Fresh crop

Out-of-state private equity plows billions into homegrown community banks. Why Rick Callicutt thinks his is such fertile ground.

By David Mildenberg

In his senior year at High Point University, Rick Callicutt, who is 6-foot-3, cleared a bar 3 inches shy of 7 feet, which he says proves some white men can jump. Now, 34 years after he set a school record for the high jump that still stands, his BNC Bancorp might be positioned to leap from a small community lender to a regional powerhouse. It’s an old story in North Carolina, where Charlotte-based Bank of America Corp. and Winston-Salem-based BB&T Corp. merged their way into the ranks of the nation’s 10 largest banks. So did Charlotte-based First Union Corp. — which assumed the name of the Twin City’s venerable Wachovia Corp. after their merger in 2001 — until a tsunami of bad mortgages pummeled its once-pristine loan portfolio and forced a fire sale to San Francisco-based Wells Fargo & Co. in 2008.

Callicutt, 55, isn’t alone in eyeballing expansion, with eight other North Carolina-based banks with $2 billion to $4 billion in assets considering ventures in new markets. As CEO from 1983 to 2001, Hugh McColl Jr. turned the amalgamation of community banks that was NCNB (née North Carolina National Bank) into Bank of America, which for a time was the nation’s largest consumer bank. But replicating that kind of growth won’t be easy because getting big in banking is much harder to do than it was 20 years ago, McColl says. With more regulations and fewer banks with assets in the tempting $5 billion-to-$10 billion range remaining after waves of consolidation, deal-making as practiced by McColl, First Union’s Ed Crutchfield, Wachovia’s John Medlin and BB&T’s John Allison has become tougher. “It’s expensive, and it takes time,” McColl, 78, says in an interview at his office on the 41st floor of Bank of America Corporate Center, the 60-story skyscraper commanding Charlotte’s skyline that wags dubbed the “Taj McColl.” He chuckles when learning that Callicutt’s company will reach nearly $4 billion in assets when two recent purchases close. That’s a mom-and-pop operation for McColl — NCNB had $13 billion (an inflation-adjusted $31 billion today) when he became its chief executive 31 years ago. “Maybe he can find a lot of $500 million-to-$1 billion banks, or maybe the secret is if he buys somebody bigger through a merger of equals. I think it’s going to be difficult.”

High Point-based BNC Bancorp — the holding company for Bank of North Carolina — might surprise McColl under Callicutt, who had been the bank’s chief operating officer since it opened in a trailer in Thomasville in 1991 and became chief executive in June of last year. One reason is his backing from Aquiline Capital Partners LLC, a New York investment firm that owns a 21% stake. The investment ties a promising community bank to ex-Wachovia CEO Ken Thompson, one of the industry’s most controversial figures, and underlines the influence of private equity in determining which banks blossom.

Eight community banks that rank among the state’s 13 largest financial institutions have attracted a total of more than $2 billion from private-equity and institutional investors since September 2008, when things got so scary that U.S. Sen. Richard Burr told his wife to withdraw $500 from an ATM. Where politicians saw risk, some investors smelled reward, buying banks on the cheap with help from desperate federal regulators. Former BofA executives were at the forefront: Gene Taylor and Chris Marshall raised $800 million for Capital Bank Financial Corp., and Milton Jones and Charlie Williams secured $500 million for Certus-Holdings Inc. (Though both groups started in Charlotte, Capital moved to Coral Gables, Fla., and Certus — which ousted Jones and Williams in April after their private-equity investors complained about excessive spending and mounting losses — is headquartered in Greenville, S.C.) Former Wachovia bankers Brian Simpson and Bob Reid raised $310 million for Charlotte-based CommunityOne Bancorp, with The Carlyle Group of Washington, D.C., and Oak Hill Capital Partners of New York each owning 22%.

Other North Carolina banks joined in. Chapel Hill insurance executive Adam Abram raised money from investors including Boston-based Harvard Management Co. to finance what is now Raleigh-based VantageSouth Bancshares Inc., which will have $4 billion in assets after it merges with Yadkin Financial Corp. of Elkin. (“A Sense of Community,” June 2013). Former State Treasurer Richard Moore used connections he made as a New York Stock Exchange director to raise $34 million from two investment groups for Southern Pines-based First Bancorp, which he has led since last year. The money let the company, which grew out of a bank organized 79 years ago in Troy, write off bad loans without destroying its capital. Not all the money from outside the state came from private-equity sources: Charlotte-based Park Sterling Corp. raised $150 million in 2010 from institutional investors including Marsico Capital Management LLC of Denver.

