To call North Carolina a competitive market is an understatement.
A pair of large banks Bank of America (BAC) and BB&T (BBT) call the state home, and several regionals from out of state operate there, too. Powerful private-equity groups back at least a half dozen N.C.-based community banks.
One of those PE-backed players, NewBridge Bancorp (NBBC) in Greensboro, went from a struggling company to an aspiring consolidator last year after raising $56 million. The $1.8 billion-asset NewBridge used the funds to clean up its loan book and announce two in-state acquisitions Security Savings in Wilmington and CapStone Bank (CPSE) in Raleigh.
In a wide-ranging interview, Pressley Ridgill, NewBridge's president and chief executive, and David Barksdale, chief strategy officer, discussed those acquisitions, their strategic direction and the intense competition for making loans in North Carolina. Here is an edited transcript.
What are NewBridge's biggest challenges and opportunities?
PRESSLEY RIDGILL: The biggest challenge for everyone is the net interest margin and the rate environment we're living in. I keep thinking each year it is going to get better, and it seems like I'm always wrong on that. Deposit rates are down so low, and there is really no room to go down there. Everyone is feeling a squeeze on the loan side. While we're very fortunate that we've had good loan production most of this year and it has come on strong in the last couple of quarters the yield on those loans are less than the things that are rolling off the books. So we're all fighting that. And there is still some interesting pricing from some of our competitors. We're seeing some opportunities that we are walking away from just because we don't think the structure makes sense for us.
DAVID BARKSDALE: The secondary challenge is getting revenue growth in a declining rate environment. Industry loan growth is still not robust. Noninterest income is seeing a decline because of a drying up of the refinance market. Traditional fee banking income is under pressure from a regulatory standpoint. So the only other place you're going to look is expense control. We've been through rounds and rounds of expense-control measures. How much more can you go?
What types of deals are you passing on?
RIDGILL: It is really about extending the duration of [commercial] loans. If somebody is willing to go out 10 years at a rate that we think is unacceptable that's a lot of what we see. We are back in that five- to seven-year term, which is about as long as we would like to commit to, though we do have relationships where we go longer [if we know the borrower]. We'll take some interest rate risk, but if you do that you can't take the credit risk. You have to be sure about the quality of your client.
BARKSDALE: And you're starting to see the big banks play down in the community banking space more than they used to. They can put out rates, terms and conditions that we're unable to match. We see things like Libor plus 175. Those are some of the deals that we've had to walk away from.
What are your plans for statewide expansion?
RIDGILL: We decided that for our franchise to be in the four largest [markets] in North Carolina would present us with good opportunity for growth. We're well-established in the Piedmont Triad [Greensboro, High Point and Winston-Salem]and we were already at the coast in Wilmington. Over these last two years we have moved into Charlotte and Raleigh. That is where we decided that a lot of our focus needed to be.
What kind of business are you targeting in Raleigh and Charlotte?
BARKSDALE: We continue to focus on C&I-relationship type of banking, like everyone. You are going to focus on small to midsize business. We've also been fortunate to have room in the commercial real estate buckets. We're not going to be doing any [land-acquisition] loans right now, but we've been looking at [new home] construction with our builder-finance group and a very tightly defined client mix. And we added a person in Raleigh and Charlotte to that team. We've been able to differentiate because not many folks are looking to get into vertical construction. And we're looking at true commercial real estate where we're doing income-producing properties. We hired two CRE specialists; one is in Charlotte and the other is in Wilmington. With that book you're doing larger deals which gets loan growth going quicker.
RIDGILL: Those CRE lenders are not just covering Wilmington and Charlotte. The one in Charlotte has done some stuff in Charleston. It covers a rather big area. We can leverage that expertise in other markets.
What would be the ideal loan mix by market?
BARKSDALE: The bulk of our business is still in [central North Carolina]. We have $175 million [in loans] around Wilmington excluding Security Savings. We'll go from being a $50 million bank to a $400 million bank in Raleigh with the CapStone deal. Charlotte, which has some CRE stuff from outside the market, was just south of $100 million at the end of the third quarter.
RIDGILL: When you look down the road a little bit, we think it would make sense over time to have a $1 billion bank in Raleigh and a $1 billion in Charlotte. We're already a $1 billion bank here in the Piedmont Triad. So we're willing to see it grow. The greater Wilmington market, though it may not be quite at $1 billion, will continue to grow. When you add it all together we could be something in the $5 billion range in the next few years.
How did the Security Savings deal develop?
