Room for More Community Banks?

Dennis G. Bedley, chairman and CEO of 1-year-old Legacy Bank in Boca Raton, raised $34 million from 300 shareholders in his initial offering in 2006 and a small secondary offering this year. Bedley had been president of Southern Community Bank of South Florida and Colonial Bank of South Florida. [Photo: Eileen Escarda]

After 35 years in banking, John Squires thought he was ready to retire after selling Orlando-based Southern Community Bank to Fifth Third Bank in 2004. But just three months later he was back in the game. And last year, Squires, now 61, opened Old Southern Bank in Orlando, the fourth bank startup of his career. Says Squires, “I didn’t have any problem with the traditional problems of hiring good people and raising capital.”

Indeed, Florida’s growth has made it fertile ground for experienced banking executives with entrepreneurial inclinations — many coming from Florida-based institutions such as Barnett that have been gobbled up by out-of-state banks.

While most of the new banks march into existence under the banner of providing more “service” to the community, shareholder equity is clearly never far from the founders’ minds. Most new community banks don’t last more than seven to 12 years, cashing out as soon as their banks become attractive takeover targets for bigger banks. “The large institutions are always hungry for market share,” says Bowman Brown, head of the financial services practice at Shutts & Bowen law firm in Miami.

But as the economy has slowed, so has bank formation: As of early October, only nine applications for new state charters had been filed with the Florida Office of Financial Regulation. Jack Greeley, a partner with Smith Mackinnon law firm in Orlando and one of the state’s leading bank formation advisers, says, “Probably this year you are going to see one-half to one-third of what you’ve seen in 2005-06.”

Florida’s dismal real estate market and concerns over a possible recession mean that banks can’t count on strong demand for loans from either residential or commercial markets. “Now, we’re going to face times when loan demand is lacking,” says Russ Hunt, co-founder and president of boutique investment bank Kendrick Pierce & Co.

The decline of the real estate market and Wall Street’s anxiety over subprime lending also have clouded the exit strategy for bank founders. If you want to get bought these days, you’d better be big. “If you are a $100-million bank, there’s not much interest” from out-of-state banks, says Squires. “You hit the radar screen at about $350 million.”

Greeley expects deals will be more selective, will receive more scrutiny and take longer. Dennis G. Bedley, chairman and CEO of 1-year-old Legacy Bank of Florida in Boca Raton says, “We’re definitely in the wrong part of the cycle.”

Hunt concurs that the acquisition market in Florida has slowed but says the “great banks that are here still command great prices.” He cites Colonial Bank’s July deal to buy Lakeland-based Citrus and Chemical Bank for $219 million, almost 3.6 times book value.

And while 2007 may prove to be a slow point in the cycle, it’s still not too difficult to find investors for community bank startups. Bedley says he raised $34 million from 300 shareholders in his initial offering in 2006 and a small secondary offering this year. Squires raised about $32 million in increments of $50,000 to $1 million for shareholders and $500,000 to $2 million for directors. He says that one of his investors studied de novo returns over the past 10 to 15 years and found that investors never lost their principal even when they invested in banks that didn’t perform well. Investors in the top 10% of banks, meanwhile, earned a 25% annual return. “It’s a pretty good investment,” he says.

Adds former Barnett Bank and SunTrust executive Bruce May, who will open First Colony Bank in Maitland in January: “There’s always room for one more well-run bank.”

Tags: Banking & Finance