2005 Industry Report: Banking

Interest in new banks is running higher than usual

Bank notes

TREND: An improving economy and more deposits have created a climate that can suppport more banks.

OUTLOOK: High stock prices will prompt big banks to enter some markets by building branches instead of buying smaller banks.

After the sale of Hendersonville-based MountainBank in September 2003, its chief financial officer, Greg Gibson, lost his job — but not his ambition. Eight months later, Mountain 1st Bank & Trust opened in Hendersonville with Gibson as CEO. It reached profitability in four months — a state record for banks. “We have a great market that really is hungry for the way we do business and the services we provide,” Gibson says. “And the timing was good.”

Others thought so, too. During the first 11 months of 2004, eight state charters were granted to bank startups. Four other banks were being organized. Only two new banks opened in 2003. In 2002, none.

Newcomers will challenge older banks for business. But with many North Carolina banks ringing up record profits and unprofitable banks down from 17.4% of the total in June 2000 to 6.6% in June 2004, the market seems able to handle more. “The amount of capital available for startups is really incredible,” says Tony Plath, associate professor of finance at UNC Charlotte.

A combination of factors has fueled the resurgence in bank formation. The economy finally seems to be recovering. Mergers have created a pool of seasoned executives such as Gibson who are eager to launch banks. And investors are ponying up, having watched earlier startups pay off handsomely. “People watched friends and neighbors do well in the ’90s, and they are projecting that trend into future,” Plath says.

Deposits at federally insured banks in North Carolina have increased in each of the past two years, reaching $163.9 billion in June. “Deposits are one of the key driving engines for community banks,” says Buddy Howard, president of Raleigh-based Equity Research Services. “As a result, community banks have grown very rapidly, and stock prices have done well.”

Meanwhile, bigger banks have made lots of money, thanks to economies of scale from mergers. They also boosted income from services such as mortgage refinancing, and low interest rates have made deposits cheap.

Charlotte-based Bank of America has posted record profits despite costly missteps. In the biggest, the bank shelled out $125 million in fines and $250 million to investors to settle complaints that it gave special deals to big traders at the expense of small investors in its mutual funds.

But the bank’s cost controls combined with a growing revenue stream — up 25% to $35.1 billion — produced $10 billion in net income for the first nine months of 2004. It netted $8 billion the year before.

BofA completed its $47 billion purchase of FleetBoston Financial in April — the traditional way banks enter markets. But it is taking a different approach in Chicago, building branches instead of buying banks. That reflects some national trends. More people, more deposits and a slowly improving economy mean a favorable climate for new branches. Yet potential takeover targets are priced high. “Because of that, in some cases it is cheaper to build than to buy,” says Christopher Marinac, a banking analyst with FIG Partners in Atlanta.

Charlotte-based Wachovia used both strategies last year. It paid $14.3 billion in November for Birmingham, Ala.-based SouthTrust. It also plans to enter Texas by building rather than buying. Wachovia planned to open six branches there by the end of 2004, then add 30 to 50 a year through 2010.

North Carolina’s third-largest bank, Winston-Salem-based BB&T, struggled with its last major deal, the $3 billion purchase of First Virginia Banks in 2003. Its profit slipped, and its stock price slumped from $40 a share in late 2003 to $33 by May 2004, so it cut costs and stopped buying banks. For the first nine months of 2004, BB&T reported net income of $1.1 billion, up 50% from 2003. The stock was trading at about $42 in December.

Gibson sees good times ahead for the industry. “Historically and statistically speaking, when the economy turns, we start to get more banks starting. It tends to be a leading indicator of the recovery.”