RIDGILL: It is very unique. We can't find any other deal like it across the country. You see an institution that was over 100 years old but a mutual and had no way to raise capital on their own unless they converted to stock. And their exposure was all coastal, so obviously their credit book had been hurt really badly. They had done a lot to clean that up but then the only way [for them] to take additional charges would have involved using earnings that were pretty much nonexistent because of increased credit costs. They had gotten into a situation where the options weren't really good. They really could have failed at some point.
The timing worked well for us. We raised our capital last year and finished our own internal cleanup and began looking at our vision of making NewBridge a consolidator of choice. We saw an institution that had a very good deposit base and I'm a big believer that deposits are vital to a community bank. We analyzed it and got comfortable with the credits they had on their books we spent a lot of time doing our due diligence. I never thought I'd end up saying that getting good at cleaning up credits would be an asset for a bank but I think it is for us. A lot our own cleanup was in that coastal market. That's how we got comfortable with the right marks.
Who spearheaded this deal?
RIDGILL: Security Savings had engaged an investment banking firm to help them. It was being marketed in a sense, but there was limited interest. I think some people took the approach of standing back to let it fail and bid through the Federal Deposit Insurance Corp. We decided that it would be better for us to be in charge of the process. We were not in it for [a one-time gain from the FDIC]. We were in it for the long-term value it would create.
BARKSDALE: That team down there is unbelievable. Every time they downsized, someone had to wear another hat. They all just picked up more duties. And there were working through those problem credits and were coming into work every day ready to do battle. That group has been more loyal and more hard-working than any group we have come across in a long time. And now they have the right to go out and grow the bank.
Is there capital remaining for more deals?
RIDGILL: The good thing about Capstone is that it really strengthens our capital ratios they were very well-capitalized and had even stronger numbers than ours. That will be a plus as we close that one, hopefully around the end of the first quarter. Then it gets back to earnings and if there's another opportunity for a clean bank where we're issuing stock at above book value levels that could create additional capital. I think we're fortunate that, if we needed to raise more capital, I feel like it is available to us. I don't really see capital as a constraint.
Are there acquisition opportunities in North Carolina?
RIDGILL: There are still banks trying to figure out what the future is for them. I think there are some opportunities. There are not as many to acquire down in Charlotte, just a couple of community banks that are smaller than CapStone. That's a market we'll have to grow out more [organically]. In Raleigh, we'll want to absorb CapStone and then take a look. You'll see us get all this pulled together and see the numbers settle down a little bit.
BARKSDALE: While we're certainly concentrating on North Carolina, there are a number of markets that we can drive to today that might make sense. And while we're pursuing an organic or M&A strategy we also feel like we have a good success formula for loan production offices. So there may be other markets out there to support [an LPO] before we build out organically or look at M&A. We want to go into overbanked markets because they are overbanked for a reason they are good markets.
RIDGILL: We are also looking at disruptions. In South Carolina, you've got SCBT (SCBT) and First Financial coming together to create a $7 billion-asset bank, and there are probably some people who didn't end up in the same seat [after that deal closed]. You have a similar situation in Virginia with StellarOne (STEL) and Union First Market (UBSH). So you start looking at markets and Richmond is a good-sized market. Charleston is booming.
Several North Carolina banks have big private-equity investors. Are there benefits to having those investors?
RIDGILL: We have some private-equity money but, from a voting percentage, nobody is over 9.9%. A lot of ours took positions under 5%. As we went through our last capital-raising process, we had several that would have loved to have taken a 24.9% voting position. That's a lot of control for one group to have. We felt like, because of the diverse base we had before with smaller investors, that it would probably work best if we kept [most new investors] under 5%. We feel like it gives everybody more options going forward.
BARKSDALE: These people invested in Pressley and the vision we set five years ago. It isn't one of those platforms where you buy a charter and set out [to push a different agenda]. They were investing in an ongoing entity and CEO versus putting in their own team.
RIDGILL: We laid out our plan and people supported it. We didn't raise so much capital that we have to do acquisitions. But, should we need money, I think some of the same investors would come back in. And we're going to pick up some new investors from the CapStone deal.
There's been talk of a possible merger between VantageSouth (VSB) and Yadkin Financial (YDKN). What are your thoughts about statewide M&A?
RIDGILL: I think there's a lot of talk that goes on among the banks here that have [$1 billion or more in assets]. We're all trying to figure out a way in North Carolina to create that super-community bank that South Carolina and Virginia now have. You look around and there are five to seven of us that are in that range where you could put them together and have [$5 billion in assets] pretty easily. It is just a bunch of talk right now.
This is a small community, and we all know each other. I've lived through two mergers of equals, but it is tough to do. There's a lot of politics that goes on with the positions, the name and where the bank will be headquartered. Are there some we'd be interested in? Yes. I've done it before. Those discussions will continue. I think something like that will happen, but I just don't know when it would happen.