Cary Street Partners’ Tom Tullidge, quoted in banking industry M&A article

From: SNL Financial
M&A Heating Up in the Old Dominion
4/15/2011

With its relatively sound asset base and healthy economy, Virginia is drawing increasing attention from investors looking to build a regional banking presence.

Tom Tullidge Jr., a managing director at Cary Street Partners LLC, said several industry players are talking about deals in the state.  “Some of the weaker banks are going to have to do something,” he said.  “There are people evaluating the need for a larger Virginia-based bank.”

Tullidge named North American Financial Holdings Inc. Chairman and CEO Roger Eugene Taylor as one industry executive eyeing deals in the state.   The former Bank of America Corp. senior officer is now chairman, president and CEO of Raleigh, N.C.-based Capital Bank Corp. and unit Capital Bank, following an investment of approximately $181 million into Capital Bank Corp.

“He’s certainly someone that has ambitions for a larger regional bank,” Tullidge said.

Tullidge also pointed to Raleigh, N.C.-based Piedmont Community Bank Holdings Inc., which took a majority stake in Burlington, N.C.-based VantageSouth Bank and announced plans to acquire Salisbury, N.C.-based Community Bank of Rowan in 2010. In February, it agreed to acquire a majority stake in Cary, N.C.-based Crescent Financial Corp.

In addition, there are a number of private equity groups actively looking to consolidate banks in the state, Tullidge said, pointing to Stone Point Capital LLC and Lightyear Capital LLC. Several larger independent community banks are also on the hunt. “Some of the largest community banks in Virginia are in the $3 billion-plus range. They are actively looking at a number of banks in the $400 million to $700 million range,” Tullidge said.

In a recent interview, Charlotte, N.C.-based Park Sterling Corp. CFO David Gaines said Virginia and the Carolinas present a competitive opportunity because there are few traditional regional banks, which he defined as being within the $5 billion to $10 billion asset range, based in these states. “[T]here is a unique structural opportunity to have a traditional regional bank headquartered here — one that is small enough that it has very much a community bank feel to its clients, but large enough that you’ve got a diversity of product lines, a diversity of geography, a diversity of revenue sources,” Gaines said.

Another Charlotte-based bank that has voiced interest in expanding its operations by purchasing banks in Virginia is Carolina Premier Bank, which plans to raise $25 million through a public offering in the fall, followed by a second offering of about $50 million in 2012.

President and CEO John Kreighbaum told SNL the timing of future acquisitions will be based on the planned capital raises, for which the company is still in the process of interviewing investment banking firms. “This is not a long-term, pie-in-the-sky plan. We would hope to push it along pretty quickly here,” he said.

Kreighbaum said Virginia is attractive because it is a healthier, more stable market than the Carolinas and because it is less concentrated. “It’s a great market. Certain sections of it are phenomenal. We feel that the Charlotte market may continue to remain status quo for a longer period of time than we can wait,” he said.

Virginia’s most attractive sections include Richmond in the south and the areas surrounding Washington, D.C., in the northern part of the state, Kreighbaum said. He added that he hopes to find a partner in the asset range of $300 million, which would boost Carolina Premier to roughly $500 million in assets.

Kreighbaum said there is “no question” that he is more interested in traditional M&A than in FDIC-assisted deals. “We are pursuing the tried-and-true acquisition strategy of looking for banks where our intentions will not be diverted for a period of months or years in attempting to overcome credit quality challenges,” he said. Carolina Premier will consider banks that have “some scratches and some dents as it relates to asset quality,” but this is not the main driver of its acquisition strategy, Kreighbaum said.

Steven Huntington, a senior vice president of Carson Medlin, the investment banking division of Monroe Securities, said Virginia has fared much better than the majority of the U.S. as far as asset quality is concerned. The state saw just one failure in 2009 and one in 2010. “In Virginia, you see the banks that are going to be making acquisitions will have to look at some banks that are not failing but have taken some big lumps and are sort of limping along and will never get to the size necessary to be really profitable,” Huntington told SNL.

Nonetheless, Virginia is beginning to see some deterioration, which could lead to consolidation in the state. Huntington said small banks will struggle to grow as overhead costs and regulatory burdens continue to increase. “I would think the acquirers in Virginia are going to be going after those smaller, bruised and battered but still-surviving banks and try to convince them that they need to hitch their horse to a bigger wagon,” he said.

According to SNL data, seven Virginia-based banks and thrifts had Texas ratios of greater than 100% in 2010. Four of these also had Texas ratios above 100% in 2009.

Banks within Virginia have also expressed interest in doing deals in the state. After Cordia Bancorp Inc. completed the acquisition of a majority stake in Midlothian, Va.-based Bank of Virginia ($209.2 million) in December 2010, President and CEO Jack Zoeller said the deal would serve as a springboard for more acquisitions in Richmond and throughout Virginia.

In an interview with SNL, Zoeller said the M&A landscape in Virginia is more interesting now than it was a year ago, as there is clearly more stress on Virginia banks. “There has been more difficulty at banks, there’s greater need for capital, there’s greater need for management, there’s greater need for workout, and some banks will probably fail. Others may need help in one of those areas,” he said. “Those are all indicators of potential M&A activity down the road.”

Zoeller said Cordia will not be seriously considering acquisitions until 2012 at the earliest. “When you invest in a bank as Cordia did in Bank of Virginia, you’ve got an obligation to all of the parties to get your arms around it and fix up what needs fixing and have it running well before you go on to the next phase,” Zoeller told SNL.

Zoeller said he was originally drawn to Virginia because per capita income in the state was materially higher than in West Virginia and North Carolina, and above the national average. Virginia also had faster population growth and lower unemployment rates than neighboring states. “All of these were really good indicators both of demographics and the economy. When Virginia’s unemployment rate goes up a fair bit, as it has in the last year and a half, it’s still going up into the 7% [range] rather than up into the 9% [range],” he said.

Another potential acquirer in Virginia is Richmond-based Xenith Bankshares Inc., which in March announced plans to commence a public offering of 7 million shares of its common stock. The company said it intends to contribute a substantial amount of the net proceeds from the offering to its unit Xenith Bank, which may use the funds for acquisitions.

“They didn’t necessarily need capital for their existing operations. They had plenty of capital. But they were looking to build their war chest,” Tullidge said.

Ultimately, Virginia’s banking landscape will largely be determined by acquirers’ ability to raise capital — not an easy undertaking in the current environment. “Strong banks can raise capital. There is clearly a dichotomy in the market,” Tullidge said. “The strong who really don’t need capital can find it if they want to be acquisitive. There are people looking to back it.”

Christina Twomey
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