At the end of 2008, the average American’s idea of a good bank was a sturdy mattress.

But a handful of private equity-backed bank veterans saw an opportunity in the L.A. area’s community banks. They rolled the dice, betting the local economy would rebound and boost local lending along with it. They were right.

Grandpoint Bank in downtown Los Angeles and Irvine’s Opus Bank and Banc of California Inc. are all lenders that didn’t exist seven years ago. Those institutions, built from more than a dozen smaller banks in Los Angeles and elsewhere, now oversee a combined $14.5 billion in assets – or nearly half of L.A.’s largest local bank, City National Bank.

Their founders took advantage of the uncertainty of the financial crisis, snapping up community banks at bargain prices and combining them into institutions large enough to manage the increasing cost of compliance and capable of participating in bigger deals. They’ve been among the region’s most profitable banks, while many smaller banks struggle.

Now, perhaps influenced by the success of some of the early players, investors such as Alex Meruelo are trying their hand at bank shopping today. But they may have a tougher time duplicating the success of the early birds.

Banks are being squeezed by low rates and higher regulatory costs, while the economic recovery has pushed up the price of potential target banks. Small margins aren’t as big of a deal if you’re buying a bank’s balance sheets for a discount – as investors did in 2010 – but it’s a factor when you’re paying market rates.

Those are just a few reasons why Don Griffith, Grandpoint’s chief executive, thinks the window to launch a successful bank roll-up has closed.

“You cannot start today buying banks and get a reasonable return,” he said. “Don Griffith could not go out and raise $400 million today and get any kind of return for my investors.”

Opus Chief Executive Stephen Gordon is also glad he started when he did, before certainty set in and prices snapped back.

“The easy acquisition activity is kind of done,” he said. “As we get further away from the distressed noise, the banking system has woken up.”

Game plans

The 2008 financial crisis threw the entire banking system in a hole, one even lenders with solid balance sheets couldn’t escape.

“It was like a tsunami,” Griffith said. “Banks are like boats sitting in a pond. It doesn’t matter how good of a boat you have, you’re going to get knocked around.”

Tim Chrisman, chief executive of bank-focused executive search firm Chrisman & Co. in downtown Los Angeles, said those rough seas created an opportunity.

“It was a tremendously opportunistic time to be able to tap into that uncertainty,” he said. “Not all of the target banks were on the brink of something bad happening.”

One of the first to see the opportunity and dive into the market was Griffith, an investor with a long history of rolling up banks and selling them for big profits.

He first dipped his toe into bank roll-ups in the late 1980s, when he teamed up with New York private equity giant KKR & Co. to buy a handful of lenders. Griffith said that partnership turned $280 million into $2.5 billion. He bought and sold a couple of banks in the South Bay, then he started First Coastal Bank in Manhattan Beach and sold that in 2007, just before everything came crashing down.

So when 2008 rolled around, Griffith saw an opportunity to build another bank in a buyer’s market. Starting in 2010, he went on a buying spree, acquiring 11 small banks.

While some were renamed Grandpoint, Griffith kept the existing names of a few, such as Arizona’s Bank of Tucson. But all the banks are under the same charter and shared systems, which gives Grandpoint the advantages of scale. The bank had $2.8 billion in assets as of March 31, making it the 11th largest bank in Los Angeles.

Reputation helps

Opus’ Gordon got started next, leading a team of Wall Street veterans, backed by New York hedge funds Fortress Investment Group and Elliott Management Corp., in the recapitalization of Bay Cities National Bank in Redondo Beach in September 2010.

Gordon said it wasn’t too hard finding financial backers, even with the uncertainty.

“I have a reputation, I have a following and people know what to expect of me,” he said.

His first move was to infuse $460 million of capital into Bay Cities and rename it Opus. He said that he was drawn to the bank because its loan portfolio was in relatively good shape – a stark contrast with many other lenders. The bank’s biggest problem was a crumbling investment portfolio and Gordon felt that was an easier fix.

“I could go to Wall Street, get bids, mark the portfolio to market and sell it off in three hours,” he said.

He also invested in systems and a team that was overqualified to run $270 million-asset Opus but that could handle rapid growth.

