The Daily Business Review – August 20, 2008
It’s a reality that most of us know: The most difficult time to get money from a bank is when you really need it. Now, banks themselves are in the same situation as they seek new sources of capital to shore up their finances.“It’s tough sledding out there,” said Nick Robbins,a corporate attorney atGunster Yoakley &Stewart in West Palm Beach. “You’ve got economic slowdown concerns,a possible recession;you’ve got the [lending]crisis that directly hits the banks.There’s not a lot of new appetite for initialpublic offerings right now, which makes it hard for banks because thereare not a lot of investors out there.”Throw in everything from the weak dollar to the election year climate, and“it makes companies and issuers want to put their head in the sand.”Banks just aren’t seen as good investments right now. BankUnited learnedthat the hard way when its efforts thissummer to raise $400 million through apublic offering fell flat.
BankAtlantic lastweek postponed plans to raise a moremodest $55 million in “non-regulatory”capital.“Unfortunately, companies still haveto grow regardless of the cycle,”Robbins said. “For a lot of companies,whether it’s a bank or a technologycompany, they’re having to look intoalternative ways of financing the companies.”For banks, which have high regulatoryrequirements for capital, the toughestquestion from skeptical investors is this:“You’ve hemorrhaged capital throughbad lending practices, so why shouldwe throw our good money after yourbad?”The irony: The loans that banks arenow making are probably pretty sound.“It’s the loans they were making awhile ago that are more problematic,but they’re being held to it today,”Robbins said. “Whereas when the loans they were making were problematic,people were pouring money into the banks.”So where does a bankgo right now to find capital?With public markets turning a cold shoulder,that leaves the private equity markets. But they’re viewing financialinstitutions in a circumspect way for now.“Capital is very efficient. It flows to thegreatest opportunities,”said attorney JonathanCole, a partner with Edwards Angell Palmer& Dodge based in FortLauderdale. “So, if there are opportunities in the banking industry,my guess is the capital will find it. My sense is,talking with people inthe private equity business,that there are a lot of people hunting but very few people shooting.”Cole said the main thing vexing investors is that the loan side of theindustry is nearly impossible to analyzein terms of value.“It’s very difficult to look at the assetside of the bank’s balance sheet andsay ‘What are these assets worth?’ ”he said. “The collateralized loan obligations,whether they’re subprime mortgagesor Alt-A mortgages or primemortgages or auto loans, they weresliced and diced in derivatives in sucha way that analyzing the credit riskwas very, very difficult.”Cole said that while part of that wasmitigated through the use of creditinsurance, “we now have the creditinsurers whose ratings are really beingAttorney Nick Robbins said, ‘There’s not a lot of new appetite forinitial public offerings right now, which makes it hard for banksbecause there are not a lot of investors out there.’MELANIE BELLpropped up by the government.”The question facing communitybanks centers on their asset mix.“What did they actually do with thedeposit money they got in? Did theymake home mortgage loans and keepthem? Did they sell them into the market,which most of them did? Did they make loans to local businesses, distributors and the like? Home-builders,developers, are they in real trouble?”Cole said. “That is a real problem.”Community banks tend to make loans into a local economy driven by the housing market. “We know what’s happened there,” he said. “So analyzing and assessing the value risk for community banks and smaller regional banks is a real issue.”Investors also are wrestling with exit strategies, he said.“If you take a $5 million or $10 millionor $20 million position in a community bank, how are you going toexit from that?” Cole said. “The markets are very small and illiquid, and traditionally the play has been we’ll flip it to a bigger bank. Who’s going tobuy these community banks now? Theglobal banks and national banks areso strong in the Florida market; dothey need to buy another $800 millionbank? Even though the pricing is likelyto be good at the moment?”Cole said private equity investors are “super analytical” and will be seeking multiple exit opportunities.“They’re going to want to have identified,mentally at least, a couple ofdifferent potential buyers … to get liquidity on their investment in the nexttwo to four years, and we don’t really have clear vision for the next two to four years.”However, deals announced this month in Jacksonville and Sanfordshowed that bank capitalizations canstill be done in this climate.
EverBank Financial Corp. received a$100 million capital investment from an arm of private investment firm Sageview Capital L.P. to supportgrowth of its banking and mortgage business lines.“Sageview’s investment in EverBank will fuel a substantial expansion plan,enabling EverBank to grow our assets by over 30 percent to approximately$8 billion and dramatically expand our direct deposit customer base,” Rob Clements, the bank’s chairman and chief executive, said in a statement.“While other banks and financial institutions have needed to raise equityto shore up capital, EverBank has generated record year-to-date earnings and has a strong balance sheet,which will enable us to deploy capitaloffensively to take advantage ofrecent market disruptions.”Under terms of the investment,Sageview will become the largeststockholder of EverBank FinancialCorp.Scott Stuart, a founding partner ofSageview Capital who will joinEverBank’s board of directors, saidhis company seeks innovative ventureswith demonstrated track records of success. That includes the bank’s“prudent risk management during avariety of market cycles” that he saidleaves it well-positioned to capitalize on current market opportunities.“Whether it’s assets or companies,we believe there are and will continue to be attractive opportunities in the financial services industry,” Stuart said.
While EverBank is not a financiallychallenged institution, Cole chucklesat the notion that previous bad lendingalone would make other banks toxicto investors.“It’s so widespread; you’d have tofire every banker in the UnitedStates,” he said. “So part of that issystemic and endemic.”Seemingly proving his point, earlierthis month Sidhu Advisors FDTannounced an agreement in whichthey will invest at least $30 million in Sanford-based Federal Trust Corp.,parent of Federal Trust Bank, acquiringcontrol of the company and recapitalizingthe struggling institution. Thedeal awaits final approval.“There are many, many other banksin Florida that are raising capital, butthey’re privately held, and we justdon’t hear about it,” said AlexSanchez, president of the FloridaBankers Association. “Many times it’sthe current investors, and you’re just raising more capital from them.”At a privately held bank seekingfunds, Sanchez explained, “you’re basically just talking to your neighborsand your friends in a small, close-knit group of investors. Obviously that’s a lot easier. And there are new banks starting — they’re raising capital.”Ken Thomas, a Miami-based independentbanking analyst, said the franchise value of Florida banks —including their location and the region’s demographic trends — can give them an edge in competing with banks in other states for capital.But a bank’s job doesn’t end withmerely finding a willing investor.“The big decision the bank has to make is not just the quantity of theinvestment but the quality of it,”Thomas said. “Is it going to be patient capital or impatient capital? TheMideast, the Far East, those wealth funds are patient capital. They think in terms of five-year planning periods.The problem with going to private equity and hedge funds is that they are really impatient capital. They’renot as desirable. They want quickaction. They think in terms of quarters.To them, a year is long-term.”“Impatient” capital also wants toget active on board, Thomas said,while “patient” capital” is not as interested in getting involved in management.“The private equity will look at a bank and say ‘What assets do you own? What is the value of that real estate? What value can we pull out of it? How can we liquefy these assets to get cash out and then put in more leverage ourselves?’ ” Thomas said.“I would rather have $250 million of patient capital then $300 million of impatient capital — people who say,‘we believe we have an investment that over time will work, and we’ll let management do their thing.’ ”
