The days of buying banks on the cheap through the Federal Deposit Insurance Corp. could be numbered, according to bankers and bank investors.
FDIC-backed deals are likely to linger into next year before fading as traditional deals become a bigger part of the market, they said.
Most see the window for federally prompted fire sales closing, especially in Orange County, which handled the real estate crash and ensuing recession better than other markets in California and across the nation.
“We do not expect too many more banks within the Southern California marketplace to fail and be closed by regulators,” said Glenn Gray, chief executive of Tustin-based Sunwest Bank. “We anticipate the next wave to be that of open-market transactions where healthier banks will acquire banks that have survived the downturn but whose balance sheets are not as strong as they used to be.”
Sunwest acquired three failed banks through the FDIC in 2009.
It will be harder for small community banks to survive here under added regulatory burdens put in place after the financial crash of late 2008, Gray said.
Fewer qualified borrowers and heightened capital requirements also stand to take their toll, he said.
“With organic growth expected to be slow, banks will look to merge to create that critical mass size,” Gray said.
The hasty bank marriages of the past few years “will come to an end,” said K. Brian Horton, president of Los Angeles-based 1st Enterprise Bank, which has a branch in Irvine.
“We’ll enter a phase of negotiated transactions,” said Horton, who splits his time between the bank’s Irvine and Los Angeles offices.
A 28-year veteran, Horton said he expects natural consolidation to hit the industry in coming years as banks face tougher regulatory requirements and scrutiny.
“It’s going to result in bank sales,” he said. “But I think the banking industry will be much stronger.”
Don Griffith, who raised $350 million in late 2008 to buy Southern California banks, said he doesn’t see too many opportunities through the FDIC, especially after a rash of failures in the past two years.
So far this year, 139 FDIC-insured banks have failed. In 2009, 140 failed.
Griffith is building Grandpoint Bank, based in downtown Los Angeles, the old-fashioned way.
He started with a $75 million investment in Santa Ana Business Bank, which Grandpoint acquired in June. The Santa Ana bank now goes by Grandpoint.
Griffith, who built and sold two Southern California banks, wanted a state charter. The Santa Ana bank provided one.
At the time of the deal, the commercial bank only had $12 million in deposits.
Now Grandpoint has more than $50 million in deposits under a team of seasoned bankers.
Santa Ana Business Bank started in 2007 by targeting the city’s dominant Hispanic population.
Grandpoint last month announced its second acquisition, First Commerce Bancorp in Encino, which is set to be folded into Grandpoint Capital Inc., the bank’s parent company.
A third branch is planned in the South Bay area of Los Angeles County.
The plan is to build up and sell Grandpoint.
“I’m just going to do what I’ve done twice in the past,” Griffith said.
Griffith served as chairman and chief executive of First Coastal Bancshares and First Coastal Bank NA from 1996 until the bank was acquired by Ontario-based CVB Financial Corp. in 2007.
Prior to First Coastal, Griffith was founder and chairman of Peninsula National Bank, which acquired Bay Cities National Bank in 1995.
Another veteran banker, Stephen Gordon, said he’s still hunting for bargains, whether they’re banks that are troubled, seized by regulators, put up for auction or are healthy.
The former New York investment banker recently led a $460 million investor financing of Opus Bank, which maintains its executive offices in Irvine.
Gordon said he hopes to grow the Redondo Beach-based bank, which had been known as Bay Cities National Bank, to 75 branches across California, up from five now, all in the South Bay area of Los Angeles County.
Gordon said he’s reviewing balance sheets, quality of deposits and locations, among other variables for potential acquisitions.
He said there’s no shortage of banks to buy in California.
His target market is big: banks with $250 million in assets to more than $2.5 billion.
Many banks simply can’t compete here as they face challenges raising money, cleaning up balance sheets or building deposits or loans, said Gordon, chairman and chief executive of Opus.
“There needs to be consolidation,” he said. “A lot of these banks need to disappear and go away.”
Gordon is in talks with interested banks, including some based here, he said. He expects to announce an acquisition soon.
“Those sellers who are the quickest to make decisions are those ones who will be invited to the dance,” Gordon said. “This is not a market for the indecisive.”
Reluctant to Sell
California banks are trading at 50% to 60% of net worth, a historic low, according to Ed Carpenter, who launched a private equity fund here in 2008 to invest in banks after years of advising startups through his Irvine-based Carpenter & Co.
That’s left some bank directors reluctant to sell before more favorable valuations come around.
Bank investors could have a different perspective, Carpenter said.
“Many boards will conclude it’s a good time for mergers as larger banks offer a fairer prospect for shareholder growth,” he said.
Since starting the Carpenter Community BancFund, Carpenter’s company has taken ownership stakes in five California banks, including Irvine-based Plaza Bank.
The fund, which has raised more than $300 million to invest in banks, primarily targets those on the West Coast.
It wasn’t that long ago that when a bank hit $300 million in assets interested bidders started to pay attention.
“That’s no longer a real viable option,” said Scott Kavanaugh, chairman of Irvine’s First Foundation Bank.
He said he sees more potential for acquisitions through the FDIC than some of his colleagues, due to the number of bad loans still on the books of community banks.
“Real estate is not turning around quick enough,” he said. “We’ll see a lot of banks going into receivership.”
For now, the fallout continues.
Last month, the FDIC made public a prior order on Westminster-based First Vietnamese American Bank to shore up its finances or find a buyout partner.
The bank, which opened with fanfare in 2005 as the first bank to specifically target Vietnamese-Americans and their businesses in Little Saigon, has not posted a profit since it opened.
First Vietnamese has a deal in the works to sell the bank to Charles and Michael Lhuillier, brothers who run one of the largest pawn shop and jewelry operations in the Philippines.
State regulators have signed off on the deal, which still needs FDIC approval.