“We parachuted in on day one with a 30-member senior management team,” Gordon said.

As soon as 2011 hit, they actively started hunting for an acquisition. First in Gordon’s sights was Cascade Financial Corp. in Everett, Wash., which had $1.5 billion in assets and 22 branches. Next was RMG Capital Corp., parent of Fullerton Community Bank, which had $684 million in assets.

Since 2012, the bulk of the bank’s growth has been organic, with the exception of a September deal to pick up 10 former branches of Century City’s PacWest Bancorp. As of March 31, Opus had assets of $5.6 billion.

Steve Sugarman of Banc of California, meanwhile, said his investment thesis was focused on what he called a “significant void” in Southern California banking, after several midsize banks failed or were absorbed by larger franchises. He set out to build a bank that served small businesses, which fit with his background as an entrepreneur and consultant.

Sugarman led a group of investors that recapitalized $863 million-asset First PacTrust Bancorp of Chula Vista in November 2010 and moved it to Irvine.

Since then, the bank, now Banc of California, has grown to $6.1 billion in assets. Sugarman said about half the growth has been organic and half through M&A deals, the biggest one being the bank’s 2012 purchase of Century City’s Private Bank of California.

While he believes the bank will grow organically over the next seven years and he doesn’t see a major acquisition on the horizon, Sugarman said he’s always going to remain flexible and opportunistic.

“Our plan is to continue building organically,” Sugarman said, “but if there’s a better plan that comes along …”

Rare opportunity

Tim Coffey, a San Francisco analyst who covers community banks for Atlanta brokerage and investment bank FIG Partners, said Sugarman, Gordon and Griffith probably benefited from a once-in-a-generation opportunity to buy banks.

“Certainly the guys who stepped in and bought into the market, I don’t think they’ll ever get an opportunity to buy banks in a good market that cheaply,” he said.

Indeed, Grandpoint, Opus and Banc of California all acquired banks at rock-bottom valuations, picking up some for close to or even below tangible book value. Book value is a bank’s assets minus its liabilities – or what a bank would have left if it were liquidated, at least theoretically.

For example, Grandpoint paid 1.1 times tangible book value for Santa Ana Business Bank and 1.3 times tangible book for First Commerce Bancorp in Encino, according to Irvine bank consulting and investment firm Carpenter & Co.

Opus bought Fullerton Community Bank for 1.3 times book in June 2011. Banc of California’s predecessor, First PacTrust, paid just 70 percent of book value – that is, less than its liquidation value – when it scooped up Santa Ana’s Gateway Bancorp in June 2011.

Good luck buying banks for those prices today. In November 2013, Koreatown’s Wilshire Bancorp paid 1.8 times book for Saehan Bancorp. And PacWest paid 2.6 times book when it agreed to acquire Raleigh, N.C., tech-focused lender Square 1 Financial earlier this year.

As those multiples rise, bank owners have higher expectations, making deals more difficult for value-minded buyers.

“For the little banks, their expectations are too high,” Griffith said. “A lot of them don’t have any pressure on them to sell.”

Strategic, not financial

Xavier Gutierrez, chief executive of Meruelo Investment Partners in Downey, the Meruelo Group’s investment arm, acknowledges that the sweetheart deals of 2010 are gone. But he still thinks banks present a good buying opportunity for Meruelo Investment.

That’s because Gutierrez doesn’t have the same acquisition criteria as private equity-backed operations such as Opus and Grandpoint.

“Because we’re not a financial sponsor, we don’t have a time line,” he said.

Indeed, Meruelo Group almost never sells its assets, which include Latino-focused La Pizza Loca chain, television stations and a Nevada casino. That’s why Gutierrez isn’t worried about being late to the party: He doesn’t have to leave it at any particular time.

“There’s a fundamental difference between how a financial sponsor evaluates an opportunity and a strategic sponsor evaluates an opportunity,” he said. “A financial sponsor looks at it as an investment with a horizon. A strategic buyer looks at how it can create upside with no time line in mind.”

Meruelo recently purchased and recapitalized Brentwood’s NCAL Bancorp, parent of National Bank of California. Gutierrez said the plan is to combine it with a bank Meruelo already owns, Irvine’s Commercial Bank of California.

