Bank startups have faded from the NC scene

dranii@newsobserver.comMay 3, 2014 

  • How Triangle startup banks have fared

    Just one of the Triangle-based banks chartered by state regulators in the last decade continues to operate as a stand-alone financial institution today. As for the rest, four were acquired, and a fifth was liquidated. Here’s the scorecard:

    •  Greystone Bank, which was chartered in 2005, exited the banking business in 2011 after winding down its business over a two-year period. That process is known as a voluntary self-liquidation.

    Greystone, which once had more than $550 million in loans outstanding, was a specialty bank that focused on making loans for multifamily housing developments. It generated deposits by selling certificates of deposit through brokers nationwide. Before it shut down, it had a single branch in Raleigh and was operating under a consent order it signed with federal regulators that called for it to write off its problem loans, among other things.

    • Durham’s Square 1 Bank, chartered in 2006, became publicly traded in March. It sold 3.1 million shares of stock at $18 each in its initial public offering, reaping $56 million before deducting fees and expenses. In addition, a group of major shareholders sold an additional 2.7 million shares at the IPO price. Today, Square 1 has a dozen offices nationwide that provide banking services to venture capital and private equity firms and the businesses they invest in. It had $2.47 billion in assets as of March 31.

    • Raleigh-based Capstone Bank, which was chartered in 2006, was acquired last month by NewBridge Bank of Greensboro. Shareholders of Capstone, which had four branches, ended up with a 22 percent ownership stake in NewBridge.

    • Patriot State Bank, chartered in 2006, was acquired last year by Capstone Bank. Patriot, which was based in Fuquay-Varinia, had three branches but was in the process of closing one of them at the time of the acquisition. Capstone followed through with that closure.

    • Keysource Commercial Bank, which had a solitary branch in downtown Durham, was acquired by High Point’s Bank of North Carolina in September. KeySource was chartered in 2007.

    • Nuestro Banco, a Garner bank that focused on the Hispanic market, was struggling when it was acquired by Four Oaks Bank & Trust of Johnston Couty for about $2.7 million. The bank, chartered in 2007, had been operating under a cease-and-desist order from regulators that called for it to overhaul its operations.

    Staff writer David Ranii

This story incorrectly reported that Nuestro Banco was acquired by Four Oaks Bank & Trust of Johnston County for about $2.7 billion. The correct acquisition price was about $2.7 million.

The steady flow of bank startups that dried up when the recession struck hasn’t revived even though the economy is on the upswing.

No new banks have been formed in North Carolina since 2009, when Coastal Bank & Trust of Jacksonville was chartered, according to the state Office of the Commissioner of Banks. By contrast, in the five-year period that ended in 2008, 28 new state banks were established – including a half-dozen in the Triangle.

“I think we are at the end of an era,” said Tony Gaeta, a banking attorney with Wyrick Robbins Yates & Ponton in Raleigh. “I don’t think we are going to have any startup banks anytime soon.”

Bank startups typically suffer during a recession, then bounce back when the economy improves. But this time is different.

“Unlike previous economic downturns,” state Commissioner of Banks Ray Grace said via email, “we have not seen a resurgent interest on the part of investors or other groups to start new banks on the upside.”

What’s happening in North Carolina is part of a national phenomenon.

Last year, just one new bank nationwide – Bank of Bird-in-Hand, which caters to the Amish community in Pennsylvania’s Lancaster County – was formed. That was the first new bank startup to open its doors in the U.S. since 2010.

The lack of bank startups – known in the industry as de novo banks – can be traced to a confluence of factors.

New hurdles erected by federal regulators are seen as a prime culprit. A tough business environment for banks, lack of interest among investors and a scarcity of bankers willing to run the regulatory gantlet also are at play.

“We just don’t have the industry conditions that favor entrepreneurship in banking,” said Tony Plath, a banking and finance professor at UNC Charlotte.

Some, including Grace, the state’s top banking regulator, worry about the long-term impact on the state’s economy given that the startup drought has coincided with a wave of smaller community banks being acquired by larger banks.

Although this industry consolidation is a way of pruning out the weaker banks, “I think it will ultimately prove detrimental if it means either the dearth or the diminished prevalence of community banks,” Grace said. “The loss of these banks will inevitably be detrimental to the economies and vibrancy of the communities they serve.”

More regulations

Of 29 new banks chartered from 2004 through 2009, Grace noted, nine were acquired and two others are scheduled for mergers. In addition, one failed and one presided over its own liquidation.

Plath also decries the lack of new bank startups.

“In the good old days of community banking, if you got turned down at a big bank (for a loan), you could always go to a smaller community bank that maybe had less strict lending standards or maybe had specialized lenders in a particular area or they know your business better than the big bank knows it,” Plath said.

The reduction in banking options, said Plath, is bad for consumers and businesses alike.

“The little banks give the industry flavor,” Plath said. “They are different from big banks. … Big banks are all homogeneous in the way they act and the way they look and the way they think.”

State banking regulators generally get high marks from area bankers. But federal regulators are considered by many to be an impediment to startups, and they’ve gotten stricter in recent years as the problems at some of the nations largest banks helped usher in the recession.

“The pendulum has swung to such an extreme – and it hasn’t completed its swing as yet,” said Thad Woodard, president and CEO of the N.C. Bankers Association.

Little investor interest

All banks, whether they are chartered by the state or by federal regulators, must obtain deposit insurance from the FDIC. And the FDIC has “raised the bar for any new banks,” Grace said.

Still, even if the regulatory environment was startup friendly, the investors needed to supply the crucial ingredient for any new bank – capital – aren’t interested. The problem is that many investors in the last wave of startups haven’t fared particularly well, and the prospects for future returns aren’t great either.

“I just don’t think there is any real strong investor money out there available for de novos,” said Jim Beck, CEO of Raleigh’s TrustAtlantic Bank. “You’re going to have to see some people over time make some money on community banks before you are going to see them jump back in on de novos.”

Higher capital requirements and the costs of complying with regulations have made it tougher for small bank in general.

“The industry is decidedly oriented towards banks that have larger scale,” Plath said. “That’s why you see all these guys merging.”

Nor are there a lot of seasoned bankers who are itching to roll up their sleeves and get involved in a startup.

Given the regulatory burdens that startups face today, “the comment I have heard from more than one banker is, it’s just not fun anymore,” Gaeta said.

Ranii: 919-829-4877

News & Observer is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service