A sense of community

Scott Custer chooses a shallow course when asked to chart his career, describing his ascent from Wachovia trainee to RBC chief executive by rattling off a few banks and titles. “That’s trying to give you the quick snapshot of everything that I’ve done,” he says, sitting in the headquarters of VantageSouth Bank — and its parent, Crescent Financial Bancshares Inc. — in Raleigh. “There’s a lot you could fill in in between, but that would be boring.” Maybe so, but the bank he leads as CEO has been anything but dull lately — its recent acquisition of Engelhard-based ECB Bancorp Inc. nearly doubled its assets to about $2 billion. Even excluding that deal, VantageSouth leapt 32 spots to No. 18 on this year’s Financial 100, Business North Carolina’s annual ranking by revenue of the largest banks, thrifts and credit unions with headquarters in the state. (Mergers that closed in 2013 are not included.) That’s the largest improvement of any financial institution on the ranking, compiled by New York-based SNL Financial LC. More important, Custer and VantageSouth are helping redefine community banking in the state — for better and worse.

Traditionally, the Federal Deposit Insurance Corp. reserved the “community” designation for banks with no more than $1 billion of assets, but it recently upped that ceiling tenfold. Moreover, it concedes, inflation and shifting bank structures make the definition harder to pin down. Tony Plath, associate professor of finance at UNC Charlotte’s Belk College of Business, has a simpler way of putting it: “The community bank as we knew it is officially dead.” Its demise is a result of slipping capital and revenue, particularly in places with high unemployment. “Little banks as a viable business model going forward in their ability to attract capital from shareholders is just gone,” he says. “The only way to survive is to get bigger, and the only way to get bigger in this market is to acquire other little banks that are similarly situated — that are also suffering.” VantageSouth and others of its ilk are amalgamating struggling community banks under a single name, hoping to create institutions large enough to handle increased federal regulations for capital while maintaining a small-town feel. “You could create a place where the whole might be greater than the sum of the parts,” Custer says.

He is certainly familiar with suffering banks. After studying business and economics at College of William and Mary in Williamsburg, Va., he skipped around, working for Wachovia and First Union before joining Centura Bank in 1988. He became CEO in 2004 — three years after Toronto-based Royal Bank of Canada bought it — and led its expansion from 270 to 430 branches. In 2006, it broke ground on a $136 million headquarters in Raleigh, where it moved from Rocky Mount. Three years later, it was the fifth-largest North Carolina-based bank by assets, with almost $29 billion, but it had become a drag on its Canadian parent due in part to bad loans in Georgia and Florida. In the second quarter of 2009, it lost $110 million, its fourth straight quarterly loss (RegionalReport, November 2009). Custer, then 52, retired at the end of October. “It’s a good time for me to come up for air and see what else is out there,” he told The (Raleigh) News & Observer.

It didn’t take him long to spot something. At RBC, he had noticed a lack of midsize banks in North Carolina. At the end of 2009, Troy-based First Bancorp had $3.6 billion of assets and Raleigh-based First Citizens BancShares had $18.5 billion. There wasn’t one institution between them. To fill the gap, Custer teamed with investor J. Adam Abram, president and CEO of Bermuda-based Franklin Holdings Ltd., parent of Raleigh-based James River Group Inc. They had been introduced through mutual friends and together launched Piedmont Community Bank Holdings Inc. in Raleigh in late 2009. “We believed we had the capital and resources to build a $4 billion to $6 billion dollar company,” Custer says.

He had the right management experience, and Abram had access to money, though Custer won’t reveal how much they initially raised. “Let’s just say it was sufficient for us to make four investments.” The first of those came in February 2010, when Piedmont purchased Burlington-based VantageSouth for $7.7 million. The following year, it bought Salisbury-based Community Bank of Rowan for $16.5 million and Crescent Financial Corp. in Raleigh, parent of Crescent State Bank, for $75 million. Last year, it merged them under the VantageSouth banner, which is a subsidiary of Crescent Financial Bancshares Inc. (Piedmont owns Crescent.) It did the same with The East Carolina Bank, ECB’s subsidiary, which it acquired in April for $40.6 million. “The common characteristic,” Custer says, “was that they all needed capital. They needed resources. They needed some management help, and it all goes back to what I said we could bring to the table. Each of these banks fit that profile.”

Many North Carolina banks need help — 14 are on New York-based Trepp LLC’s watch list for failure, and though the financial-analysis provider doesn’t reveal identities for fear that would cause panic, not one has more than $1 billion of assets. But there have been plenty of suitors. Asheboro-based FNB United Corp. acquired Granite Falls-based Bank of Granite in 2011 (cover story, June 2012) as part of a $310 million recapitalization. It will eventually fold it into its CommunityONE Bank. Charlotte-based Park Sterling Bank Corp., the parent of Park Sterling Bank, bought Gastonia-based Citizens South Bank in October 2012 for $83.2 million, catapulting 26 spots on the Financial 100 in the process. As Plath points out, much of the money pumped into these institutions is “out-of-town equity.” For instance, FNB United’s largest investors were Washington, D.C.-based The Carlyle Group and New York-based Oak Hill Capital Partners, both of which committed $75 million. Some North Carolina banks have benefitted from acquiring troubled ones in other states. First Citizens, No. 3 on the Financial 100, has bid on 17 failed institutions since 2009 — seventh-most of any U.S. bank — and has acquired six of them, according to SNL.

That kind of equity won’t be patient for profit. “The thing that made community banking unique around the state and around the country was that every community bank was a little bit different in credit standards, appetite for risk,” Plath says. “If you were a business that was turned down by bank one or bank two, you could always pick a different bank and expect to find a different reception. That’s not the case anymore. As the banks get bigger, they get more professionally managed. That creates homogeneity in terms of lending standards and in terms of business models.” But that’s beneficial, at least to banks, which must be more geographically diverse to limit the exposure of their loan portfolios. “What killed Bank of Granite was that history they had in Granite Falls, and they didn’t say no to old-line Granite Falls businesses when they should have.”

For now, the new community-banking structure is masking sluggish economic growth. Because of the consolidations — along with better management and the elimination of redundancies — the Financial 100’s combined net income has increased 648.9% since 2011, even though revenue has fallen 1.2%. That structure should continue to hide the stagnant loan market for at least one more year. “You can’t make money based on refinancing mortgages when all the refis have already taken place,” Plath says. “And you can’t grow profit through cost cutting, because you’ve already become as efficient as you can by reducing employees. So the only thing that’s left for the banks to continue to show profitability growth in a market where there’s just no loan growth at all is combining with another institution and gaining efficiencies by gaining scale.”

Top 10 (by revenue in $M)

1.) Bank of America (Charlotte) $98,897.4
2.) BB&T (Winston-Salem) $10,580.9
3.) First Citizens BancShares (Raleigh) $1,163.7
4.) State Employees’ Credit Union (Raleigh) $846.1
5.) First Bancorp (Troy) $153.3
6.) BNC Bancorp (High Point) $137.5
7.) Coastal Federal Credit Union (Raleigh) $117.6
8.) Southern BancShares (Mount Olive) $102.8
9.) Truliant Federal Credit Union (Winston-Salem) $89.8
10.) Square 1 Financial (Durham) $82.8