It was 2009, the economy was in the grip of the Great Recession, and Scott Custer was in search of a second act after retiring as chief executive of RBC Bank at the not-so-tender age of 52.
Meanwhile, serial entrepreneur Adam Abram was looking for a seasoned bank executive to run Piedmont Community Bank Holdings, a bank holding company that he and business partner Steven Lerner had recently co-founded – but which didn’t yet own any banks.
The collaboration between Custer, the veteran banker, and Abram, who was able to tap a network of investors who had backed his past ventures, has reverberated throughout the state’s banking industry. It ultimately led to the creation of the new, expanded Yadkin Bank – a Raleigh-based bank that today has more than 70 branches and $4.3 billion in assets. It’s the largest community bank headquartered in North Carolina.
Piedmont, which ultimately raised $153 million from investors, engineered a series of progressively bigger acquisitions and mergers – five in all.
Those five deals included the 2011 acquisition of a controlling interest in Cary-based Crescent State Bank, which at the time had 15 branches, for $75 million. That bank, which morphed into VantageSouth Bank with headquarters in Raleigh, roughly doubled in size by acquiring East Carolina Bank, which had 25 branches, for stock valued at $51.6 million. The latest deal was a merger of equals completed July 4 between VantageSouth and Yadkin Bank of Statesville.
“It’s kind of neat to think I started this in my guest bedroom,” said Custer, referring to the early days when he was both the CEO and the sole employee of Piedmont. Today Custer is CEO of Yadkin Bank and its corporate parent.
Piedmont no longer exists after being folded into Yadkin’s corporate parent in conjunction with the completion of the VantageSouth/Yadkin merger; Piedmont’s investors ended up with a 30 percent ownership stake in the new Yadkin Bank.
All the wheeling and dealing didn’t stop Custer from building up new lines of business at the bank – such as a builder finance division that targeted homebuilders – and providing business loans guaranteed by the Small Business Administration. They have become major contributors to Yadkin’s bottom line.
The merger of equals also triggered a round of cost-cutting that eliminated about 85 jobs, mostly through attrition but also involving layoffs. Today Yadkin has about 900 employees.
Raymond James analyst William Wallace called this track record of integrating banks, cleaning up their balance sheets as needed and improving performance “an impressive feat.”
But, he noted, it’s too soon to pass judgment with regard to the merger of equals that created the new, expanded Yadkin Bank.
“I would say, so far, so good,” said Wallace, who rates the stock a “strong buy.”
Yadkin generated $14.7 million in net income in the fourth quarter as its loan portfolio grew at a 10 percent annualized rate.
“We still have work to do, but we are as far along as we could be right now,” said Joe Towell, the former CEO of the old Yadkin and executive chairman of the post-merger Yadkin. “I’m very enthusiastic about the future.”
It all started with Abram, who was Piedmont’s chairman and who previously founded two insurance holding companies, James River Group and Front Royal, that sold for $572 million and $167 million, respectively. Today he is chairman and CEO of James River Group as well as a member of Yadkin’s board of directors.
In 2009, the state’s community banks were struggling because of problem real estate loans that weighed down their balance sheets and regulators that were upping their capital requirements. But Abram saw an opportunity to get into banking “because I had a lot of confidence in the long-term economy of the state.”
To be sure, it was a buyer’s market. But, at the same time, Abram said, it was a “buyer beware” market.
Banking lawyer Tony Gaeta of Wyrick Robbins Yates & Ponton, which has done some work for Yadkin, agreed that investing in banks at that time was risky because buyers could end up plowing much more capital into a bank than they anticipated.
“You don’t want to be the rowboat that catches the 2,000-pound anchor,” he said.
Bill Wagner, a Raleigh-based investment banker with Raymond James, said Piedmont “has been very conservative in their approach and very focused on looking at asset quality and the troubled loans of the (banks) they’re buying. They have done a very good job of avoiding those that could have really dragged them down.” Wagner assisted Piedmont with the original VantageSouth acquisition and also represented Crescent when it was acquired by Piedmont.
Piedmont was part of a wave of well-financed, acquisition-minded players that emerged.
Among them were Capital Bank Financial, which was formed by former Bank of America executives based in Charlotte. It acquired a series of banks, including Raleigh-based Capital Bank, and today has 162 branches in North and South Carolina, Florida, Tennessee and Virginia.
But not all of the new players that cropped up managed to build new franchises like VantageSouth and Capital did.
Brady Gailey, an analyst with Keefe, Bruyette & Woods, said some investment groups that managed to raise money were unable to execute on their plans for one reason or another.
“A lot of them just could not get the acquisitions done,” Gailey said. “A lot of them hit regulatory issues.” Regulators have the power to greenlight or reject acquisitions.
Build something new
Custer was an experienced deal-maker. He engineered a turnaround of RBC Bank after he was named CEO in 2004 and, on his watch, the bank expanded from 270 to 430 branches through acquisitions. But, like many regional banks, RBC, which was owned by Royal Bank of Canada, stumbled because of troubled loans after the recession struck.
