Private Equity-Backed Piedmont Eyes Buyouts

Three months after stepping down as the chief executive of Royal Bank of Canada's U.S. operations, Scott Custer is gearing up to build a new bank spanning the Carolinas and Virginia.

Custer recently became chief executive of Piedmont Community Bank Holdings Inc. in Research Triangle Park, N.C., a venture backed by Stone Point Capital LLC, a private-equity firm in Greenwich, Conn., and Lightyear Capital LLC, a private-equity firm in New York.

Late last month Piedmont was granted bank holding company status by the Federal Reserve Board. It is preparing to roll out an aggressive acquisition strategy focused on community banks of all stripes — healthy, ailing and failed — principally in North Carolina, South Carolina and Virginia.

"We would very much be interested in doing FDIC-assisted transactions and we plan to pursue those with vigor," Custer said in an interview. "But we also think there is a great opportunity with healthy community banks or banks that just need some capital. We are after those, too."

Piedmont's creation represents another example of private equity's much anticipated flow into the banking business and a more accepting regulatory environment, particularly for companies that recruit experienced bankers to lead the expansion.

"These sorts of deals are coming out of the woodwork. For private equity, the banking industry is the hottest area," said Ken Thomas, an independent banking consultant and economist in Miami. "And for better or worse, the regulators seem to have established a good amount of comfort with such groups."

Custer would not specify how much money Piedmont has raised or how big a cluster of banks it is looking to build. But he did say, "It is a sufficient amount to knit together a nice-sized franchise in three states."

It is less that he is withholding information, than admitting Piedmont's plans are not set yet.

"Beyond that, we don't really know yet," Custer said. "Some of our strategy is built around our ability to be flexible. The industry has become very fluid, so we feel that our strategy needs to be as well."

Piedmont was founded nearly a year ago by J. Adam Abram, a North Carolina entrepreneur who has started real estate investment companies and insurance firms.

Abram entered the banking industry by striking a deal last year to acquire a 60% ownership stake in VantageSouth Bank in Burlington, N.C. The investment in the $95 million-asset bank required Abram to establish a bank holding company. With Fed approval, Piedmont can now close on its investment in VantageSouth — it will not need to apply for a charter or deposit insurance, Custer said.

In an interview, Abram said he was prepared to act alone but soon realized that by pairing with outside investors — namely private-equity firms — he could establish a bigger entity more quickly.

"As I learned more and thought harder, I decided my plans would be more successful if I took a larger view," Abram said. The addition of private-equity funding complicated the regulatory process, Abram said, but he acknowledged regulators needed to fully understand the business plan before approving it.

"Once they understood what we wanted to do, I found the process to be pretty open," he said.

Recruiting Custer helped.

"I knew we would have to get a first-class CEO to partner with us in building the company," Abram said. "There is no substitute for experience."

Custer, who stepped down from RBC Bank in October, said his exit was not tied to his decision to join Piedmont. Rather the opportunity presented itself as he pondered what to do after RBC.

Banking experts estimate that Piedmont raised $300 million to $500 million, on par with other private-equity ventures seeking to break into the banking industry.

"I am guessing it is pretty serious money. Likely several hundreds of millions of dollars," said W. Gray Medlin, co-founder and managing director in the Raleigh office of the investment banking firm Carson Medlin Co. "That's how much they will need to successfully compete with all the other firms out there."

Examples of private-equity funds focused on failed banks include Bond Street Holdings LLC, which purchased two banks in Florida last month from the FDIC through a shelf charter. Also, the turnaround artist Patrick Frawley last month led an investment team in buying a Georgia bank.

Medlin said Piedmont's strategy to look beyond acquiring failed institutions could be shaped by its decision to build in the Carolinas and Virginia. Credit quality at North Carolina and Virginia banks has outperformed banks in other areas, particularly elsewhere in the Southeast. Meanwhile, credit quality at South Carolina banks mirrors that of banks in Georgia and Florida, so that state might present better opportunities for failed-bank deals.

Medlin said Piedmont likely will encounter companies, such as those in need of capital or those seeking a quick exit following a tough exam, willing to sell at a steep discount to book value.

"Regulatory exams are just ferocious," Medlin said. "I think that is going to lead some investors and directors to say: 'This is not the game we thought it was, get us out of here at any reasonable cost.' "