Wilbur Ross Doubles Down on Michigan's Talmer Bancorp

It is tough to imagine having turned down $200 million of capital in 2010, when so many bankers were clamoring for cash, but that's what David Provost did.

Provost, the head of a $90 million-asset de novo in Troy, Mich., had secured $400 million of capital from investors, including WL Ross & Co., to chase failures. But it was too much for the first target, he thought, so he returned half of the funds with a promise to come back for it at some point.

That time is now.

The story of Talmer Bancorp Inc., which now has $2.2 billion in assets, is in many ways the antithesis of other private equity-backed banks that raised large amounts of capital in anticipation of a sea of bank failures. With some of those banks now suffering from indigestion, Talmer is ready for its second course.

"We didn't need $400 million. We were very concerned about excess capital and not being able to give our investors a return," Provost said in an interview. "Capital just sitting around drags you down, or it could make you motivated to spend it in ways that are not prudent, just to do something with it."

Talmer's measured approach is continuing with its latest round of capital. It has commitments for $174 million, but is only taking $21 million for now, with the remainder available on demand. The company bought Lake Shore Wisconsin Corp., a bank holding company shell with $26 million in cash in December. That purchase brought Talmer to its $400 million goal.

"The committed capital structure is the best of both worlds. It gives us the opportunity to look for acquisitions, either of failed or open banks, without the burden of having unused capital sitting on our balance sheet," Provost said. To be sure, the company's Talmer Bank and Trust was already flush with capital. At Dec. 31, the bank's total risk-based capital ratio was 34.6%.

Provost said that while other private equity-backed banks have gone public or are in the midst of an offering, his company "didn't need that much capital today." Such companies include the $11 billion-asset BankUnited Inc. in Miami Lakes, Fla., another investment tied to Wilbur Ross that raised $783 million in an early 2011 initial public offering. Last month BankUnited gauged interest in its potential sale, but did not receive any bids at its desired price.

Ross wrote in an email that Talmer's luck with failed banks prompted his reinvestment. Meanwhile, he defended BankUnited.

"We are doubling on Talmer because they have been uniquely successful at acquiring and assimilating FDIC assisted deals and there will be more to come in this region. We are leading this as an 'on demand' deal because rate of return is maximized by putting the money in immediately before an accretive transaction," Ross said. "Bank United has had spectacular earnings. … Florida has suddenly become the darling of strategic and portfolio investors. This makes it expensive to buy."

BankUnited and Talmer are co-owned by Ross, but the similarities end there. BankUnited has one acquisition, but has not been active in failed banks beyond its own sale to a group of private equity firms in 2009.

Meanwhile, Talmer has bought four failures: CF Bancorp in Port Huron, Mich., in April 2010; First Banking Center in Burlington, Wis., in November 2010; Peoples State Bank in Hamtramck, Mich., in February 2011; and Community Central Bank in Mount Clemens, Mich., in April 2011.

Since buying Community Central, Provost said the company has been on a bit of a self-imposed break. He wanted to get all of the acquisitions integrated and has been orchestrating the current raise. Provost said he is ready to go back on the offensive and would like to announce an open-bank deal this year. Such deals have become his focus lately because of the lack of failure deals with the Federal Deposit Insurance Corp., though he also remains interested in such deals.

"Bank consolidation is going to pick up, we are starting to see more stability in pricing. Our valuations are starting to come in line with possible sellers' expectations," Provost said. "And the FDIC process still has a way to go."

Provost said he is particularly interested in banks around $1 billion in assets and that are in the company's existing markets of Michigan and Wisconsin or in the Chicago area. In the greater Midwest, he said the target would need to be "transformational" for Talmer. "The rule of thumb for us is in-market banks about half our size," he said.

Industry observers said they liked Talmer's decision to have capital waiting. With the pace of failures being slow and erratic, it makes sense to have dry powder ready to go. It is a strategy that more banks could use in the future as private equity becomes more familiar with the sometimes snail-pace of the banking industry.

"The trouble is that you never know when these silly things [bank failures] are going to show up, so I think this is a great idea," said Randy Dennis, the president of DD&F Consulting in Little Rock, Ark., which has been one of the leading consultants on failed-bank acquisitions during this cycle. "I think investors are more cautious now with their money. You need capital, but you don't need capital to be useless and burning a hole through your balance sheet."

Chip MacDonald, a partner at Jones Day in Atlanta, said that it is difficult to withdraw capital after it has been injected into a company.

"The ideal thing is 'just in time' capital, but it is very hard to achieve that in this volatile market," MacDonald said. "And it is hard to get it back after it has been put in the bank. The regulators are not too keen on taking Larry the Lobster out of the pot."