Buying struggling banks is not for the faint of heart. The brains behind a local private equity fund buys stakes in struggling banks to turn them around within two years. Now those investments could take closer to a decade to mature.
Community Bank Investors of America LP, better known as CBIA, is a private equity fund founded in 2007 by locals Larry Fentriss and Tim Anonick to identify struggling, undervalued community banks, take an equity position in them and, in some cases, take over leadership of the bank. The fund is also associated with CBIA Advisors, a broker-dealer in Richmond that helps orchestrate bank mergers and bank capital raises.
CBIA’s fund has taken large stakes in four banks: Norfolk-based Bank of the Commonwealth, Inland Community Bank in Los Angeles, the former Bay Financial Savings Bank in Tampa, Fla., now known as Progress Bank of Florida, and Gateway FSB in the San Francisco area.
Turning struggling banks around is no easy task even in normal economic times. CBIA is now working to do so in a time when banks of all sizes and in all markets are dealing with troubled assets and troubled borrowers and bank executives who in some cases don’t have the experience of dealing with such trying conditions.
Late last week, Fentriss spoke to BizSense by phone from the West Coast, where he is acting as interim CEO of Gateway FSB while it works to get back to proper form.
Richmond BizSense: For those not familiar with the firm, what exactly does the CBIA fund do?
Larry Fentriss: We look at troubled banks, try to get in there at a big discount, try to fix them and sell them.
RBS: What is the size of the fund?
LF: The first fund is $12 million. It is pretty much deployed at this. We’re looking at forming a second a fund, a bigger fund: $25 million to $30 million. We kind of put the second fund on the shelf because the economy was falling so rapidly. I’m not totally sure we’ve hit bottom yet. It’s starting to look like it.
RBS: In terms of bank acquisitions, is it a buyers market or a sellers market?
LF: It’s definitely a buyers market. We’re overwhelmed with prospects. The challenge now is raising money, even though we have a pretty good track record. The people we typically bring together to invest – many of their investments were held in bank stocks. A lot of our contacts have gotten beat up in this market. There’s a real shortage of capital out there right now.
RBS: Are the banks you invest in generally privately held or publicly traded?
LF: Most of them are private. We have had an anomaly where some of the public companies are trading at huge discounts because people are running from them.
RBS: What’s hurting community banks the most?
LF: In the case of Gateway, they did four big transactions they shouldn’t have done. They deviated from their business model, and they were mistakes. In the case of Progress, the market just collapsed. The real estate values just collapsed. The collateral of the loans then just wasn’t there. Commonwealth got too much into real estate development at a time when the market was peaking and overheated. It created a bunch of issues similar to Florida, but the collapse in real estate values wasn’t as bad.
RBS: Has the value of community bank stocks as a whole been damaged unjustly by guilt by association because of all the problems at large national and investment banks?
LF: They are throwing out the baby with the bath water.
RBS: What is your modus operandi in taking control of a bank (positions on the board, replacing executives, etc.)?
LF: It depends on how much capital we put. We then determine whether or not local people [in that particular market] would be an asset on the board and try to recruit them. In some cases we have had management changes and in some cases we have not.
RBS: How long does it take to turn a bank around?
LF: We recapitalized Valley Bank in Los Angeles back in 2001. It took about 18 months to fix it, and we made back two and half times our money. We typically say it’s a three-year model. But as long as the economy is struggling, the time frames are longer.
RBS: How does the health of the banking market in Richmond and statewide compare to others where your fund has an interest?
LF: Florida has been disastrous. On the West Coast you have Las Vegas, Sacramento –they’re just doing terrible. The scary thing about Inland (in Los Angeles): We have had about seven banks around us failing. You sit there and you say, “Gosh, everybody around us has gone under. Should we be worried here?” There hasn’t been a bank failure in Virginia yet, at least recently.
RBS: How do you find these banks?
LF: You have to live out of an airplane and screen the data from the FDIC. In some cases, banks contact us and say they need capital.
RBS: How many investors does the fund have, and how do you keep them happy in a time when community banks are struggling for reasons beyond the norm?
LF: There are about 80 investors for the first fund. There are a lot of Richmond people in it. We tell everybody it’s a long-term project. It’s a 10-year fund, a 10-year commitment.
RBS: Do you ever have to deal with investors who get scared or get cold feet early in the investment?
LF: Our investors call us, and they ask us about investments from time to time. Some call us more than others. But it was a tenured commitment from the beginning. There is no mechanism to take people out unless they trade their ownership to another investor.
RBS: Is CBIA Advisors brokering many deals these days?
LF: We’re doing very little there right now because we are spending so much time managing the assets of the fund.
Michael Schwartz covers banking for BizSense. Please send news tips to [email protected]