July 12-18, 2013
Florida community banks ripe for mergers and acquisitionsBy Brian Bandell
With the wave of Florida bank failures mostly over and the recession in the rearview mirror, it’s prime hunting season for bank buyers.
Many analysts expect increased merger and acquisition activity across the state. Although Florida lost 110 banks over the last five years, leaving it with 204, most of those were failures. Fewer Florida banks are on death’s doorstep now, and the economy is improving in most parts of the state.
Bankers seeking deals in Florida can no longer wait for FDIC Friday – the day of the week regulators typically pulled the plug on banks over the past several years.
Many investors in Florida community banks wanted to sell during the recession, but they couldn’t because the struggling real estate market made their loan portfolios difficult to evaluate, said Fernando Perez-Hickman, chairman of Miami-based Sabadell United Bank and managing director for the American operations of Banco de Sabadell, which has acquired three Florida banks. The market has improved enough that it’s easier to value loan portfolios, so he expects more banks to come to market.
“You have management and shareholder fatigue,” Perez-Hickman said. “They created the bank 15 years ago thinking they would sell it after eight years. They’ve been in the game longer than they thought. Now they’re thinking about selling because, while the market is better, the margins are low and the cost of doing business is high.”
It’s still hard for banks in Florida in below “well capitalized” status or under regulatory enforcement actions to raise capital, said James Angleton, president of Miami Lakes-based Aegis FinServ Corp., a diversified financial company that works with banks. While some banks have attracted new investors, many potential directors and major owners are scared off when they see the FDIC hitting directors of failed banks with lawsuits, he added.
Michael Rose, who covers five publicly traded banks in Florida as senior VP of equity research with Raymond James & Associates in St. Petersburg, said M&A activity is clearly picking up. Community bank shareholders could either accept cash or take stock in larger banks and look to capitalize on their greater potential.
“We will go through a period over the next five to 10 years where we will see meaningful consolidation in Florida,” Rose said. “There may be a year or two where activity is more robust, and we could be on the precipice of that.”
Factors fueling deals
The combination of low interest rate margins and regulatory compliance costs weigh more greatly on small banks. Rudy Schupp, president and CEO of Boca Raton-based 1st United Bank (NASDAQ: FUBC), said his $1.75 billion-asset bank has 13 people in regulatory and Bank Secrecy Act compliance, compared with three people at his former bank of the same size several decades ago. Those 10 extra employees are expensive, and their costs cannot be recouped from clients.
“The compliance requirements today are a one-size-fits-all proposition,” Schupp said. “They become disproportionately expensive for a small community bank. I don’t think anyone can say what the size level is where you can handle the extra costs of business, but it’s not below a half-billion dollars in assets.”
Florida has 155 banks below that size.
Regulators also require banks to maintain higher capital ratios to be “well capitalized.” Schupp said that forces community banks to withhold capital from growth, and it limits their return on equity.
With few good prospects for profits, many shareholders of smaller banks are looking to get out, Miami-based bank analyst and economist Kenneth H. Thomas said.
“A lot of these small bankers can’t make a decent profit and they aren’t having fun doing it, so why do it?” he said. “But they’ve got to get a decent price for their shareholders.”
Prices in Florida will be better than in other Southern states because it is an attractive market – especially Miami, which Thomas calls one of the best five banking markets in the nation. Both foreign groups and out-of-state banks want to be here, he added.
Thomas noted that several Florida banks receiving major capital from private equity funds during the recession did not pick up as many failed Florida banks as they planned and still have excess capital. That money has to be invested somewhere, and M&A is a logical outlet, he added.
For in-state banks, M&A is the most efficient way to enter a new urban market, Schupp said.
“For me to build branches in Orlando, Tampa and Clearwater, it would take a decade to get somewhere,” said Schupp, whose 1st United Bank has acquired one Florida bank a year since 2008, including in those cities.
Perez-Hickman said he’d only consider buying a smaller bank if it was in a market where Sabadell had a small presence, such as Orlando or Tampa, because that would be a big leap for its market share there. Yet, it wouldn’t buy a smaller bank in Miami because Sabadell can easily grow organically there.
Rose said Florida franchises of more than $1 billion in assets would command the most value because there aren’t many of them left. Florida-based banks hold only 19.4 percent of deposits in the state, he noted, and there’s clearly a value in community banking.
Headwinds for deals
Talking M&A is easy, but many obstacles could prevent deals from closing. Schupp said one of the biggest is the required accounting. The selling bank must value its assets at mark to market based on collateral value, whether loans are current or not, and this often reduces the book value in the purchaser’s eyes, he said.
This puts downward pressure on the price, and some sellers would rather wait a few years and see if their loan values improve with the economy, Schupp said.
Thomas said some shareholders could be disappointed with the prices offered for their banks, especially if they’re seeking more than book value. The 1.5 times book value price for Miami-based City National Bank of Florida was an eye opener, but that was one of the strongest banks in the state, he added.
“Many banks now feel more emboldened where they can ask for, or at least hold out for, better prices,” Thomas said.
Regulators are also taking a tougher look at mergers, with the approval process dragging on – sometimes until it falls through, Schupp said. This is common when the buyer has little banking experience or is a foreign entity. The regulatory delay to the merger between M&T Bank and Hudson City Bancorp due to regulators reviewing M&T’s anti-money laundering compliance sent a stern message to the industry.
“It’s a much more rigorous process where they are analyzing it more than ever, saying: ‘Do I get a healthier combined entity, or in some way does this business combination make the successor institution weaker?’” Schupp said. “I happen to think it makes sense, but it has protracted the time involved in the regulatory approval process.”
Given all the difficulties in completing a merger, a banker may wonder whether it’s better just to pursue organic growth. There are more opportunities for lending in this improving economy, so some capital-rich banks could choose to outcompete their rivals, instead of buying them. This is a negative factor for community banks of $100 million or less, with their size representing a productive year of organic growth at a $1 billion-plus bank.
“There are very few buyers for the smaller community banks,” Schupp said. “If you are going to buy a bank, you will buy one that will move your needle from a financial standpoint.”
Merge or face extinction
Some of those smaller banks are too small to command a good price, but too small to turn a profit in this environment. Angleton said those banks would either merge with like-size competitors of face extinction.
Perez-Hickman suggested that small banks get together to create critical mass.
“I don’t see any reason why M&A activity is going to slow down anytime soon,” he said.
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