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Business Observer Friday, Jun. 18, 2010 10 years ago

Bank bids heat up

Competition for the assets and deposits of failed Florida banks has increased in the last few months as investors swarm the state. But the threat of oil washing up on Gulf Coast shores could dampen their enthusiasm.
by: Jean Gruss Contributing Writer

Industry. Banking
Trend. Consolidation
Key. Investors may temper their enthusiasm for assets of Florida banks if the Gulf oil spill becomes catastrophic.
By the Numbers. Click here for a list of failed banks from along the Gulf Coast.

In the battle for the assets and deposits of Naples-based Bank of Florida's three failed subsidiaries last month, federal regulators received a total of 16 bids from five undisclosed bidders.

“The environment was more competitive,” noted EverBank Chairman and CEO Robert Clements, the eventual winner.

The bidding for Florida banks has gotten so intense that private-equity financier Wilbur Ross Jr. told American Banker he's looking to buy bank assets in Michigan instead. “In Florida, the pricing for a bank, even a failed bank, has gone up enormously,” he told the trade publication recently. “It is a very different market from what we encountered a year ago.”

Ross spearheaded a group of investors in failed BankUnited in Coral Gables in May 2009. “When we bid for BankUnited one year ago, there were three bidders. Now a typical bank failure can have dozens of interested parties,” says John Kanas, chairman, president and CEO of BankUnited, in response to emailed questions.

David Call, South Florida president and CEO of Fifth Third Bank, speculated that more investors might buy struggling Florida banks without assistance from the Federal Deposit Insurance Corp. For example, in May TD Bank acquired The South Financial Group for 28 cents per share, parent company of Mercantile Bank in Florida. TD says the unassisted acquisition will be “slightly accretive” to earnings.

But there's a potential showstopper lurking offshore: the oil spill.

The challenge with the spill is that if oil washes up on more Florida shores — or appears to be threatening much of the coastline — coastal real estate values will likely take another hit. That makes banks with coastal real estate collateral less valuable.

In addition, bankers are worried about exposure to the hospitality industry because tourists will likely cancel Florida vacations because of tarred beaches.

For example, a half dozen real estate transactions on Sanibel Island in Lee County have been put on hold because of the uncertainty over the oil spill, says Kevin Hale, a veteran Florida banker and executive vice president and director of community banking with Mutual of Omaha Bank.

Mutual of Omaha Bank acquired the assets and deposits of Marco Community Bank from the FDIC in February and is opening branches in the Tampa Bay region. “We've been very active with residential lending but we're starting to see buyers delay closings or back away, waiting to see what happens with oil spills,” Hale says. “As every day passes, it becomes a hotter topic in our state.”

Jerry Campbell, chairman, president and CEO of Tampa-based HomeBancorp Inc., calls the spill a “potentially big problem” for the industry.

“The banks are like a mutual fund of economic activity for our area,” because they get direct impacts and reflect indirect ones, says Campbell, whose young bank recently bought two former Encore Bank branches in Pinellas County.

“The impact could include loss of value for beach front real estate properties, plus negative impact on local fisherman and other commercial activity on the Gulf,” he says. “The indirect impact could include tourism declines, with associated loss of retail and hospitality businesses.”

Investors already have started to worry about the impact of the oil spill on banks with a significant presence in the Florida Panhandle. Bloomberg recently reported that stocks of publicly traded bank companies such as Regions Financial Corp. and Synovus Financial Corp. have suffered bigger drops relative to the broad KBW Bank Index.

Foresight Analytics, a California-based research firm, projects another 17 banks in Florida will close this year. But Matthew Anderson, Foresight's managing director, says that list could grow if the oil spill becomes a major catastrophe.

“Potential bidders could be scared away until they have better clarity on where things might end up,” he says.

Questionable value
Estimating the present value of Florida banks was already a difficult task before the oil spill, but the uncertainty about pollution creates another layer of complexity.

“We're still faced with the nagging question of what is the true value of the real estate portfolio,” says Hale. “Not only are we concerned about the real estate values, but one of our primary sources of revenues, tourism and fishing, is in question.”

Even before the spill, bankers started to worry that the bidding was getting overheated.

“I can tell you from experience that there are great pockets of opportunity in the state, but things have definitely not come all the way back,” says Kanas, who expects another 100 banks in Florida will either merge or close through this cycle. “Florida is at the point in the recovery we expected it to be when we came here, but a full recovery is still a few years away.”

The bigger the bank, the more bids it's likely to get, says Brian Davis, the chief accounting officer for Arkansas-based Home BancShares. His company was one of the bidders for the assets and deposits of Naples-based Orion Bank and Sarasota-based Century Bank in November, ultimately won by Louisiana-based IberiaBank. Home BancShares recently acquired the assets and deposits of failed Old Southern Bank in Orlando and Key West Bank.

Davis says his company scouted the Bank of Florida subsidiaries that failed May 28. “We looked at those, but the bank that got it bid pretty dadgum aggressive,” Davis says.

Ultimately, investors aren't particularly interested in the assets and deposits of failed institutions, which explains why the FDIC has subsidized most deals. Rather, they're strategically seeking branches in regions where they foresee future growth, says Anderson.

“You're not buying today's conditions, you're thinking about the future,” he says. “Traditional growth areas like Florida and Georgia have attracted attention longer term because it's a safe assumption that growth will resume.”

Thinning out bidders
Uncertainty over the oil spill may temper the number of bidders and the prices investors are willing to pay, but it probably won't put a halt to acquisitions and consolidations.

“We'll continue to see FDIC assisted deals in the state of Florida for the next 12 to 18 months,” Hale says.

Meanwhile, struggling banks may worry that the already bad situation could get worse. “A number of smaller banks are looking for partners and what we have noticed is that the directors and shareholders have become a little more realistic in their price expectations,” Hale says.

“The Tampa market is especially important to our future goals,” says Kanas. “We are currently evaluating a number of branch locations in the region.” BankUnited recently hired Harlan Parrish, a well-known Fort Myers banker formerly with Colonial Bank and later with BB&T, to lead the bank's retail network.

“There is definitely capital on the sidelines, but the terms of the deal have to be right,” Kanas says.

While the oil spill may scare away potential investors, it could bring others back who believe today's deals are becoming too rich. “That could have the reverse effect on some acquirers,” Anderson says.

For some acquirers whose strategy of expanding in Florida remains intact despite the oil-spill threat, the net effect could mean less competition and better terms from the FDIC.

In fact, like a hurricane, the oil spill could have some positive impact on economies of the Gulf Coast if oil companies and the government spend billions of dollars on the cleanup. “That's where it gets harder to sort out the economic impacts,” Anderson says.

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