Community banks like to tout the virtue of being on Main Street, not Wall Street. It’s all part of a grand marketing plan to differentiate themselves from the mega-banks that dominate the nation’s financial infrastructure.
But the recession and loose lending practices by many of these small banks left them weakly capitalized, burdened by a mountains of bad loans that brought in restrictive federal oversight. Now, they’re starting to find rescuers in an unlikely group: private equity groups.
Last week, the Carlyle Group and Oak Hill Capital Partners played matchmaker in a wedding between Bank of Granite (GRAN) and FNB United (FNBN), two struggling banks that made their bones in the mill towns and foothill communities of North Carolina. The merged bank will have $2.9 billion in assets and 63 branches. It’s the latest in a string of investments by Carlyle, which has used similar plays with small banks in Georgia, Virginia and Hawaii.
The all-equity deal works like this: Carlyle and Oak Hill will each invest $77.5 million in the new bank, and each will own just under 25% of the stock (which avoids having to file as a bank-holding company). To make it work, they have to find another $155 million from other investors and also get the okay for the recapitalization from federal regulators.
Companies like Carlyle and Oak Hill haven’t become wealthy by throwing good money after bad, so for them and their partners to put up more than $300 million on two companies with a combined current market cap of around $20 million indicates there is more here than meets the eye.
Many community banks are caught if not in a death spiral, then at least a death whirlpool. They’re saddled with non-performing assets and operating under federal consent orders that limit their ability to make new loans. They can only bootstrap so much. That’s not exactly a welcome mat for the average investor. But look past that wreckage and there’s potential with that risk.
At the heart of any deal involving a troubled bank is corralling damaged assets. Carlyle’s team, led by Jim Burr, has a strong reputation for knowing which bucket to put the assets, limiting surprises on the back end. In February, Carlyle and Burr just closed out a similar deal (done in partnership with Anchorage Capital Group) with Hawaii’s Central Pacific Financial Corp.
“They’re going fishing with Carlyle as bait,” says Tony Plath, a banking professor at UNC Charlotte and a long-time observer of North Carolina’s hypercompetitive banking scene. Carlyle’s involvement, he says, sends a signal to other investors that the proposal has been well-scrubbed. The goal, he says, is to get a deal without regulator assistance. “If it goes to the FDIC, then anything can happen.”
In their heydays, Bank of Granite and FNB were well-regarded banks that carved out niches in the blue-collar communities ringing North Carolina’s major metro areas. They survived the Great Depression, but got stung in the Great Recession as the construction boom ended and small manufacturers closed their doors.
To that extent, the private-equity bet — and others like it — is a belief that the worst is over. Carlyle isn’t talking about its game plan, but its management team at the combined bank is filled with old hands at Wachovia (WFC) with a splash of Bank of America (BAC). Most observers expect the bank to close smaller branches, particularly in communities where the two banks overlap, and shift resources to the Greensboro and Charlotte markets, where the potential for growth is much stronger.
“At the end of the day, this has to be an operating story,” says Chris Marinac, with FIG Partners in Atlanta, which specializes in bank deals. One challenge for Carlyle’s team and the others is the intellectual shift from running money-center banks to a community mindset, where the action is much closer to the ground. “I think it can be done, but there’s a smaller support staff. Sometimes, you’re the guy who also has to take out the trash.”
With so many Americans skeptical about the ethics of Wall Street, being owned by private-equity firms isn’t exactly a selling point for a community bank. But at the end of the day, good service and good location are what matter most. And if Carlyle and company can get the new bank on sound footing and properly positioned in the marketplace, they’re likely to exit the scene in a few years and turn over the keys to a mega-bank wanting quick access to North Carolina’s suburban growth.
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