A lack of new bank startups combined with an extended wave of industry consolidation has raised red flags that community banks, long a linchpin of local economies, could be headed for the endangered species list.
“We as an industry are concerned,” said Peter Gwaltney, president and CEO of the N.C. Bankers Association. “It’s something we talk about frequently.”
“The trends are bad,” said Larry Barbour, president and CEO of Raleigh-based North State Bank, a community bank with seven branches. “A crisis in banking is looming if it doesn’t get straightened out fairly quickly. We have some time, but we don’t have a lot of time.”
The numbers compiled by the N.C. Office of the Commissioner of Banks tell a daunting tale.
No startup banks – de novo banks in industry parlance – have opened their doors anywhere in the state since 2009, when Coastal Bank & Trust of Jacksonville was chartered. By contrast, in the five-year period that ended in 2008, 28 such banks were established, including a half-dozen in the Triangle.
Recessions typically put a halt to the formation of new banks, but in the past startups have bounced back along with the economy.
There is something different when you are a locally owned and headquartered bank where there is a board of directors ... that is right there. There’s a level of commitment that’s hard to match.
Peter Gwaltney, president and CEO of the N.C. Bankers Association
This time, however, slower-than-usual post-recession economic growth, abnormally low interest rates – which have squeezed bank profit margins – and increased federal regulation have continued to put a damper on bank startups.
Meanwhile, the number of banks chartered in the state – the majority of which are community banks – has dwindled 43 percent since 2008, from 92 to 53, primarily because of mergers and acquisitions. And, based on deals already announced, the number of state-chartered banks is expected to drop to 50 by the end of the year.
Among those pending deals is the $1.4 billion acquisition of Yadkin Bank, which is headquartered in Raleigh, by Pittsburgh-based FNB Corp. for $1.4 billion. Yadkin itself is a product of a series of acquisitions that gave it 100 branches in North and South Carolina and $7.5 billion in assets.
“Like a lot of industries, there’s a lot of consolidation going on,” said Bob Hatley, president and CEO of Paragon Bank, a community bank headquartered in Raleigh.
Since the recession began at least seven community banks with either a Triangle headquarters or a local presence have been swallowed by larger competitors. The list: CapStone Bank, Crescent State Bank, Keysource Commercial Bank, NewBridge Bank, Nuestro Banco, Patriot State Bank and TrustAtlantic Bank.
Banks are being driven to buy other banks “to achieve scale to spread the cost of the regulatory burden, regulatory compliance, over a larger organization,” Gwaltney said. “It’s more cost-efficient.”
A concern for small businesses
The national picture is similar to what is happening in North Carolina.
Nationwide, since 2009 the Federal Deposit Insurance Corp. has approved just three applications for deposit insurance from new banks. By contrast, in 2007 alone the FDIC approved 161 applications.
In testimony before Congress last month, FDIC Chairman Martin Gruenberg noted that “the current economic environment with narrow net interest margins and modest overall economic growth remains challenging for U.S.. banks and the establishment of de novo institutions.”
Meanwhile, a March 2015 study by the Federal Reserve Bank of Richmond found that from 2007 through 2013 the number of banks nationwide fell by more than 800, a decline of 14 percent.
To be sure, there is no universally accepted definition of community banks. For example, the Office of the Comptroller of the Currency defines them as banks with up to $1 billion in assets, while the Federal Reserve Bank includes banks with up to $10 billion in assets.
But there is widespread agreement that community banks, however they’re defined, play a vital role in local economies.
“Even though they have a relatively small share of the total banking assets in the banking system in this country ... they make the lion’s share of small business loans,” said Ray Grace, the state banking commissioner. “And small businesses, as you know, are the lifeblood of our economy.”
Community banks, he added, “have a different approach to lending. They are relationship lenders. ... Community bankers know their customers very well. That’s one of the reasons that, during the downturn, the losses in a lot of community bank portfolios were less than the corresponding very large banks.”
If we just keep on the path we’re on, then I think there is a real danger that we lose (community banks).
Ray Grace, N.C. Commissioner of Banks
A 2015 study by Harvard University researchers found that although community banks accounted for about 20 percent of total bank assets – down from more than 40 percent in 1994 – they provide more than half of small business loans and 77 percent of agricultural loans.
“All banks invest in their community and participate in their community and are vital to their communities,” Gwaltney said. “(But) there is something different when you are a locally owned and headquartered bank where there is a board of directors ... that is right there. There’s a level of commitment that’s hard to match.”
In some rural towns, a community bank may be the only bank with a local presence.
Community banks historically have been willing to set up shop in towns “that the big banks aren’t interested in,” said banking lawyer Todd Eveson of Raleigh’s Wyrick, Robbins, Yates & Ponton.
Grace doesn’t like what he sees with the current trends.
“If we just keep on the path we’re on, then I think there is a real danger that we lose (community banks),” he said. “And, once lost, it will be extremely difficult to ever get them back.
Improving economy could help
But he also sees reason for optimism, starting with the expectation that the pace of mergers and acquisitions involving North Carolina banks will slow.
For starters, the dwindling number of banks operating in the state creates fewer M&A opportunities. In addition, he said, the smaller community banks that remain aren’t so attractive to banks that have expanded to the point that they’re hunting for big deals.
Grace also said that, thanks to the slowly-but-steadily-improving economic climate, the state is starting to hear from investor groups interested in starting new banks.
Although he’s not providing any details, he did say: “I think we will get some new banks ... I will be surprised if I don’t see an application by the first quarter of 2017.”
However, Paragon Bank’s Hatley said that it’s unlikely that any startups will be created in the rural communities that need them the most.
“The small communities have gotten hammered from the recession,” he said, so there’s little economic incentive to start a bank in a small town today.
Instead, Hatley continued, he expects that any bank startups would be limited to the state’s strongest markets: Raleigh and Charlotte.
Community banks we have lost
The following banks were either based in the Triangle or had a presence here, but have been acquired since the recession:
CapStone Bank – Acquired in 2014 by NewBridge Bank
Crescent State Bank – Purchased in 2011 by what is now Yadkin Bank
Keysource Commercial Bank – Acquired by Bank of North Carolina in 2013
NewBridge Bank – Purchased by Yadkin Bank earlier this year
Nuestro Banco – Acquired by Four Oaks Bank & Trust in 2009
Patriot State Bank – Purchased in 2013 by CapStone Bank
TrustAtlantic Bank – Acquired by First Tennessee Bank in 2015
Greystone Bank exited the banking business in 2011 after winding down its business over a two-year period
Yadkin Bank has agreed to be acquired