Private equity groups take aim at Florida banking targets
By Zachary S. Fagenson
With 14 Florida banks shuttered last year and even more expected to fail this year, there's no shortage of opportunities for private-equity groups flush with cash to get a foothold in what some experts call one of the country's most lucrative banking markets.
Yet the days of generous loss-sharing agreements provided by the Federal Deposit Insurance Corp. may be over and investors may be willing to pay a premium for only banks with a substantial footprint and respected name.
"Wells Fargo identified South Florida as very sort of hot market," said Jose Sirven, practice leader for Holland & Knight's financial services group. "Depending on the size of the deal, the banks that will have the largest existing footprint will be the ones that will command, for obvious reasons, the biggest interest.
"And those [investors] need to be very well funded," he added.
Of the 140 bank failures across the country last year, one of the most notable private-equity acquisitions was that of BankUnited in May.
After teetering on the brink of collapse for nearly a year, federal regulators seized the then Coral Gables-based bank and sold it to a consortium of private-equity groups that included the Carlyle Group, Blackstone and WL Ross & Co. and was led by New York banker John Kanas.
Investors paid about $900 million and assumed $12.7 billion in assets and $8.3 billion in deposits. The bank's failure cost the Federal Deposit Insurance Corp. $4.9 billion. The federal government will also share in a percentage of the losses up to $10.7 billion of the new bank's assets.
But BankUnited was a one-of-a-kind acquisition due to the speed of the deal for a still-respected bank with a good branch network.
The latter two elements would be reason enough for Wall Street investors to "pay a little premium," but they're not the only reason moneyed investors would place their chips on Florida.
Purchasing a failed bank "gives [investors] an opportunity to have a banking charter, which is a very special piece of paper that enables them to do a lot of things, especially grant credit and have access to federal-discount window," said Ken Thomas, a Miami-based banking analyst and economist.
Still, there's been no shortage of interest in Florida banks. Mr. Thomas predicted 20 will fail this year in Florida and opportunities will present themselves "up the coast."
Late last year former Bank of American CEO Hugh McColl Jr. and former Chief Financial Officer Marc Oken were among investors in the Charlotte, NC-based Falfurrias Capital Partners. The group raised as much as $600 million to buy Florida banking assets, according to Bloomberg.com.
And while a handful of banks have failed since that announcement, there's yet to be an acquisition.
Similarly, BankUnited investors have voiced interest in expanding their footprint through buyouts but haven't made a significant investment since the initial deal nearly a year ago.
"We continue to evaluate acquisition targets in Florida but we have not found the right opportunity," BankUnited Chairman John Kanas wrote in an e-mail.
In an interview with the Wall Street Journal, BankUnited investor Carlyle Group's Managing Director Olivier Sarkozy echoed Mr. Kanas's sentiment.
"We are looking at failed banks. BankUnited has bid on a number of them," he said. "But prices have gone so high that there is no longer a return on investment."
Despite that, Mr. Sirven of Holland & Knight said the FDIC as well as the Office of the Comptroller of the Currency created a "shelf charter" for investors hoping to scoop up failed banks.
The "process allows a group that doesn't own a bank to, in effect, obtain a bank charter which sits … until it's needed to purchase a failed or failing bank," he said. "The interesting thing is that you don't have to have a bank in mind … when you do this.
"Then when the opportunity comes and you have your shelf charter, you're able to compete with other banks for those assets without having to undergo a regulatory approval."
Yet some called into question the intent of private-equity groups swooping into the Sunshine State on a white horse with hundreds of millions in tow. Many of them, Mr. Thomas said, are looking to return a bank to profitability and either take it public or sell it to larger institution.
"In general their focus is on giving returns to Wall Street investors, not giving returns to the community," Mr. Thomas said. "If there's a problem loan they're going to pick up the phone to call their lawyer to foreclose.
"A community banker is going to pick up the phone and call the borrower and say "Let's talk about this payment you missed, let's modify the loan,'" he said.
But private-equity investors can inject desperately needed liquidity into communities that were choked off in the hands of the worldwide financial crisis.
"The increased private-equity interest in the state is a good thing," Mr. Kanas of BankUnited added in his e-mail. "As failing banks are washed out of the system, the credit opportunities for businesses expand and the local economies will rebound faster."