Amid a tumultuous financial market, things are relatively calm at RBC Bank.
Owned by the Royal Bank of Canada, the Raleigh-based U.S. unit has avoided subprime mortgages and hasn't relied too heavily on its investment banking unit, areas that are now haunting many of its brethren.
Though it has been dogged by losses on home builder and other loans, RBC posted a profit of $16.4million in the second quarter, according to data filed with the Federal Deposit Insurance Corp. That's a decline of 39 percent compared with a year ago, but it came after two straight quarters of losses.
Like some other financial firms, RBC hopes to soothe consumers by emphasizing its financial soundness in a marketing campaign. “Everybody's got concerns,” said Scott Custer, CEO of RBC Bank, Royal Bank's U.S. subsidiary. “If a bank like Wachovia can go through what it went through, then people assume it can happen anywhere.”
With branches in six states, including about 20 in the Charlotte area, RBC is neither a giant nor a bit player in the N.C. banking scene. Custer says the middle is a good place to be: “We have the resources, the stability, the consistency of delivery that you'd hope you would find in the large companies. Yet we try to act and feel like a smaller company. I'd say we compete very well against both.”
Custer, 52, who started his career at Wachovia, talked with the Observer recently on topics ranging from real estate lending to why it's probably a bad time to be in the Porta-John business. Questions and answers have been edited for length and clarity.
Q. What are your thoughts on a new Democratic administration and what that means for the banking industry?
“My greatest hope is that now there's at least a level of clarity and certainty, because the market has been so up and down and hard to figure out. Now we know what we're dealing with: We've got a Democratic president and a Democratic Congress. I don't know how (President-elect Obama) will govern. I think a lot of it will be in appointments that are made. I worry a little bit about tax increases. Over time that doesn't usually seem to work.”
Q. Are there any industry changes you would lobby for?
“I was a proponent of the (federal bailout) plan that was put in place; I think that was needed and I think it's going to prove to be a good thing, even though there are certain provisions I'd like to change. Other than that, I think many folks in the banking industry would rather see some of the accounting rules changed that don't always match up with real life – fair value accounting, mark-to-market accounting. (Both refer to requirements that companies value their assets based on a price they could immediately fetch rather than their long-term value.) Somebody said it would be good if we could find out where the folks at FASB lived, and you could go find them and change the rules. They're kind of this mysterious group called the Financial Accounting Standards Board, apparently they're in Connecticut.”
Q. Will you take advantage of the federal banking bailout?
“Subsidiaries of foreign banks aren't eligible to access the TARP (the Troubled Assets Relief Program) from a capital standpoint. We can participate in the liquidity programs, and we've got that opt-in option coming up in the next couple of weeks. … But we haven't made the decision yet. We're still in the meeting with the Fed, meeting with the Treasury. As you would expect with government programs, there's a lot that goes with your participation. When something sounds too good to be true ….
(Also) I believe there is a bit of a playing field being set up here for some companies: The top 14 or 15 banks in the country that got the largest amount of funding, they're being viewed as the banks the government has found favor in. From where I sit, that's a little bit of an uneven playing field.”
Q. How is the trouble at Wachovia affecting you? Are you picking up deposits from Wachovia customers?
“First of all, I'll say that we have taken no delight in this situation. The whole thing has not been good for North Carolina, and it's not been good for banking. Notwithstanding, we have seen Wachovia clients moving deposits (to us) from across the state, just as other banks have. I wouldn't say we've specifically targeted those, but our bankers are aware of where there are opportunities.”
Q. We're seeing a lot of consolidation in banking. Do you plan to buy up some more banks?
“We're in the middle of integrating a pretty complex transaction, Alabama National (a Birmingham bank that RBC bought for $1.6 billion in February). We need to finish that right now. I think you always will try to be opportunistic, but the dilemma is that even though prices are down, you're still acquiring somebody else's balance sheet, and there's such a tremendous risk in that. We've got our own problems. I'm not sure now's a good time to be taking on somebody else's.”
Q. What are your problem areas?
“Where we've seen the biggest challenge, where most companies have, is in the residential segment. And not so much the mortgage business, because we were never really in subprime. But residential construction and residential development have been hit hard. Any business that touches housing, whether you install swimming pools or run a Porta-John company, is feeling the slowdown. …
Our builder finance business was (making loans) across the whole country, and we're essentially shutting down our nationwide business. We're still in builder finance, but we'll focus on the six states that (our branches) are in. When you're a regional bank but have a business that is far flung across the whole country, you'll get concentrations that are unhealthy. And even your best builders are struggling, where you have value deteriorations that are just so significant.”
Q. Banks keep talking about how they're tightening their underwriting standards. Can you give us some specific examples?
“Take commercial real estate as an example. In the past you might have been willing to take the appraised value of a future project and used that to determine how much you lend against. Today you're going to look at hard costs versus hard equity. You're going to ensure that the developer's money is going in up front, not at the back end. … (In the past,) you might have done a residential project where you'd finance 10 units, six presold. Today you're going to finance those 10 units all presold, with verified contracts.”
Q. Will you get a more high-profile location in Charlotte? (RBC's main local hub is on Providence Road, just outside uptown.)
“I think we're always going to look for opportunities, and in this day and this market, there may be more opportunities than there were a few months ago. But we have no specific plans.”