Meruelo eventually wants to build a larger financial services platform that complements its extensive web of businesses. Gutierrez also expects community banks to receive some much needed regulatory relief, as escalating compliance costs have hit their margins – even though it wasn’t the community banks that brought down the economy in 2008.

Gordon still thinks Meruelo might have started too late, though, and believes it’s going to be tougher without a publicly traded bank whose stock they can use for acquisitions.

“They’re privately held and buying with cash,” he said. “The math is going to be tough for a guy that only has cash to work with.”

Still, Meruelo isn’t the only one who still sees opportunity in scooping up L.A. banks.

F&T Financial Services Inc. in Porterville announced in February that it will acquire downtown L.A.’s Pan American Bank. There’s also SunPac, a private investment firm that acquired Fresno’s Security First Bank that same month and is planning to use it as a platform to build a commercial bank serving Southern California. SunPac is led by V. Charles Jackson, a former chief executive of Pasadena’s Community Bank.

While prices aren’t what they were, Gutierrez hasn’t found there to be a shortage of opportunities. He said there are plenty of closely held community banks whose owners held on through the crisis and might want to transition to a less stressful role.

“They survived the heart attack,” he said. “The question becomes, do they want to continue holding on? You kind of see they may not.”

Takeout

Going on five years from when they started buying banks, the question is what’s next for Gordon, Griffith and Sugarman, all of who have track records of profitably exiting from their investments.

Griffith sold First Coastal to Citizens Business Bank in Ontario for a robust four times tangible book value – a multiple he remembers with pride.

Gordon also had fortuitous timing during the last cycle. He sold Irvine’s Commercial Capital Bancorp Inc. in 2006 to now-defunct Washington Mutual for $1 billion in cash.

Sugarman, who isn’t even 40, wasn’t around long enough to cash in before the last downturn, but he’s been a fund manager and is no stranger to dealing with return-minded investors. He acknowledged that enough years have passed where some of the early postcrisis players might want to harvest their investments.

“A lot of PE-backed banks that started five or six years ago, their sponsors are now looking to divest,” he said. “A lot of larger banks or international banks are looking to restructure. And a lot of teams that have worked through the crisis have now gone seven or eight years patiently trying to manage their banks toward an exit.”

There’s also the fact that Opus and Banc of California are already public, and Griffith said that’s likely in the cards for Grandpoint in the near future. Not that going public automatically presages an exit, but public equities tend to be easier to trade than private ones.

“For the first time, we may be thinking about an IPO at some point,” Griffith said.

Sticker shock

Gordon is excited about the future of the L.A. economy, boasting that Opus has funded more than $1 billion in small-business loans in the area over the past 12 months – but he’s certainly glad he started acquiring banks in 2010. In fact, he said his biggest regret was not buying more banks when discount shopping was in full effect.

“I underestimated how quickly distress would snap back,” he said. “I thought I’d have another year of runway to buy troubled institutions. It just came back so fast that the opportunities went away and I got a little sticker shock.”

Reflecting on it today, even those slightly higher prices would still have been good value, he said.

“Whatever I would have paid was less than I would be paying today,” he said.

Sugarman believes good deals are still out there, but only for strategic buyers who have a plan to actually generate value from these banks, such as Meruelo. The point in the market cycle for speculative or financial buyers has passed.

“The opportunities that remain need to really be strategic in order to make sense,” he said.

Gordon is more circumspect. He got in at the ground level – basement level, some might say – and rode the rebound for five years. He insists he’s still optimistic about the local economy, but he also thinks the sizzling property market is raising some red flags.

“I am fearful that Southern California has become the real estate capital of the world, and there’s such a focus in the economy about real estate,” he said. “Now crazy things are going on that came out of rates being too low for too long.”

The last time house flipping was so popular, it was followed by a dramatic swing in the housing market that caused the crisis that made cheap acquisitions like Opus’ string of deals possible. Gordon has seen this movie before and doesn’t want to be the last one in the theater when the credits roll.

“I am concerned that there are bubbles emerging and everyone is setting up for the next cycle,” he said. “The banking system is starting to ignore risk again. It’s not being paid risk-adjusted returns for what it’s doing, because it’s desperate to generate yield.”