CommunityOne Bancorp in Charlotte, N.C., was among private equity's most ambitious and most improbable rescue efforts in the aftermath of the financial crisis.
And it seems to have worked.
Four years have passed since the company, known at the time as FNB United, secured $310 million from investors, including Carlyle Group and Oak Hill Capital Partners, to buy Bank of Granite, another struggling financial institution. The funding propped up two listless companies, buying them time to bring in fresh leadership, cut expenses and find a way to survive.
CommunityOne has produced healthier results in recent quarters, reentered certain business lines and opened loan production offices in Raleigh, N.C., and Charleston, S.C. Executives at the company, which recently bought a branch and $65 million in deposits from CertusBank, have also started to discuss their interest in buying whole banks.
The company's speedy improvement has astounded several industry observers.
"It has been a remarkable turnaround," said Lee Burrows, chief executive of Banks Street Partners, an Atlanta investment bank. "They put together two relatively rural franchises, moved the bank to Charlotte, cleaned up bad loans and recovered their deferred-tax asset. That's a lot of work in a short amount of time."
The progress is even more impressive given the level of skepticism that existed at the outset.
"A number of folks didn't expect it to work," said Bob Reid, who joined CommunityOne in conjunction with the recap and became its chief executive last October.
"It is tough to live in an impaired environment for long," Reid added. "You have a totally different mentality when you're impaired where you can't invest in people, systems and the community."
Impaired may have been a generous assessment of the condition of CommunityOne Bank and Bank of Granite in 2011. Both banks were operating under enforcement orders. Nearly a quarter of CommunityOne's loans and about 11% of Bank of Granite's were at least 90 days past due, according to regulatory data.
CommunityOne had a negative 6.15% Tier 1 risk-based capital ratio; Bank of Granite's Tier 1 risk-based capital ratio was 3.82%.
Still, a number of factors improved the banks' odds of survival, Reid said. Each institution had "a good stable deposit base" in terms of core funding that made it attractive to longer-term investors. Several bankers, including Wachovia veterans Reid and Brian Simpson, were recruited to oversee the merger and rescue efforts.
The banks also secured the support of private equity and their regulators. Oak Hill and Carlyle signed on as investors and the new management team spent about a year getting representatives from the Federal Reserve Board and Office of the Comptroller of the Currency familiar with a rather complex series of transactions.
In the end, the regulators grew comfortable with the situation, realizing that "it was better than having taxpayers save the banks" or running the risk of having two bank failures, Reid said.
CommunityOne also held about $52 million in capital from the Troubled Asset Relief Program. The company eventually negotiated an agreement with the Treasury Department to convert agency's preferred stock into common stock at a substantial discount. The Treasury sold the converted shares in May 2014 to private investors.
From that point on, it was up to management to find ways to stretch capital as it addressed legacy issues. Expense savings tied to merging the banks "gave us time to ride out the cleanup," Reid said.
Management aggressively tackled CommunityOne's problematic loans and closed branches. For instance, the number of branches has fallen 30% since the recap, to 45 locations. The process wasn't pretty; CommunityOne lost more than $275 million from early 2010 to mid-2013.
Since then, the company has reported earnings of nearly $162 million, including the recapture of a sizable deferred-tax asset. Nonperforming loans to total loans fell below 5% in mid-2013 and stood at 1.4% as of June 30. The company's risk-based capital ratio is 14.28%. The company also changed its corporate name from FNB United to CommunityOne and was freed from its OCC order in 2013.
"There was a nice sigh of relief" when the company turned the corner, Reid said. "Fixing something that's broken can have an adrenaline rush, but it isn't that fun."
CommunityOne has shifted gears to focus on expansion, raising another $25 million late last year through a private placement of common stock to accredited investors. The offering priced at $10.56 a share, compared to an adjusted $16 a share associated with the recap. (The adjustment takes into account a 1-for-100 reverse stock split that occurred around the time of the recap.)
Management has five objectives for this year: increase loans, add core deposits, enhance fee income, maintain expense discipline and explore M&A opportunities. The company resumed making commercial real estate loans in 2013 and it returned to originating Small Business Administration loans earlier this year.
Cost-cutting has continued. Simpson left the company in September 2014 as part of a larger effort to reduce management and expenses.
"As you get better healed, you get better pricing from vendors," Reid added. "It also lets you consider more expansion. We're now able to aggressively grow our business."
Reid also wants to open more loan-production offices — and perhaps pursue acquisitions — in markets with "better-than-average demographics and good small and midsize businesses." The company is interested in cities such as Virginia Beach, Norfolk and Richmond in Virginia, along with Greenville, S.C.
Pricing could be an issue as Reid aims to remain disciplined. The market for M&A in the Carolinas is "frothy," he said, noting that many banks are selling at 150% to 200% of tangible book value. "That would be a pretty hard deal for us to swallow."
CommunityOne could still find opportunities, particularly among banks with assets of $200 million or less that may be considered too small for the region's larger acquirers, Burrows said.
"Pricing for smaller banks could be closer to 130% of tangible book," he said. "For certain targets, CommunityOne could be the first choice, and Reid gets A-plus ratings for his experience and bedside manner."
Another thing to look out for is the role that private equity will continue to play at the company. A number of other private equity firms have exited the banking industry, and CommunityOne has filed the necessary documents to let Carlyle and Oak Hill sell stock. But both firms participated in last year's private placement, and neither has shown an interest in paring back their stakes.
Representatives for Carlyle and Oak Hill declined to comment.
Reid, for his part, declined to discuss the prospects of either firm cashing out.
"We have a really good relationship with this group," Reid said.
Private equity "is always going to look opportunistically" at its investments, he added. "There are certainly other industries that are presenting opportunities, but we were looking for folks with patient money."
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Corrected September 14, 2015 at 11:56AM: In the Sept. 14 issue, an article, "Two Banks and a Rescue Plan that Beat the Odds," didnt account for a 1-for-100 reverse stock split that took place around the time of CommunityOne's recapitalization and would have valued shares sold to investors at $16 each.