Business Cover

Opportunity Knocks

Written by Penny Font
Wednesday, April 28, 2010

Locally headquartered banks' buying spree has Lafayette emerging as the banking hub of the South.

Decades ago, Charlotte, N.C., emerged as one of the nation's prominent banking headquarters - second only to New York City in assets. Much of that is attributed to vigorously competitive financier Hugh McColl, who transformed North Carolina National Bank into a formidable national player through a series of aggressive acquisitions, ultimately creating Bank of America.

Written by Penny Font
Wednesday, April 28, 2010

Locally headquartered banks' buying spree has Lafayette emerging as the banking hub of the South.

Decades ago, Charlotte, N.C., emerged as one of the nation's prominent banking headquarters - second only to New York City in assets. Much of that is attributed to vigorously competitive financier Hugh McColl, who transformed North Carolina National Bank into a formidable national player through a series of aggressive acquisitions, ultimately creating Bank of America.

In Lafayette, IberiaBank late last fall became the second largest bank in Louisiana overnight after acquiring two failed Florida financial institutions, increasing its assets to nearly $10 billion. Three months later, Home Bank took over six branches - and $208 million in deposits - from the Northshore's failed Statewide Bank. And not long after raising $40 million in capital through a public stock offering, MidSouth Bank assembled a mergers and acquisitions team led by newly hired senior vice president Lorraine Miller.

No one has been so bold yet as to declare that the events of the last six months somehow signify that Lafayette is The New Charlotte.

But in a time when banking industry reports are starting to read like pages ripped from a John Steinbeck novel - except when it comes to Lafayette - perception is growing that Acadiana is indeed emerging as something of a banking center in the South, and is likely to continue doing so.

After all, hundreds of banks across the country are in trouble - including three in Louisiana - and more are expected to exit the industry voluntarily given a tougher regulatory environment that makes profitability challenging. And Lafayette banks are clearly poised to scoop up more.

Rusty Cloutier of MidSouth Bank

"I don't think many people realize that Lafayette is now one of the new hubs of banking from this standpoint," says MidSouth Bank President and CEO Rusty Cloutier. "Lafayette is now not only the predominant banking center in Louisiana; it is becoming one of the predominant banking centers in the South. There's a lot of emphasis on the banking community in Lafayette by investors around America."

It comes at a time when bank failures nationwide are already higher than they've been in two decades - and expected to peak this year. More than 700 lenders are on the "troubled institutions" list. Before all is said and done, the FDIC insurance fund could spend more than $100 billion for losses.

That these three banks are aggressively shopping for growth speaks volumes about the health of community banks in Louisiana in general and Lafayette in particular.

Acadiana's community banks have become players in the market today because they have played it safe over the last decade or so, in large part due to lessons learned the hard way.

Local lenders - stung by their experiences during the oil bust of the 1980s - say they have been conservative with lending practices when their colleagues elsewhere were not. Home Bank CEO John Bordelon says many Lafayette banks typically haven't change underwriting criteria for loans - regardless of the direction of the economy.

Mike Maraist and John Bordelon of Home Bank

"Most Lafayette banks were very much involved in the downturn in the banking industry and the economy in the 1980s, and a lot of bankers remember those mistakes well," Bordelon says. "The discipline learned in the 1980s has carried forward."

He says local institutions didn't fall into the pitfalls of the late 1990s and early 2000 that caused problems for so many other banks: reaching for yield through exotic mortgages and loans outside their region.

Says Pete Yuan, Lafayette market president for IberiaBank: "All of us were disciplined in who we lent money to - even in good times. We didn't lend to anyone out of our comfort zone."

Linus Wilson, an assistant professor of finance at UL Lafayette, says local banks' refusal to liberalize underwriting standards meant fewer foreclosures and less of the "boom and bust" cycle banks in other parts of the nation have experienced - particularly those with loans in places like Georgia and Florida.

Last year, Louisiana's foreclosure rate was .3 percent, compared to 2.21 percent nationwide and nearly 6 percent in Florida, home to nearly one-fifth of the 50 failed banks so far this year.

"Community banks stuck to the bread and butter of banking - making loans and taking deposits," Yuan says. "We didn't chase the trendy types of revenues that the big banks went after. We didn't have concentrations like subprimes and derivatives."

