Tony Gaeta, a well-known and well-respected lawyer in community banking circles, is sailing into the sunset.
The 70-year-old attorney – who has been with the Raleigh law firm of Wyrick Robbins Yates & Ponton since it absorbed the boutique firm he founded in 2013 – is retiring at the end of this year. Gaeta, however, will be available as a consultant to Wyrick Robbins’ financial institutions practice.
“I’m going to miss the adventure of starting banks, merging banks ... but it’s time for the next adventure,” Gaeta said.
His post-retirement plan includes, at the end of January, taking his 56-foot motor yacht down to Florida along with his son Thomas, a sea captain.
“And that’s where I’ll be for three months. I’m basically inviting family and friends to come on down and make a reservation and come on the boat, because I need at least one, if not two, crew people to help me drive the boat anywhere,” Gaeta said.
Earlier this year, the UNC School of Law’s Center for Banking and Finance honored Gaeta with its Leadership Award for outstanding contributions to banking law and the banking industry, only the fifth such award bestowed in the center’s 20-year history.
“Tony is deep in his knowledge,” said Thad Woodward, who retired last year as president and CEO of the N.C. Bankers Association. “He’s trusted. He is so highly regarded. When you bring Tony Gaeta in, you know the job is going to be done right.”
Gaeta has worked for decades with community banks and helped many get started. But not in recent years.
That’s because no new state banks – known in the industry as de novo banks – have emerged in North Carolina since 2009, when Coastal Bank & Trust of Jacksonville was chartered. By contrast, in the five-year period that ended in 2008, 28 de novo banks were established, including a half-dozen in the Triangle.
Gaeta recently sat down with News & Observer reporter David Ranii to discuss the state of community banks. The following excerpts from his interview have been edited for space and clarity.
On the dearth of community bank startups statewide: “The economic downturn hit so hard that some of these towns that would have started a bank can’t support (one) … The economies just haven’t come back strong enough to support the startup of a community bank.”
On the lack of startups in the Triangle: Charlotte and Raleigh “are the two economies that could support a community bank, but there are two things holding them back. I would say not prohibiting, but holding them back. One, the capital level requirement of the regulators has gone from, when we started Paragon Bank in Raleigh in 1998, it was $15 million local money raised. The number now being bandied about (by regulators) if we were to start a bank is Raleigh is $25 million or more. So we need to raise more capital.”
In addition, “we don’t have the willing local investors that are patient enough. Their patience is becoming thin because it takes longer for these community banks to become profitable ... because of the regulatory burdens and interest margin compression” – that is, the reduction in the spread between the interest rates banks pay on deposits and the rates they charge for loans.
“It used to be, oh, you’ve got to be $100 million to $150 million in assets to be profitable. Now you hear the experts saying you’ve got to be between half a billion and a billion in assets to spread the cost of regulatory compliance.”
Why it matters: “A lot of our local communities are suffering from the lack of their own community bank. They can be more flexible (with loans) than some of the bigger banks, where the decision is made at corporate headquarters outside of where that community is.
On the regulatory environment: “Before the Great Recession, you were considered by the FDIC a de novo bank during your first three years of life. After your third year, you weren’t as strictly regulated. There wasn’t as much oversight.
“Now it’s seven years. You’re considered a de novo bank (until) your seventh anniversary. That means you must follow your business plan to the letter, and any change in your business plan, where you want to maybe start a mortgage operation – which is perfectly permissible – well, it’s not in your business plan. Submit an application ... And they’ll take six to nine month to consider that. The bank management doesn’t have the flexibility.”
On the impact of low interest rates on profitability: “All banks have a set amount of operating expenses. To cover that, they basically charge interest on loans. While deposit interest rates are historically low ... the loan rates are 4 percent to 5 percent. That’s about all they can charge. So if you’re paying half-percent on deposits, but your overhead is 2 to 3 percentage points, and you’re only charging 4 (percent on loans), you can see the margin of expense to income is very slim.”
On consolidation in the community banking industry: “A lot of the people that were investing in (community banks) were looking at a minimum of five-, but maybe a seven- to 10-year, turnaround of their investment money. The pressures from the shareholders onto the board of directors to say ... why hasn’t our stock risen high enough and when will it? Well, who can predict that? Maybe the alternative is to find someone like Bank of North Carolina, a Yadkin ... tie our stock to theirs.
“I also think ... a lot of these banks that started up in the late ’90s into the 2000s, they have boards of directors who maybe are just getting a little tired, and management (too). So now management is faced with, do I have management succession, do I have board of director succession, or do we just say it is better for shareholders to tie in with a much bigger bank and take our profit now?”
On the future of community banks in North Carolina: “I think we’re going to see fewer of them. I am hopeful the next crop of lawyers, and bankers, will be able to replenish. But when will that happen? I think we need stronger local economies and a little bit more normal interest rate environment.”