Put two ailing banks together and conventional wisdom dictates you might have twice the problems. You might also have a very attractive target for private equity.
In North Carolina, for example, former First Union Corp. executives have announced plans to rescue the insolvent FNB United Corp. in Asheboro and the troubled Bank of Granite Corp. in Granite Falls. The transaction calls for the $2 billion-asset FNB United to receive a $310 million equity infusion to coincide with its purchase of the $987 million-asset Bank of Granite. So far, FNB United has $77.5 million in commitments each from Carlyle Group and Oak Hill Capital Partners.
By the fall, if all goes to plan, North Carolina will have two fewer troubled banks — and another potential consolidator.
Brennan Ryan, a partner at the law firm Nelson Mullins, said more deals like this are developing because struggling community banks and their dealmakers have realized that it is easier to attract investors to larger organizations.
"The key is that you need to gather a critical mass to make it interesting for investors," Ryan said. "How do you get large enough to get these investors in the door? In some cases, you pair up."
While several companies have used private-equity-backed deals to narrowly escape bank seizures, the idea of bundling multiple stragglers also makes sense given the potential efficiencies, said Martin Friedman, a portfolio manager of FJ Capital in Arlington, Va. "It is basically a simultaneous roll-up," he said. "It is not dissimilar from other private-equity deals, except the immediate scale that you get."
Jeff Adams, a managing director at Carson Medlin, a division of Monroe Securities, said the banking companies are a great fit and would have been likely partners when they were healthy. "It is a logical combination. ... There are significant cost saves to be had," he said. Adams said the deal is likely welcomed by regulators who may have been plotting seizures of the two banks.
"FNB United had negative capital, so you have to believe they were on the short list for failures, and Bank of Granite likely wasn't far behind," he said. "It is a private solution, and it brings another market consolidator into the picture, which the Southeast needs."
The companies said Wednesday that Bank of Granite would eventually be merged into FNB United's CommunityONE Bank, but that the two would operate as separate banks for an undefined period after the deal's expected third-quarter completion.
The combined company would be led by two former First Union executives. Brian Simpson would serve as FNB United's chief executive, and Bob Reid would serve as president. The new executives and the two companies did not return calls seeking comment.
North Carolina has seen a good amount of veteran bankers teaming up with private-equity firms to do deals, Adams said. "You have a lot of these 'big bank' guys getting together to hatch new banks," he said, though he wondered about their ultimate game plan. "I am guessing these are going to be roll-up and sell strategies, because most of these guys have never worked in banks that were anything less than $50 billion in assets," Adams said.
The investors are likely keeping the banks separate as they sort problems since regulators might be unwilling to combine two troubled banks.
Ryan said regulators are typically looking for strong banks after deals close, so keeping them separate as problems are sorted out makes sense. "It is a great transaction, but it is a complicated one," he said. "Combining two troubled institutions is not something [regulators] would typically approve, so you have to convince them otherwise. Clearly, they have the capital coming in, they have new management, but they are going to need to address the burden of the problem assets."
At Dec. 31, both banks were significantly undercapitalized. CommunityONE's problem assets made up nearly 20% its portfolio and were getting worse, said Karen Dorway, the president of BauerFinancial, a bank-ratings firm in Coral Gables, Fla. Bank of Granite's problem assets made up 8.7% of total assets, but were improving.
In December, SunTrust Banks Inc.'s bank agreed to convert half of a $15 million loan to the company to preferred equity to help boost capital, but gave FNB United until June 30 to raise $300 million or risk defaulting.
Dorway estimated that CommunityONE needed about $77 million to become well-capitalized based on fourth-quarter data, and Bank of Granite needed about $26 million. "On a combined basis, $310 million would be a huge boost and would give them some room to work with," she said.
Also helping its capital base is the Treasury Department, which indicated in an April 6 letter its willingness to convert the $51.5 million in preferred shares it purchased from FNB United through the Troubled Asset Relief Program into common equity.