cover

4 CHARLOTTE Business Journal
cover story
On the horizon
What’s the future
of bank startups?
The last time someone wanted Tony
Gaeta’s help to navigate forming a
new bank, the veteran lawyer turned
them down.
That was four years ago. And no
one else has asked since.
“I told them, ‘I can’t take your
money. I can’t guarantee we’ll even
get a charter,’ “ he says.
Gaeta in a 40-year career has
helped dozens of North Carolina
banks launch. But he’s unsure when
he’ll see another
one. Even as many
community banks
in the state merge
— and seemingly
leave a void for
a new, small
local lender to
fill — slow growth,
wary investors
Tony
and conservative
Gaeta
regulators have
dampened the
prospects of a
startup bank.
It has been almost six years
since Forest Commercial Bank of
Greensboro opened in 2008, part
of the last class of de novo bank
charters in North Carolina. Carolina
Premier Bank in 2007 was the last
new bank in Charlotte.
Nationally, no bank charters were
granted in 2011 or 2012. Last year,
one new bank was formed in the
entire U.S. Pennsylvania’s Bird-inHand Bank (yes, that’s the actual
name) opened last month with
Federal Deposit Insurance Corp.
approval to serve a small Amish
community.
As the economy recovers and
the number of North Carolina banks
continues to dwindle, someone will
soon consider applying for a new
charter.
But Gaeta expects only a wellplanned, well-capitalized de novo
bank that has identified a growing
metropolitan market will stand a
chance. He also believes regulators
will approve only a traditional model
that would gather local deposits and
lend primarily to hometown clients.
Specialty banks and business banks
need not apply.
“The state, with the right
application, would be willing,” he
says. “And the FDIC says there’s no
moratorium. But that application
will get drug through the mud.
Everything will be scrutinized.”
Still considering a startup? Find
some deep pockets. Gaeta estimates
the requisite $10 million to $15
million needed pre-recession to start
a bank won’t be nearly enough.
“I don’t know how much, but it
will take a lot more than it used to
be, that’s for sure,” he says. “And
investors just aren’t lining up for
community banks again.”
— Adam O’Daniel
Why banks can’t
Story by Adam O’Daniel
Bryan Kennedy is surrounded. But that’s
not necessarily a bad place to be.
The president of Park Sterling Bank,
from his midtown headquarters with a
skyline backdrop, is in the middle of a
market every competitor wants a piece
of. He understands why, because he’s
trying to get a piece of other metros, too.
As North Carolina’s community
banks look at the year ahead, most share
a common goal. Get bigger. And get bigger in big cities.
That means merger and acquisition
talks will heat up. The salaries of top
bankers in top markets will rise. And the
terms for good borrowers in good markets such as Charlotte are increasingly
competitive.
“If you’re going to be a player in the
Carolinas, you’ve gotta be in Charlotte,
Raleigh, Greenville (S.C.) and Charleston,” Kennedy says. “The smaller communities continue to be economically
challenged.”
Banks have been consolidating for
several years to lower cost structures
and better cope with increased regulation and capital requirements. But as the
economy grows, larger markets are outpacing smaller communities at a startling rate. For example, in the third quarter of 2013, Park Sterling’s loan portfolio
grew 19% in its metro markets. But a
poor showing in smaller markets pushed
down the total number to nearly flat.
That means banks need to grow larger
so they can win business in those larger markets. It’s nearly impossible for a
small bank without a Charlotte presence
to win meaningful business here.
“The biggest business in some of these
towns are church loans,” Kennedy says.
In bigger markets such as Charlotte
“there are tons of players, but there are
more deals to be had.”
Kennedy founded Park Sterling
here before the recession, one of several small commercial lenders in the city.
Then post-recession he teamed with
new Chief Executive Jim Cherry, raised
capital and bought two large deposit franchises, Gastonia’s Citizens South
Bank and South Carolina’s CapitalBank.
Meanwhile, Park Sterling paid big bucks
to poach successful lenders in the other must-have cities, including Greenville
and Charleston, S.C., and Richmond, Va.,
most recently. The goal is to build an $8
billion regional bank.
Others share that notion. But without the good fortune of forming in Charlotte eight years ago, they’re jockeying
for a share here now. Troy-based First
Bank has opened a lending office down
the street from Kennedy at Park Sterling.