At Bank of North Carolina, capital has come slower, arriving in smaller chunks than at its rivals. Swope Montgomery, who was CEO until his retirement last year, and Callicutt started the bank with $3.8 million from local investors. It was nine years before their first purchase — a bank in Kernersville with $50 million in assets — followed by acquisitions in Asheville, Charlotte, Durham, Greensboro and Greenville, South Carolina. Self-imposed limits on real-estate lending protected it from the pitfalls that tripped many of the 465 banks that failed in the U.S. between 2008 and 2012. Having grown up in Davidson County, where so many jobs were in the fading furniture and textiles industries (cover story, May 2012), the bank knew the danger of putting too many eggs in one basket, Callicutt says.

Bank of North Carolina’s ambitions grew after it won the bidding for failed Myrtle Beach, S.C.-based Beach First National Bank in April 2010. As was common in government-assisted deals at the time, the feds agreed to assume 80% of potential losses on outstanding loans, shielding the buyers from harm. The transaction provided more than $500 million of deposits from Beach First customers, reducing Bank of North Carolina’s reliance on national secondary markets for deposits. Federal regulators frown on so-called “brokered deposits,” which are more volatile than those of local customers. Three months after buying Beach First, the bank raised $35 million, including more than $25 million from Aquiline Capital Partners. Led by Jeffrey Greenberg — the former CEO of New York-based Marsh & McLennan Cos., the largest U.S. insurance broker — it wanted a community bank in its stable of financial-services companies. It interviewed 20 management teams and spent six weeks studying Bank of North Carolina’s financials before investing, Callicutt says.

“I’ve walked in Rick’s shoes,” says Ken Thompson, the former First Union/Wachovia chief executive who joined Aquiline in 2009 as a senior adviser. Now on Bank of North Carolina’s board, he discusses strategy with Callicutt at least weekly. “You look in his eyes, and you realize how intense he is. He’s a wonderful leader, and the rank-and-file would run through a brick wall for him.” Admirers once said the same about Thompson, who succeeded Ed Crutchfield as First Union CEO and chairman in 2000 and oversaw the acquisition of Wachovia. The deal created the nation’s fifth-largest bank and the East Coast’s largest retail-banking network. Combining Wachovia’s expertise in corporate lending with First Union’s expansion into investment banking, it raised hopes that here was another Charlotte-based financial institution to rival New York’s powerhouses.

The dream turned into a nightmare after Thompson paid $25.5 billion for Oakland, Calif.-based Golden West Financial Corp. That was in 2006 — at the peak of the housing boom. Golden West’s World Savings Bank, the nation’s second-biggest thrift, specialized in exotic adjustable-rate mortgages. Wachovia, which had long prided itself on stringent credit controls, watched its mortgage loans implode along with home values in California, Florida and Georgia, harbinger of the wider financial crisis to follow. After its first quarterly loss in seven years, the board dismissed Thompson in 2008. He was replaced by former U.S. Treasury Undersecretary Robert Steel, who negotiated the bank’s merger with Wells Fargo during the height of that autumn’s credit crisis. Though the Wachovia name would remain on the Tar Heel branches until 2011, Charlotte’s dream of becoming an international financial center had died then.

Thompson, 63, splits his time between Charlotte and New York, where he monitors companies in Aquiline’s portfolio and helps pick four or five investments a year from more than 4,000 potential deals. One was BNC Bancorp, which at the time had about $1 billion in assets. A year ago, the bank sold shares to raise $72 million, including about $20 million from Aquiline, which now holds 21% of its stock. Federal banking rules limit private-equity groups to 24.9% ownership because of concerns over their influence. Last year, BNC Bancorp stock soared 116% — the best performance of any bank in the Southeast — as it swung to a $19 million operating profit from a $3.3 million loss in 2012. It was Aquiline’s top-performing investment. The fund honored Callicutt at its annual meeting in New York. He didn’t get a plaque, Thompson says, but was paid $1.96 million in cash and stock, nearly twice as much as Montgomery ever earned in a year.

 

Callicutt, a High Point native whose father was a pharmacist and mother a school teacher, cultivates friendships with banking executives across the Carolinas, establishing himself as a favored buyer if and when their boards choose to sell, says Allen Rogers, a Charlotte investment banker with Peter Browning Partners LLC. He represented Spartanburg, S.C.-based Regent Bank when BNC Bancorp acquired it in 2011. More deals are likely, he says, because some small banks can’t afford new technology and don’t have as many products as larger competitors.

Since the recession, both big and small banks must carry more capital to appease regulators fearful of another bust. BofA’s ratio of tangible equity to assets, for example, now exceeds 9%. “I never saw 9%,” McColl recalls. “I thought of it as an interest rate, never as a capital ratio. We were fighting to get 4 or 5 or 6%, and when we got to 6, we thought we had discovered America.” But less risk means less reward, and small banks struggle to earn enough to attract investor interest. “All this regulation and pressure they put on banks makes it harder for them to raise capital, so we have a catch-22. If you have too much capital, your returns go down.” But the quickest trigger for bank mergers has nothing to do with finance. “The age of the CEO is the most important factor,” he says. “When the CEO said, ‘Wait a minute, I’ve had a good time running this bank, but it’s time to get out of here, and I want to get paid,’ those were the easiest to buy.”