RBC’s ailments factored into Custer’s decision to retire from the bank.
“I just felt that it was time for (Royal Bank) to bring in one of their own to run the business here and to assess what they were going to do with it,” Custer said. “As long as I was there, it was going to be harder for that to happen.”
In 2012, Royal Bank sold RBC Bank to Pittsburgh-based PNC Financial Services Group for $3.45 billion.
Custer was enticed by the opportunity to build something by joining Piedmont. By contrast, he said, at the end of his stint at RBC, “we were winding things down instead of building.”
Piedmont, which was chartered by regulators in 2010, started out small, first acquiring Burlington’s VantageSouth Bank and then Salisbury-based Community Bank of Rowan – each of which which had just two branches.
“Even though we had the capital where we could do a much larger deal, we were able to establish some credibility with the regulators by doing something smaller,” Custer said.
At the time, Custer said, regulators were skeptical that bank holding companies such as Piedmont that were backed by private equity firms were more interested in buying a few banks and flipping them than rolling up their sleeves and improving their finances.
But Piedmont was in it for the long haul.
“VantageSouth was a troubled institution. We cleaned it up quickly,” he said. “Then Community Bank of Rowan was probably less troubled, but it still had some issues. We did the same thing there.”
In addition to injecting new capital, “we got rid of bad loans aggressively,” Custer said. Some were sold, some were foreclosed; and loan workouts – that is, modifying the terms of the loan – were accelerated.
Custer also installed his own management team, many of whom he had worked with at RBC and its predecessor, Centura.
“It was a little bit of getting the old band back together,” he said.
The next step was buying Crescent State Bank.
“Crescent was the bank where we finally started to get some decent scale,” Abram said. In addition, he continued, “it really gave us the franchise we needed in Raleigh.”
When it comes to deal-making, Custer prides himself on price discipline.
“If you overpay for anything, it is hard to ever make it work,” he said.
Being a tough negotiator triggered a backlash when some shareholders of the corporate parent of East Carolina Bank objected they were being short-changed by the all-stock offer that valued the bank at $51.6 million. But in the end, the ECB Bancorp shareholders approved the acquisition by a roughly 2-to-1 margin.
Still, shareholders of the acquired banks that received stock have benefited from the appreciation of Yadkin Bank shares. Crescent shareholders who have held on to their shares have enjoyed a 183 percent increase in their holdings, based on Thursday’s share price of $19.66. East Carolina Bank shareholders have seen their holdings rise 86 percent.
The merger between VantageSouth and Yadkin, completed last summer, was a merger of equals – a type of deal that is notoriously difficult to pull off. A popular line of thinking is that, in the end, a merger of equals is a misnomer because one side or the other ultimately gains control.
But the management of both banks felt that such a deal, if done well, had the potential to provide the biggest payoff to their respective sets of shareholders.
“It was clear to me that size does matter in terms of your balance sheet,” said Towell, who was chairman and CEO of the old Yadkin Bank and now is executive chairman of the new Yadkin Bank.
The new Yadkin Bank’s six-person operating committee consists of three executives from each of the predecessor banks. Likewise, the board of directors of the new Yadkin Bank consists of seven members from each bank.
Brady Gailey, an analyst with Keefe, Bruyette & Woods, said the Yadkin deal is the most successful merger of equals he’s seen.
“They really did a good job of dividing up the responsibilities,” Gailey said.
Whether Yadkin will be involved in more deals anytime soon remains to be seen.
At this point, “Yadkin does not have to make acquisitions in order to be highly successful,” Abram said. “But Yadkin is in position (to make a deal) if a good acquisition comes along.”
That’s not the only acquisition scenario for Yadkin, however.
Gailey believes that a bank of Yadkin’s size that is “hitting on all cylinders” and has a significant presence in the highly desirable Raleigh and Charlotte markets is bound to attract the attention of larger banks.
“I think that any bank that would like a bigger presence in North Carolina is going to want to acquire Yadkin,” Gailey said.
Building a bank, one deal at a time
2009 – Piedmont Community Bank Holdings is formed by Triangle entrepreneurs Adam Abram and Steven Lerner.
2010 – Piedmont agrees to acquire a majority stake in Burlington’s VantageSouth Bank, then announces a deal to acquire Salisbury-based Community Bank of Rowan. Each bank has two branches.
February 2011 – Piedmont Community Bank Holdings agrees to purchase a controlling stake in Crescent State Bank, which has 15 branches, for $75 million.
September 2012 – Crescent State Bank agrees to acquire East Carolina Bank, which has 25 branches scattered across the state, in a deal valued at $51.6 million.
December 2012 – Crescent and VantageSouth merge to become VantageSouth Bank.
January 2014 – The corporate parents of VantageSouth and Yadkin Bank announce a merger of equals that will create the largest community bank headquartered in North Carolina, with $4 billion in assets and more than 70 branches.
July 4, 2014 – The VantageSouth/Yadkin merger is completed, with the combined bank operating under the Yadkin Bank brand.
Staff writer David Ranii