It also doesn't hurt that Louisiana's economy is very much energy- and agriculture-based - and prices for commodities and oil and gas have held up well. South Louisiana has also experienced a strong housing market and low unemployment.
"The publicly traded banks in Lafayette are in very good shape," Wilson says. "They have good loans, and they are well over-capitalized. It puts them in a good position when it comes to these Friday-night auctions."
Those Friday-night auctions weren't IberiaBank's first go-round in the acquisitions game. Over the past five years, the former building association methodically has been acquiring banks in strategic markets throughout Louisiana, Texas, Arkansas, Alabama and Florida.

North Louisiana and Baton Rouge came first, followed by central and northwest Arkansas.

Pete Yuan of Iberia Bank

But when the financial turmoil started, Yuan says, the dynamics changed. Instead of purchasing healthy and operating banks, IberiaBank was finding its way into those desirable markets at a lower cost.

When a bank fails, the FDIC takes bids from competing institutions. As an incentive, the insurance fund absorbs the majority of losses in a sharing agreement.

Says Beth Ardoin, vice president for communications: "It gave us the chance to get in on the bottom and build something nicely going up."

Yuan says IberiaBank is looking for markets with good economic dynamics, which he defines as those that may not be growing today, but have the infrastructure and cycle to come back. Arkansas and Alabama are two such examples.

"When the economy rebounds, we can take advantage of it," he says. "We're not going in there and making acquisitions just because of the FDIC. We've always been looking for opportunities that fit our company and banks that fit our culture. That hasn't changed. The FDIC just gave it a little different dynamic for entering certain markets."

Typically, IberiaBank makes its entrance with de novo operations that begin with a loan office, like those in Mobile, Houston and Memphis. That's why the Florida acquisitions - Naples-based Orion Bank and Century Bank of Sarasota - made good financial sense. Orion had deposits of $2.1 billion; Century Bank, $631 million.
"It immediately gave us a deposit-rich market to draw and use for our other markets," Yuan says. "Our group in Houston can now get funded through deposits raised in Florida. The way Florida is now, we're not going to make too many loans, but it does give us the footprint there so that when it does improve, we're that much more ready to take advantage of it."

The purchase grew IberiaBank's assets to nearly $10 billion - less than $2 billion shy of Whitney National Bank.

The same strategy is true for Home Bank, albeit on a much smaller scale. Itself a former savings and loan, Home Bank raised $100 million in new capital when it converted to stock. In 2009, Home Bank enjoyed net income of $4.7 million a 72 percent increase over the previous year.

The institution embarked six years ago on a strategic plan that called for expansion along the 10/12 corridor, where much of Louisiana's population growth has been concentrated.

Its first and only other acquisition was in 2006, when it merged with Crowley Building & Loan. However, the bank has just opened its third full-service branch in Baton Rouge, which will serve as its headquarters in the capital city.

The lender has long had its eye on the Northshore, specifically Mandeville. After Hurricane Katrina, waves of people began migrating there from the coast. But so did the banks. Says Bordelon: "It was difficult to start new banks there - particularly in Mandeville - because it was so saturated with banks from all over."

Statewide Bank - ranked seventh in the market - was Home Bank's opportunity.  The institution had six branches, $243 million in assets and nearly $209 million in deposits.

"Our strategic plan was always to grow along the 10/12 corridor; it was our prime target because we felt it was one of the best markets in the state," says Home Bank board Chairman Mike Maraist. "Timing-wise, it worked out well. The acquisition of Statewide just fell where we had our strategic plan to be there. It was an opportunity to pick up six locations at one time and a very good customer base."

Wilson says it was considered a prime acquisition in Louisiana. "I'm sure some of Home Bank's cross-town rivals are sad that they were not the winning bidder in that," he says.

For now, Home Bank has no plans to expand beyond the corridor. "Without a doubt, there will be more bank acquisitions in South Louisiana," Maraist says. "As to whether or not Home Bank will look at them, we will, but only if it makes sense strategically. We're not going to grow for growth's sake. If it fits into our strategic plan, we may or may not have an interest."

MidSouth Bank has made no secret of its desire to take advantage of the current buyer's market in banking.

In December, the bank raised $40 million in capital through a public stock offering. MidSouth also formed a mergers and acquisition team, putting two of its top employees - Regional President and Senior Vice President Troy Cloutier and Vice President Dwayne Farris - on the task. In February, Lorraine Miller joined them in the newly created position of senior vice president and director of mergers and acquisitions.