Greensboro’s NewBridge Bank hired Tim
Ignasher away from Park Sterling for its
R by
the numbers
Dominant dozen
The 12 largest N.C. community banks,
including HQ city and assets:
1
2
3
4
5
6
7
8
9
10
11
12
First Bank (Troy)
$3.2 billion
Bank of North Carolina
(High Point)
$3 billion
Southern Bank & Trust
(Mount Olive)
$2.3 billion
Square 1 Bank (Durham)
$2.2 billion
CommunityOne Bank
(Asheboro/Charlotte)
$2 billion
VantageSouth Bank (Raleigh)
$2 billion
Park Sterling Bank (Charlotte)
$1.9 billion
Yadkin Bank (Elkin/Statesville)
$1.8 billion
NewBridge Bank (Greensboro)
$1.8 billion
HomeTrust Bank (Asheville)
$1.7 billion
The Fidelity Bank
(Fuquay-Varina)
$1.6 billion
Peoples Bank (Newton)
$1 billion
entrance here.
High Point-based Bank of North Carolina made the largest splash, building a
flagship regional headquarters and bank
branch across from Piedmont Town Center in SouthPark. It also opened its wallet and purchased Charlotte’s First Trust
Bank in 2012.
“Charlotte is critical,” says investment banker Lee Burrows, chief executive of Banks Street Partners in Atlanta.
“It’s the biggest market in the Carolinas,
a must-have, along with Raleigh, Greenville-Spartanburg and Charleston.”
While some metros still offer plenty of
targets, Charlotte has few small banks for
sale. So activity here will likely be more
organic or on the periphery.
Burrows, whose firm specializes in
M&A work, senses 2014 could be a busy
year for bank mergers and acquisitions
as rivals all look for an edge in the best
markets. The combination of improving
stock prices, a healthier economy and
an urgency to find earnings growth will
likely speed up talks.
“All of the top 10 community banks
in North Carolina will be active in some
shape or form,” he says. “It’s hard to
grow loan volumes organically. And
when you’re trading at 200% of book
value, you can pay 150% of book for a
competitor, and that feels better around
a board table.”
Activity is already hot. Raleigh-based
VantageSouth Bank and Elkin-based
Yadkin Bank last fall discussed a merger
5
January 24, 2014 cover story
wait to grow
R Closer
look
Here are some of the North Carolina banks jockeying for more dominant positions:
Park Sterling Bank
HQ: Charlotte
Assets: $1.9 billion
CEO: Jim Cherry
Bank of North Carolina
HQ: High Point
Assets: $3 billion
CEO: Rick Callicutt
Nancy Foster, chief
risk officer and Bryan
Kennedy, president,
of Park Sterling Bank.
Nancy Pierce
that hasn’t come to fruition. In November, NewBridge Bank agreed to acquire
CapStone Bank, improving its share in
the Triangle. In December, Bank of North
Carolina agreed to buy banks in Albemarle and Chapel Hill.
Analysts and bankers expect the largest players may soon determine their
best path is to merge and create a handful of super-community banks.
“There are so many hurdles, and it can
be a lengthy process,” Burrows says. “But
don’t forget North Carolina has a long
history of successful mergers of equals.”
He says out-of-state banks may also
create waves in the M&A pool. SCBT
Corp. in Columbia, S.C. still eyes a larger
North Carolina presence. Several growing banks in Virginia and Tennessee are
kicking tires in North Carolina. Even
Bank of the Ozarks in Little Rock, Ark.,
has shown interest in the state with its
recent purchase of First National Bank
of Shelby and a new full-service operation in Charlotte.
However, Bank of North Carolina
Chief Executive Rick Callicutt isn’t convinced 2014 will be a watershed year
for community bank deal-making. He
agrees activity will be high. But with
so many interested buyers, and so few
interested sellers, he questions whether 2014 will be the year of the big deal.
Instead, he thinks his strategy of
buying small suburban banks with low
deposit costs may be the best course
forward. Then he can use the savings
to grow organically in bigger markets,
gradually improving his profits.
“Everyone else might be out there
elephant hunting,” he says. “We’re not
chasing size. We’ll be as big as we need
to be to earn $1.50 per share, then $1.75.
Smaller transactions are less risky and
more predictable.”
At Park Sterling, the risk appetite is
also kept in check. Kennedy says the
management team is focused on finding
the right people in the right markets to
build a strong commercial and industrial loan portfolio. “There’s a real fight for
talent,” he says. “We have the right people, just not enough of them.”
Park Sterling’s latest deal, the addition of five Richmond bankers and plans
to open an office there, received favorable reviews.