Callicutt, who becomes vice chairman of the Raleigh-based North Carolina Bankers Association this month, boasts of good relations with former CEOs whose banks he has bought. He employs two of them. That contrasts with Capital Bank’s purchases of banks in Raleigh, Winston-Salem and Greene-ville, Tenn. All of those deals spawned legal battles with their ousted senior executives over pay. “To be a serial acquirer and to have a seat at the table, you have to be very conscious of how you undergo every deal,” says William Wallace, a bank analyst in Baltimore with Raymond James Financial Inc. “There are different approaches to consolidation, and Rick has taken a very friendly approach. He is getting a lot of inbound calls because they are a proven consolidator.” BNC Bancorp’s fastest-growing market the last two years has been Charlotte, where it bought First Trust Bank for $35 million in 2012. That bank’s former chief executive, Jim Bolt, now is the High Point bank’s executive vice president for Mecklenburg County. “Because of the way they’ve treated their merger partners, Bank of North Carolina has gained a reputation as one of the acquirers of choice.”

“We lived in the trailer and started this thing, which gives you so much more insight into what’s going on in the company,” Callicutt says. “It’s a culture that Capital Bank can’t have. They bought all of these troubled banks, but now they don’t know what to do with them.” Marc Oken, a former BofA chief financial officer who is on Capital’s board, bristles when told of Callicutt’s comments. “Gene Taylor knows more about bank consolidation than those guys will ever know,” he says, citing the Capital CEO’s experience as a senior retail-banking executive during BofA’s rapid growth. Falfurrias Capital Partners, a Charlotte venture-capital firm controlled by Oken and McColl, invested in Capital out of respect for Taylor, McColl says. The fund, which normally buys controlling interests in companies, has since sold its stake, earning a 20% return on an investment of less than $10 million. Capital, which operates in five states, had $6.5 billion in assets as of March 31.

Callicutt doesn’t confine his criticism to Capital. “The same is true at these other banks where guys have parachuted in,” he says. He cites Jim Cherry, a Wachovia executive for more than 30 years before becoming CEO of Park Sterling Bank in 2010. “The Wachovia engine ran 24 hours a day whether Jim Cherry was there or not, but that’s not the case at a community bank. You’ve got to crank that thing every day and know when the spark plug needs changing.” Park Sterling, with 44 offices in four states and $2 billion in assets, is attracting more talented bankers and expanding methodically, Cherry says. It rebuffed private-equity groups, who often must sell their investments within five to seven years to satisfy their investor partners. “We could have raised dramatically more money if we had taken private equity. But then there would have been pressure to deploy the money faster and not as thoughtfully. If you get it, you have to put it out.” One thing that sets Park Sterling apart is its chairman, Bud Baker, who as CEO of Wachovia agreed to the 2001 merger with First Union. “Bud Baker’s credibility let us raise our money at the individual investor level rather than through private equity,” says Larry Carroll, a Charlotte financial planner and a Park Sterling director. “Institutional investors have known Bud for 20 years or more. That’s the bottom line.”

Pressure from private-equity investment was evident, Callicutt and other bankers say, in CommunityOne’s 2011 purchase of Granite Falls-based Bank of Granite, whose troubled assets — including overdue loans and foreclosed property — equaled a third of capital after the Catawba Valley’s manufacturing economy faltered. Formerly FNB United Corp., the successor to a 106-year-old Asheboro bank, CommunityOne saw its losses narrow to $1.5 million last year after posting deficits totaling $177 million in the two previous years. “Those are two smart guys [Bob Reid and Brian Simpson], but there was too much private equity chasing too few good deals,” Callicutt says. “They bought two shitty banks at once,” referring to FNB and Bank of Granite. Investors’ ability to buy banks for less than book value dissolved faster than expected because of competition for deals and an improving economy that bailed out some lenders. Reid, Simpson and Chairman Austin Adams, a former chief information officer at New York-based JPMorgan Chase & Co. and First Union, declined interview requests.

Aquiline is in no hurry to exit Bank of North Carolina, Thompson says, because it holds companies as long as 12 years. While his firm owns a fifth of its stock, he has only one of 15 board votes. “It’s much easier to hold on to companies that are growing and performing well than selling at some arbitrary time.” Callicutt says his job is to make sure profit increases 90% during the next two years over 2013 earnings to impress analysts and investors. Rising interest rates should help banks make more money from the spread between interest received from loans and paid on deposits. Bank of North Carolina also is recording fewer losses from nonpaying loans as the economy rebounds. “We knew we had a good franchise, and the tallest midget coming out of the crisis could have a once-in-a-career opportunity to do something special. It just happens we happened to be right.”

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