State of Banking

De Novos
Small Cogs Help Turn a Big Economy

Below right: Butch Congleton stands in front of a sign announcing Millennia Community Bank in Greenville. Photo by Dan Crawford

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By Ed Martin

As the rain drummed on his mother's roof, Butch Congleton fretted. He and his family had fled north to Robersonville when the Hurricane Floyd-swollen Tar River isolated their Greenville home. They were safe here, but his dream wasn't.

Congleton remembers when the dream first came to him growing up in Robersonville as one of eight children. Sometimes he would go with his father, who owned two downtown stores, to the Wachovia Bank. When he was 8, he looked up at the banker and said, “One day, I'm going to be a bank president, too.”

Thirty-two Septembers later, Congleton was about to know if his dream would come true. He was scheduled to appear before the North Carolina Banking Commission to hear its decision on granting a charter for his proposed Millenia Bank of Greenville. But roads west were cut off by Hurricane Floyd floods, and when he tried to hire a helicopter, all but rescue flights were grounded. The postmaster mentioned that some back roads were open, so Congleton decided to try looping north, then along the Virginia line, and back to Raleigh. He drove off into the rain, skirting washed out bridges.

The usual 90-minute drive took five hours. Arriving at the Banking Commission for his do-or-die meeting, Congleton realized some of his directors, who were needed to provide valuable backup and moral support at the hearing, were stranded in flood shelters. For an hour or more Congleton faced the panel of 15 veteran bankers and others who grilled him on Millenia's business plan.

The grueling examination is one that all wanna-be-bankers must pass to receive their charters. “You're not really standing naked before the world. You just feel like it,” says Wes Sturges, president and chief executive of First Commerce Bank of Charlotte, chartered in 1996. “Your knees,” adds Thad Woodard, president of the N.C. Bankers Association, “are knocking like when you got married.”

Congleton told the commissioners that his customers would be mostly rural, lower- and middle-income. And, he added, “the kind of mom-and-pop businesses I grew up with.” They deliberated, and gave him their blessing to start — as soon as he raised $5.5 million from investors.

Millenia Bank of Greenville was born. It would become one of 35 new Tar Heel banks created this decade, tops in the nation.

It joins the ranks of community banks sprouting at an unprecedented rate. Since 1990 investors have pumped $200 million into new North Carolina banks, money which usually comes from small investors. Congleton needed 2,000 investors, mostly school teachers, factory workers and small-business owners to put up an average $2,200 each to create the first black-owned bank chartered in North Carolina since 1971.

Usually, it's a safe investment. Many of the 35 new North Carolina banks have returned profits in as little as a year. First Commerce Bank went from nothing to $88 million in assets in three years and is highly profitable.

Typically, they must work hard to win customers, as the two-year-old Bank of Asheville did for Laurey's Catering. Although highly popular, with annual revenues of over $1 million, the restaurant was in trouble just over a year ago. Even before an employee was diagnosed with hepatitis, which cost the catering and gourmet-meals-to-go shop unexpected thousands of dollars in lost sales, owner Laurey Masterton had let growth get away from her. Cash flow was a trickle, and bills mounted.

Bank of Asheville helped her consolidate her debt. “(Bank president) Howard Montgomery would come by every month and spend hours and hours going over our books,” says Masterton. “He and his loan officer would help me spot trends and organize my balance sheet, and they helped me juggle long-term and short-term debt. They saved my business life,” Masterton says flatly.

Experts say service like that is a big reason de novo banks, as the industry calls those starting from scratch, flourish in North Carolina. “Growing banks is like growing tomatoes,” says Tony Plath, director of the Center for Banking Studies at UNC Charlotte. “With tomatoes you need water, fertilizer, sunshine and a favorable environment. With banks, you need good infrastructure, a good economic environment and good bankers. North Carolina has them all.”

When it comes to new banks, “We're more prolific than any other state,” adds Woodard. Big banks control 90 percent of assets, but community banks make up more than 120 of his 134 members. “They've proliferated from Elizabeth City to Hendersonville, and they're still coming.” Insiders can name another eight de novo banks in the works.

Underlying the formation of each is usually a drama like that of Millenia's Congleton. Only the details and dollar amounts differ.

In the age of overnight Internet successes and virtual companies, banks are created the old-fashioned way. The process is part Norman Rockwell, with Rotary Club networking and cookouts and fish fries under shade trees in back yards. “How about a prospectus with that burger, neighbor?” But it also requires months of financial finagling, grueling work and high-stakes intrigue.

Investors with deep pockets are limited and timing is critical. Sturges launched his Charlotte bank in 1995 and needed to raise $8.8 million. Two weeks later, by coincidence, First Federal Savings & Loan of Charlotte converted to public ownership with a $300 million stock sale. Investment money dried up overnight and it took Sturges a year longer than expected to raise his startup capital.

