to have incurred from the BP oil spill that took place in the Gulf Coast in April 2010.
Frustrating developments on both fronts spurred the bank to agree to sell itself last month to First Bancshares in Hattiesburg, Miss., according to a document recently filed in conjunction with the proposed acquisition.
Other real estate owned amounted to just 1.6% of Gulf Coast's total assets at the end of 2009. Two years later, OREO made up nearly 11% of all assets, based on call reports filed with the Federal Deposit Insurance Corp. The bank's total capital ratio, meanwhile, shrank rapidly from 12.6% at the end of 2009 to 5.5% two years later.
Gulf Coast, which has lost money every year since 2008, was hit with a regulatory order in early 2010 requiring it to address problem assets, improve earnings and boost capital. The order was modified last year to incorporate regulators' concerns associated with the Bank Secrecy Act and information technology.
While the bank fixed its BSA and IT issues, management struggled to get a grip on foreclosures, which totaled 14.2% of assets as recently as Sept. 30. Though the bank raised $3.2 million in 2014, its total capital ratio remains low, at 6.2%.
"While asset quality has slightly improved, Gulf Coast has not established sustainable recurring earnings to enhance its regulatory capital ratios and remains in noncompliance of certain mandates of the order, particularly regulatory capital and earnings," the filing noted.
Gulf Coast's board determined last year that the bank would need more than $6 million to comply with the order and position itself for future growth. At the same time, the bank had been hopeful that it could claim up to $15 million tied to pending litigation against BP.
That settlement proved elusive. The bank's legal advisers told the board that it "could take several years" for its case to be considered. In April, however, BP offered the bank a $101,000 settlement.
That low offer contributed in part to the board's decision to sign a formal letter of intent with the $1.3 billion-asset First Bancshares, which had offered to pay $2.3 million, or 50 cents a share, for the bank. First Bancshares was one of 21 banks Gulf Coast had contacted the prior fall about a possible merger, the filing noted.
Hoppy Cole, First Bancshares' president and chief executive, had several issues that he needed addressed, including writedowns for foreclosed properties and branches. First Bancshares eventually found an unnamed party to buy $15.8 million in other real estate owned for $6 million. First Bancshares disclosed when it announced the Gulf Coast acquisition that it would keep just $1.4 million in OREO, recording a $12 million mark for the rest.
The parties also discussed how to handle a potential BP settlement.
First Bancshares "indicated that it was amenable to preserving the BP settlement for Gulf Coast's shareholders as it had done for two of their previous acquired banks and that this offer could be in cash or stock," the filing noted.
As an agreement neared, First Bancshares told Gulf Coast it was juggling a number of initiatives, including another potential acquisition and a stock offering. As a result, the companies agreed to several extensions to allow First Bancshares to announce all the transactions at one time.
At that point, flooding influenced the deal's timing.
First Bancshares was in talks to buy the $258 million-asset Iberville Bank in Plaquemine, La. Those negotiations were delayed in August when catastrophic flooding devastated central Louisiana. First Bancshares later disclosed that it would place 8% of the cash involved in the Iberville deal in escrow as a contingency for loan losses tied to the flooding.
All the banks were finally able to reach agreements, allowing First Bancshares to disclose both of the acquisitions — and a $63.3 million private placement of preferred stock — on Oct. 14.