Hampton Roads Bankshares is still in recovery, but already it offers a possible cure for the indigestion banks and their private equity partners are giving each other these days.
Two recent moves at the Norfolk, Va., bank — the announcement of plans to raise as much as $86 million in a stock offering, and the removal of the "interim" before Douglas Glenn's chief executive title — are signs it has the strong support of its biggest shareholder, Carlyle Group LP, industry observers say.
Picking managers whose moves inspire confidence is crucial to placating big investors, many of whom are anxious to see their investments in banks made in recent years pay off soon. Glenn is one of those managers, observers say.
"This guy has the confidence of the Carlyle Group," says Kent Engelke, the chief economic strategist at Capitol Securities Management Inc. in Richmond, Va. "Everything these days is about raising capital and maintaining investor confidence."
Glenn, 45, who had previously been Hampton Roads' general counsel, succeeded John A.B. Davies Jr. six months ago. Davies resigned last year to return to his consulting practice. Both executives had to deal with fallout from an acquisition that overextended the company and an economic downturn that had led the several quarters of losses.
Hampton Roads bought Gateway Financial Holdings Inc. in September 2008, after the seller's capital was depleted by securities writedowns tied to holdings in Fannie Mae and Freddie Mac. That acquisition, coupled with the stagnant economy, produced headaches.
"The growth alone would have been a challenge," Glenn said in a May 2010 interview with American Banker. "The fact that it happened in the teeth of the economic downturn just magnified those challenges."
Thom Dix, the $2.2 billion-asset company's treasurer, would not comment, and he said that Glenn was unavailable to comment. Efforts to reach representatives of Carlyle Group, which in 2010 agreed to infuse $73 million into the once "critically undercapitalized" company, were unsuccessful.
Carlyle Group owned 23% of Hampton Roads, as of Dec. 30, according to regulatory filings. New York investment group Anchorage Capital Group LLC is its second-largest investor with 21%, followed by CapGen Capital Group LP at 17%. Hampton Roads' stock has fallen 87% over the last year, dropping from $19.75 per share on Feb. 22, 2011, to $2.65 per share at the close of trading on Tuesday.
Hampton Roads has pared away many of the assets it gained from Gateway, unloading branches in Charlottesville and Richmond, Va., and an insurance business. Last year, Hampton Roads said it was looking to sell its mortgage business, though management has offered no update on that effort.
The company has also decreased total assets and its loan portfolio. Total loans outstanding at Dec. 31 fell 23% from a year earlier, to $1.5 billion. The company in past regulatory filings has touted its focus on "limited origination activity, resolutions of problem loans and chargeoffs."
"They've written down everything but the kitchen sink," Engelke says.
The plans for a stock offering reflect Hampton Roads' need to improve its risk-based capital ratio, said Lee Burrows, chief executive at Atlanta-based Banks Street Partners LLC, an investment bank that advises community banks.
"I'm sure a stock offering wasn't their first choice, but they need to raise capital to play offense, so they're not playing defense anymore," said Burrows, who's not involved with the Hampton Roads stock offering.
The risk-based capital ratio for the company's Bank of Hampton Roads unit fell to 9.23% as of Dec. 31, according to the bank's most-recent call report. That's below the 10% threshold to be considered well-capitalized by regulators.
The company's turnaround story is far from complete, though the 2010 capital raise reversed several quarters of negative tangible common equity. Hampton Roads has lost more than $250 million over the past two years, including a $21.4 million loss in the fourth quarter. (The company's tangible common equity has also slipped, dropping to 5.08% at Dec. 31 compared to 6.23% a year earlier.)
Henry Custis, who became the company's chairman in 2010, credited Glenn for playing a lead role luring $275 million in capital from Carlyle and other private equity funds. "Since then [he] has been working tirelessly to refocus the company on our community banking franchise, which we firmly believe is the right path to return to profitability," Custis said in a Feb. 13 press release.
Hampton Roads used an executive search firm to review potential CEO candidates before sticking with Glenn, who was an outside director before being recruiting to join the company in 2007.
Hampton Roads is well-positioned to use the capital it has raised to gain market share in southeastern Virginia, Engelke says. The company has 3.1% deposit market share in the area around Virginia Beach, according to June 30 data from the Federal Deposit Insurance Corp. Wells Fargo & Co. has the top market share, at 23%, and TowneBank, based in Portsmouth, is the biggest Virginia-based bank with 13.9% market share.
Hampton Roads also has an agreement to sell seven North Carolina branches to ECB Bancorp Inc. in Engelhard, N.C. ECB, however, recently said that plans to raise $80 million to fund the acquisition stalled after regulators had not yet approved a potential investor from participating in the $942 million-asset company's planned stock offering. (The branches were obtained by Hampton Roads when it bought Gateway.)
Hampton Roads probably decided they needed to move on a capital-raise, once the ECB agreement looked like it was in jeopardy, Burrows said.
"Hampton Roads is a nice franchise and they can be aggressive again, but they need to restore capital" so regulators will allow Hampton Roads to make acquisitions, Burrows said. "The only way they can do that is to shed bad assets, or raise capital."