As a microcosm of the banking sector and the broader economy, North Carolina provides an interesting glimpse at some of the trends and issues impacting banks nationwide.
“North Carolina’s banks are strong and benefiting from a robust economy,” says Ray Grace, who has served as the North Carolina Commissioner of Banks since 2013. “A sign of the good times for banking here is the interest we’ve seen in this cycle from out-of-state banks buying their way into North Carolina markets.”
Out-of-state banks making recent acquisitions in North Carolina include Columbia, South Carolina-based South State Corp., Pittsburgh, Pennsylvania-based F.N.B. Corp., and two Tennessee banks: Pinnacle Financial Partners, in Nashville, and First Horizon National Corp., in Memphis.
As the state’s banks consolidate, there is interest in opening new banks—the first since the financial crisis.
North Carolina also boasts a burgeoning technology sector, including the bank operating system nCino, based in Wilmington, and payment solutions provider AvidXchange, digital banking provider Zenmonics and IT consulting firm Levvel—all based in Charlotte.
In this interview, which has been edited for length and clarity, Grace explains why he’s seeing more interest in opening de novo banks in the state, shares his advice for banks exploring fintech partnerships and weighs in on prospective challenges for the industry.
BD: North Carolina just chartered its first de novo bank in a decade, with American Bank & Trust in Monroe, North Carolina. The Charlotte Observer reported you believe there’s more interest in opening new banks in your state. What’s driving that interest, and do you expect more activity to result from that interest?
RG: During the so-called Great Recession, the traditional economic drivers for bank formations disappeared. The economic downturn increased credit risks from borrowers, monetary policy wrung the margins out of lending, and the predictable tightening of the regulatory screws increased both the cost and the complexity of banking. Normally, we would have seen a faster return of de novo activity, but this was of course no normal recession, and fittingly, it was no normal recovery. Rather than the “V-shaped” recovery we had seen following previous downturns, this was the dreaded “L-shaped” variety, prolonging the drought.
On the heels of an epic consolidation trend, many North Carolina markets, including some that had been historically very supportive of community banks, lost those banks. As with previous consolidation episodes, this has left voids in these markets, particularly in rural areas. At the same time, we have seen a strong, decisive uptick in the economy through much of the state, a gradual return to normalizing interest rates, and, mirabile dictu, the beginnings of a swing of the regulatory pendulum toward a somewhat less restrictive environment. All these factors have contributed to the return of industry profitability and made the banking model attractive once again.
BD: Banks have been increasingly working with fintech firms to better expand and improve their own products and services, but properly vetting younger tech companies can be tricky. Do you have any advice for banks exploring fintech partnerships?
RG: Banks will need to embrace new technologies if they are to remain viable. That said, they need to focus on being cutting edge, but not bleeding edge. There is a dizzying array of gee-whiz products being introduced now, and it’s important to be careful in what you choose to implement.
Like a lot of advice, mine is more easily given than followed, but start with the fundamentals. What [or] who are your markets? What are you offering those markets and customers in the way of products and services, and why? What is trending, and in what directions? How does all this fit in with your business plan? Does your business plan still make sense? If not, change it.
In light of the foregoing, is your management team and board adequate to your bank’s current and future needs? For example, do you have a chief technology officer? A tech-savvy director or two?
Know what is available, [and] study and carefully assess the alternatives that fit the needs of your business plan. Discard applications or products that do not enhance customer value and the quality of their experience—while not breaking the bank.
What existing bank systems must be accessed by the new application? What firewalls or other protections are provided for access, data and systems security?
What is the financial strength of the company you are contracting with? What is their capacity to support the application? Do they have a track record with other banks? What would be the consequences to your operations in the event of failure of the vendor? Who owns the code in that event, and who could take over support?
Not long ago, there were any number of fintech startups with interesting offerings but limited resources and infrastructure, which made them risky to engage with. The good news is that’s changing, and clearly it is better to deal with companies that have some legs, financially and organizationally.
BD: Is there anything else you think is important that boards be aware of heading into 2019?
RG: Change, or the failure to meet its challenges, is the single greatest existential risk to banking as we know it. However, boards cannot afford to lose focus on more traditional risks. There is an old banking axiom that the worst of loans are made in the best of times. These are some pretty good times, and we are beginning to see some troubling signs that memories are short. Among those I would cite are the rising prevalence of “covenant light” loans and other structural concessions on the commercial side, and 100 percent financing in both the commercial and mortgage lending spaces. Some in Washington are again talking about the need to increase access to affordable housing. Déjà vu all over again?
Interest rates are likely to continue to rise, albeit at a modest rate. I think this is a good thing for the industry and the economy, but it will require an increased emphasis on sound funds management policies and practices on both sides of the balance sheet.
Our banking industry has always faced challenges: the Great Depression, disintermediation and the thrift crisis of the 80s, the repeal of Regulation Q, the Great Recession and resultant Dodd Frank Act, and a host of others. Yet, the industry has survived and reinvented itself time and again. Unfortunately, banks have also been the target of damaging criticism from Washington, sometimes for good reason but too often for political motivation. Restoring the public trust tarnished by this criticism will play a critical role in ensuring the industry’s future. We need to be reminded that banks are special. That they are the only industry that “creates” money. And that they are the place where people have traditionally gone when they wanted to buy a home or a car, or start a business. In a very real sense, banks are where people go to make their dreams come true. That’s a powerful story. It’s up to banks to tell it and to make it so.