But there's another reason. Virtually all de novo executives cut their teeth with large, existing banks. Many, says Raleigh lawyer Tony Gaeta, who has handled legal work behind a dozen new banks, put in months or years of groundwork while still with an existing bank. Only at the last minute do they synchronize public announcement of the new bank with their resignation from the old.

A case in point is James Bolt, president of First Trust Bank in Charlotte, which was chartered in May 1998. When Bolt needed a preliminary conference with State Banking Commissioner Hal Lingerfelt, Gaeta arranged for them to meet blocks away from the commission offices. Bolt was a high-profile Central Carolina Bank executive at the time. “Jim knew he'd be recognized if people saw him at the commission,” says Gaeta. “The whole process can get pretty clandestine.”

The new banks vary tremendously. Some, including High Street Banking Co. in Asheville and Park Meridian Bank in Charlotte, target doctors, lawyers and other wealthy individuals. Others seek to serve average people, including Scottish Bank of Charlotte which resurrected a bank name famous in eastern North Carolina from the 1930s through the 1960s.

Often, de novos spring up after a local bank is bought by one of the state's Big Four — Bank of America, First Union, Wachovia or BB&T. A recent example is American Community Bank in Monroe.

On a November day in 1998, Randy Helton glanced around the temporary site of American Community and his eyes widened in disbelief. Helton, president of the new bank, had expected a few hundred investors and customers to drop by for customer appreciation day. Instead, 1,300 visitors poured in.

Helton had been recruited only seven months earlier from First Union Corp. by a group of Monroe business leaders after First Charter Corp. of Concord bought Bank of Union.

“The whole thing was from the grassroots up,” says Helton. “Until 1995, Union County had always had a locally owned bank, and a small town like this takes great pride in ownership. Suddenly, we had eight regional banks like Bank of American, First Union and Wachovia, and the smallest was First Charter, a $2 billion bank.”

The banking commission set American Community's minimum shareholder investment at $6.5 million before opening. Helton started selling stock in April 1998 and in 30 days found takers for one million shares at $11 each. The bank then offered another 300,000 shares. At the end of 90 days, it had raised $13.7 million. Now, a little over year later, it has assets of $57.5 million, is already profitable, and will soon open its fifth branch.

Another spark for de novos comes when banks reduce staff following a merger. In that process some executives invariable are left without jobs, creating a restless talent pool. When Bank of Asheville opened in 1997 its 11 staff members had 150 years of experience. When Raleigh's Capital Bank, which set a startup record by raising $27.5 million, opened in June 1997, its president, James Beck, already had nearly 25 years experience, including having started the SouthTrust Bank franchise in North Carolina. He and his top four executives totaled 100 years in banking. Congleton had been with BB&T for 17 years.

Jimmy Thomas, vice president for real estate lending, chuckled at Cameron Coburn's question as the two bumped into each other at the back door of United Carolina Bank's Wilmington office one evening three years ago. “Jimmy, have you ever thought about forming your own bank?” Coburn asked. “Where were you 10 years ago?” Thomas replied.

Thomas and Coburn had been offered positions with BB&T, which had bought UCB, but both were evaluating their options. So in June 1997 Thomas and Coburn found themselves squinting at each other across a single desk in a one-room office in Wilmington, sharing a laptop computer and working the phones for investors willing to commit $7.7 million. “We thought we could do it overnight,” says Thomas. “It took a year.” Bank of Wilmington got its charter in June 1998, having raised $9.3 million. Today, it has two offices, including a second Wilmington branch opened in August, and more than $40 million in assets.

Other success stories? Catawba Valley Bankshares Inc., formed in Hickory in 1995, today has offices there and in Newton-Conover, with assets of nearly $112 million. And in Hendersonville, MountainBank, chartered three years ago, has $108 million in assets and four branches. Its third quarter profits of $131,000 were up 285 percent from a year earlier. That, notes president J.W. Davis, “exceeded our net income for all of 1998.”

There is, of course, more to the phenomenon of de novo banks in North Carolina than hard work by motivated bankers. History, regulation, luck and technology are on their side, too.

“In Southern business, real men start banks,” quips Plath, the banking professor. “That's been going on for three generations.” One theory holds that the Civil War was as much an economic as a social struggle. “The antebellum attitude was that, to reclaim economic independence, we had to become our own financiers. We didn't want to have go hat-in-hand to New York to ask the Yankees for money, and the tradition of the merchant bank was formed.”

Visit Scottish Bank in Charlotte. John Stedman Jr., founder and president, spreads a scrapbook of yellowed news clippings and advertisements on a table. They date to the late 1930s when his grandfather, John P. Stedman, founded the original Scottish Bank in Lumberton. It was an era when banks gave toasters and dinnerware to customers, and passed out dime savings cards to encourage their kids to save.

First Union bought the original Scottish Bank in 1964, but in 1972, John Stedman Sr., John P. Stedman's son, formed Republic Bank in Charlotte. Republic was bought out by CCB Financial Corp. for $125 million in 1986.

