ABA Banking Journal - November 2010 - (Page 32)
Cover story | the capital challenge politically correct, a lot of them are not particularly attractive, and some of them are not at all attractive.” What makes a bank attractive and a good story, for investors? Good management comes up as a “must.” Investors aren’t looking for a good bank in search of a leader, experts say. Asset quality, and asset management skills, are also critical. And then come robust markets with growth potential. “You really have to match all three items,” says Siegel. Numbers help, of course. Patriot’s recent deals, says Wycoff, share the common feature of “strong ‘pre pre’ earnings, meaning strong pretax and strong pre-provision.” In other words, clean fundamentals. There’s also a strategic angle investors like that at first blush surprises. “It’s actually a back-to-the basics business focus on conservative credit standards and extensions of existing strengths,” says Matthew Moore, director at Protiviti. Investors are much more likely to buy strategic plans that call for in-market expansions and logical extensions of geographic footprints. In terms of footprints, investors like banks with an established productive branch network, in spite of changing consumer usage of bank channels. “The community bank is still a hub,” says Josh Siegel of StoneCastle. For him, this comes down to an important fact so obvious that people forget it about community banks: “When you ask their customers who their bank is, they give you a banker’s name.” But investors also want to see robust remote channels. “It’s now ‘table stakes’ to have a strong internet presence and strong mobile capability,” says Terry Moore, North American banking managing director for Accenture. One last factor: Investors like to have company. Board and senior management participation in a new capital issue is critical. private equity plays for money Before you even begin to consider tapping private equity, says Kirk Wycoff, ask yourself a critical question: “Would my bank’s board accept equity that wants to look under the covers?” If the answer is negative, don’t seek it. Further, for many private equity players, a bank has to have more than $500 million in assets, and the firm will be looking for deep discounts on ownership, advises bank attorney and consultant Jeff Gerrish, of Gerrish McCreary Smith Consultants, LLC. In his opinion, such deals are the choice “when there is no other choice.” Even if there’s willingness, there will be tradeoffs. Smaller institutions should know that investors will assess a liquidity discount if a bank’s shares are thinly traded, warns Michael Barry of Stifel Nicolaus. In banks under $100 million, the legal control issue, mentioned earlier, can lead to structures where multiple investors must buy in to avoid triggering control issues. Wycoff says such group deals can be difficult to accomplish in that size category, though not impossible. But let’s say your bank makes it over every hurdle with a private equity firm or firms. Then things reset to 0, because the regulators become involved. Walt Moeling of Bryan Cave LLP has often helped bank clients and investors make their case to agencies, and he says private equity types and regulatory types have a built-in disconnect. Regulators, accustomed to barking orders to bankers like drill instructors, find the investors too independent. Investors, he says, don’t get the regulators at all. Fundamentally, says Moeling, the investors go in feeling, “They can’t turn us down, because we want to put $50 million into a good bank.” Moeling chuckles, having been through it, and says, “They can, and they will.” Shrinking the bank Clearly, when regulators put a gun to your head, you’ll shrink your bank. But there’s a great deal of sentiment against shrinkage as a strategy, and not just from bankers. “Shareholder value is about growth,” says Accenture’s Terry Moore. Furthermore, he says, the likely trend in banking will be, really has to be, spreading fixed costs such as compliance over more business, not less. “You really have to grow your way out of this,” says Moore of community banks. “Shrinking is a band-aid,” adds StoneCastle’s Siegel, “and you’ll still be bleeding. Try, try, try again to find some capital.” n Onl I nE E x T r a A talk with a private equity player http://tinyurl.com/equitytalk 32 | ABA BANKING JOURNAL | november 2010
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