Rusty Cloutier says the bank is focused primarily on Louisiana and Texas - its existing markets - but possibly Mississippi as well. The bank currently has branches in 14 Louisiana cities and five Texas cities, including Beaumont, College Station, Houston and Conroe.

All this branching out is good for the Lafayette economy, Wilson says. If community businesses thought they had good access to credit already, the financing options are only going to get better.

"It makes all three banks stronger financially because they aren't dependent on any particular economy," Yuan says. "Before, Home Bank was solely dependent on Lafayette and Acadiana. The Northshore is a completely different market with different dynamics. The same with MidSouth expanding into Texas. And IberiaBank started out in Louisiana, diversifying to other parts of the state; now we're a regional bank in multiple states and multiple economies."

With 772 banks on the FDIC's watch list, acquisition opportunities are likely to be plentiful this year for IberiaBank, Home Bank and MidSouth. Wilson says the regulators favor community and smaller banks in the sales, given that they don't want national banks to expand, posing the same systemic risks to the financial system that got us here in the first place.

Just three banks in Louisiana have what's called a troublesome Texas Ratio, a formula for determining the health of a financial institution. When a bank has a ratio above 100 percent, it means it has more non-performing assets than it does equity capital plus loan-loss reserves.

Central Progressive Bank in Lacombe has already received a cease-and-desist order from the SEC. First National Bank USA in Boutte and Union Bank in Marksville have formally agreed to take corrective action. Statewide, which failed in February, had a ratio of 114.7 percent at year's-end.

"Most of those banks are not in trouble because of their Louisiana loans," Cloutier says. "Most are in trouble because of loans in other parts of the United States that are in trouble. This is not a local problem."

But Cloutier and others look for another source of consolidations this year: New federal banking regulations that are convincing some in the business to call it quits.

"A lot of bankers feel it's time to give up," Bordelon says. "The economy is tough, and the regulatory environment is going to get a lot worse before it gets better. It is becoming a more difficult environment to operate a bank - especially smaller institutions."

Cloutier says MidSouth is targeting healthy banks as well as failed ones. "We became convinced that a lot of banks in America are going to fail," Cloutier says. "But a lot of people are also deciding to exit the industry. There might be some straight sellouts. We wanted to be in a great position to take advantage of that."

Ultimately, Bordelon predicts the number of banks in the United States may eventually drop to 6,000 or 7,000 institutions. Currently, there are roughly 9,500 - approximately 155 of them in Louisiana.

Given that environment, UL's Wilson looks for banking assets in Lafayette to continue growing, particularly given the plans of IberiaBank and MidSouth.

Given that New Orleans hasn't been the banking center that it once was since Capital One acquired Hibernia Bank, continued acquisitions by Lafayette banks could bring about a power shift in Louisiana banking.

The Crescent City is still home to Louisiana's largest bank - Whitney Holding Corp. - which covers a five-state Gulf Coast region, including central and South Alabama, and the panhandle and Tampa Bay metropolitan areas of Florida. But the bank - continuing to try to clean up bad loans - lost $3.8 million in the fourth quarter of last year, compared to earnings of $8.2 million in the fourth quarter of 2008.

"We probably will see Lafayette become something more in terms of banking - certainly within the state and the region," he says. "North Carolina is going to be hard to compete with in terms of the size of Bank of America and others. And there are other super-regional banks in other parts of the South. But Lafayette will have more banking assets than other parts of Louisiana."

But not everyone is convinced that Lafayette is "the new banking center of the South."

"Some of my peers have made that comment," Yuan says. "It's flattering, and it's a great thing to think that; I'm proud that people are talking in that tone. But it's really too early; we're still a community of relatively small banks. Instead of being the biggest, we just want to be the best, with strong capital by following the right strategies."

Cloutier, however, thinks Lafayette stands to gain much from a growing banking industry - just like Charlotte did.

"There will be lots of jobs and lots of great opportunities, reasons for people to move into this community who might not have ever considered Lafayette," he says. "That's exactly what happened in Charlotte. Banking made that city what it is today."

Penny (Brown) Font, who has extensive experience covering news and business in Acadiana, is a freelance writer based in Baton Rouge. To comment on this story, contact her at [email protected]