“It seems to provide a solid de novo
market for Park Sterling to gain additional business,” Sandler O’Neill & Partners
analyst Kevin Fitzsimmons wrote in a
note to clients. “Getting a shot in the arm
on loan growth will be an especially welcome benefit.”
Kennedy notes every strategy has a
tradeoff. Striking a big merger in a key
market could deliver quick earnings, but
with dilution for shareholders and added risk. Chasing organic growth by hiring top lenders is less risky, but it comes
with elevated expenses and no immediate promise of higher revenue.
“No matter how you do it, some investors aren’t going to like it.”
Latest: Bank of North Carolina is poised
to become the largest community bank
based in North Carolina. It closed the
book on 2013 by announcing a pair
of acquisitions it hopes to close this
spring, Albemarle’s Home Savings Bank
and Harrington Bank in Chapel Hill. The
lender has grown since the recession
with a string of small acquisitions,
strategically completing deals to
expand its footprint along the Grand
Strand and in Charleston, S.C. In 2012,
it acquired Charlotte’s First Trust Bank
for an entrance into the Queen City. It is
backed by private-equity firm Aquiline
Capital Partners, which installed former
Wachovia Corp. CEO Ken Thompson on
the bank’s board.
First Bank
HQ: Troy
Assets: $3.2 billion
CEO: Richard Moore
Latest: First Bank quietly opened its first
loan-production office in Charlotte in
2013, leasing some space in a modest
midtown office off Morehead Street.
It’s a move designed to help the rurally
focused lender conduct more business
in an urban market. First Bank, with
branches concentrated in small towns
across southern and eastern North
Carolina, has a strong deposit base that
some banks would covet. How long
before it feels pressure to deal its way
into more high-growth markets?
VantageSouth Bank
HQ: Raleigh
Assets: $2 billion
CEO: Scott Custer
Latest: VantageSouth has been on the
prowl, including recent talks with Yadkin
Bank among others that have yet to
blossom into a deal. The lender, backed
by a consortium of investors known as
Piedmont Community Bank Holdings,
has made it clear it wants to be a major
player in the Carolinas and Virginia. So
far, Vantage has experienced success
in eastern parts of the state with its
2013 acquisition of East Carolina Bank.
Vantage is looking for a beachhead
in Charlotte, and a Yadkin deal would
surely have accomplished that. But has
that negotiation cooled? As expected,
neither bank will talk. In the meantime,
Vantage has intentions to open a
branch office in SouthPark and establish
Small Business Administration lending
operations here.
Latest: If Virginia is for lovers, call Park
Sterling smitten. The bank this month
hired a team of commercial bankers
and two executives in the Richmond
market as it tries to grow business there.
While peers have been more active with
whole bank purchases, Park Sterling
has executed its regional strategy by
hiring experienced bankers in major
markets, including teams in Raleigh,
Greenville, S.C., and Charleston, S.C.
Most of its size and scale comes from
just two post-recession transactions: the
2012 acquisition of Citizens South Bank
in Gastonia and the 2011 purchase of
Greenwood, S.C.-based CapitalBank.
Yadkin Bank
HQ: Elkin
Assets: $1.8 billion
CEO: Joe Towell
Latest: Yadkin Bank finds itself in a small
controversy. The bank’s former CEO
and longtime board member James
Smoak abruptly resigned in December,
citing his disagreement with the bank’s
growth strategy. But the bank hasn’t
disclosed specifically which part of
the strategy he disagreed with. It’s not
even clear what Yadkin’s strategy is at
the moment, though some analysts see
it as a potential target. The bank has
conducted a remarkable turnaround
project that included a major capital
raise and liquidation of bad assets.
Its share price soared 97% in 2013 as
it delivered on promises of fixing the
franchise. The remaining unanswered
question: Will Yadkin now prefer to grow
on its own, serving the Piedmont and
foothills, or will it look for a partner?
NewBridge Bank
HQ: Greensboro
Assets: $1.8 billion
CEO: Pressley Ridgill
Latest: NewBridge will scoop up a
piece of the Triangle banking market
in 2014 with its announced acquisition
of CapStone Bank. Illustrating the
industry’s fight to capture more metro
business, NewBridge sweetened its offer
for CapStone at least twice, according
to securities filings, in order to beat
rival bids. NewBridge has also made
aggressive moves in Charlotte, hiring
its market leader, Tim Ignasher, away
from Park Sterling Bank following Park
Sterling’s purchase of Citizens South
Bank. NewBridge in 2013 established
a retail presence in SouthPark and is
interested in more growth here.