Today, John Stedman Jr., who occasionally dons kilt and sword to promote the latest Scottish Bank, chartered in 1998, says he hopes to recapture the spirit of the original, focusing on accounts for seniors, families and small businesses. “Essentially all community banks make a case that small businesses are underserved, and that they can do better,” says Harry Davis, professor of finance at Appalachian State University and economist for the banking association. Congleton, for example, says the focus of Millennia Bank will be enterprises of less than $1 million a year in sales. Bank of Asheville, in only its second year, has become the state's 14th largest small-business lender, and has been named by a local consumer group the minority-business lender of the year.

North Carolina bank laws and regulatory environment get credit, too. Capital Bank's Beck, in Raleigh, notes that Depression Era statutes that permitted development of branch networks set the stage for community banks like Scottish Bank, and that today's banking commission, under Lingerfelt, plays a unique role. It's both tutor and tormentor.

Throughout months leading up to a charter hearing, the staff, say de novo bankers, is nurturing and coaching. “They're customer friendly,” in Plath's words. That includes passing out a thick packet of information, developed with the N.C. Bankers Association, that presents a paint-by-numbers approach to startups.

Then the charter hearing becomes the final exam, a stern reality check. “Up to that point, you've been out in the community selling air,” says Sturges. “`We don't have a bank, and we don't have a charter, but, boy, it's going to be great!' Then you go before the commission and think, `I've got a year of my life and a million dollars of my friends' and associates' money at stake. If I don't do this right, I won't get a second chance.'”

In addition to staff help in preparing for the hearings, startup bankers have available to them lots of expert legal advice. In addition to Gaeta, the Raleigh law firms of Sanford Holshouser and Moore & Van Allen, along with Ward and Smith, of New Bern, and in Greensboro, lawyer Ed Winslow of the firm of Brooks Pierce, all focus on startups. Winslow is also counsel for the Bankers Association.

But in practice, the tough regulatory environment has paid off. Although two new banks, Crown National in Charlotte and Bank of New Hanover in Wilmington, failed when caught in the early-1990s recession — they were insured and no depositors lost money — others have generally prospered.

“Another big reason for the explosion of startups this decade is that we've not had a recession since 1992,” notes Davis. “In February, this will become the longest post-World War II recovery period, so it has simply been a good time to start a bank.”

One of the biggest boosters, however, of de novo banks is technology, simultaneously helping to create a market for them but also giving them tools to compete with giant rivals.

At the sprawling First Union customer service center in suburban Charlotte, a computer system called “Einstein” helps customer service representatives sort 45 million calls a year by assigning each customer a small, green, yellow or red square on the computer screen. That signals to the representative the customer's minimum balance and how profitable he or she is for the bank. And that sets the tone for how the customer is handled.

The bank saves $100 million a year by weeding out unprofitable customers, such as those who call often to check on their balance. But many customers like personal service, and are the bread and butter of community banks. “We don't compete with big banks,” says Montgomery. “We complement them.”

Other de novo bankers think so, too. “Technology enables large banks to focus on profitability instead of personal relationships,” says Congleton. “The majority of customers in an area like ours, which is more rural and farm oriented, still enjoy a bank that's willing to deal with them on their turf and their terms.”

Technology also helps keep equipment costs low. “We used to spend millions of dollars for those big, blue boxes,” says Sturges, a former CCB executive, referring to giant computer systems such as the IBM AS400, the $190,000 computer that once was a mainstay of banking. Now, a $5,000 personal computer-based system can do as much. “You no longer have a huge investment in fixed assets,” adds Sturges. “In our first year, we budgeted only $450,000 for premises, equipment, the works.”

Banks also pare startup costs by relying on a huge support industry that handles everything from monthly statements to credit and debit card servicing, all on an outsourced basis. That helps minimize staffing. Thomas, for example, notes that his bank, less than two years old, offers both kinds of cards, all possible deposit and loan services, ATMs, a brokerage, and soon, electronic banking.

Outsourcing also puts investor dollars to work. “Ninety-eight percent of our assets are earning money, instead of buying buildings or equipment,” says Helton at American Community in Monroe. “Technology levels the playing field with the big guys. There's nothing they can bring to a customer that we can't bring more efficiently and more user-friendly.”

It's ironic that many little banks tend to become big banks. Triangle Bancorp of Raleigh mushroomed in a decade from $53 million in assets to $2.3 billion before being acquired by Centura Banks of Rocky Mount in 1999. As community banks mature, the very investors who made them possible often want to cash in when lucrative buyout offers come along. “Founders put their hearts, souls and pocketbooks into them,” says Woodard. “But shareholders pressure them to sell, and it's not often the gnat can swallow the elephant.”

Not all go that route, though. A few months ago, banners and flags flew on the town square, as thousands turned out to celebrate the 125th anniversary of First National Bank of Shelby. “The one thing the big banks haven't figured how to do yet,” says Plath, “is to grow old along with you.”

COPYRIGHTED MATERIAL. This article first appeared in the January 2000 issue of North Carolina Magazine.