2007 Industry Report: Banking

N.C. companies hoist sales for inner and outer banks
By Chris Richter

Bank notes

TREND: North Carolina megabanks continued to expand outside the state, and the number of startups increased.

OUTLOOK: Expect the rate of bank charters to slow. Smaller banks will look for mergers or growth in neighboring states.

North Carolina's two largest banks went shopping last year, but their sexiest deals weren't for full-service banks like themselves. In October, Charlotte-based Wachovia paid $25.5 billion for Oakland, Calif.-based Golden West, a savings bank that specializes in home-mortgage loans. Wachovia added $62 billion in deposits and 285 branches and entered states it has targeted for expansion, including Califor-nia. Charlotte-based Bank of America announced in November that it will pay $3.3 billion for New York-based U.S. Trust, part of San Francisco-based Charles Schwab. U.S. Trust will make BofA the nation's top private-wealth manager when the deal closes in March.

Though Winston-Salem-based BB&T, the third-largest bank in the state, didn't close a big deal last year, there could be one in its future. To survive and remain relevant among the behemoths, CEO John Allison says, the bank needs to merge with a like-sized bank within five to 10 years. It has talked about expanding into the Washington, D.C., metro area, Georgia and Florida.

Expect Wachovia to expand its businesses outside traditional banking. BofA is likely to look overseas because, with the purchase early last year of Wilmington, Del.-based MBNA, it hit the 10% cap on U.S. deposits gained through acquisition. It has a toehold in China, having spent $3 billion in 2005 to buy 9% of that country's second-largest bank, China Construction Bank. CEO Ken Lewis has said he isn't very interested in Europe - growth is too slow there - but analysts say BofA has been eyeing London-based Barclays Bank.

Growth in the Triangle is coming largely from outside players. RBC Centura Banks, based in Raleigh but part of Toronto-based Royal Bank of Canada, has been among the state's most acquisitive banks. In early November, it agreed to buy 39 branches in Alabama from Birmingham, Ala.-based AmSouth Bancorp for an undisclosed sum. That came three months after a $456 million agreement to buy Atlanta-based Flag Financial. And it broke ground on a downtown Raleigh headquarters in Sep-tember, calming fears that it might move out of state.

Boston-based Fidelity Investments announced in August that it will build a $100 million office complex in Research Triangle Park and create 2,000 jobs. The company already employs about 1,000 in North Carolina. And Switzerland-based Credit Suisse will spend $40 million to expand its office in RTP and add 400 jobs, doubling its work force there.

No homegrown bank has said it will expand its Tar Heel work force that much in 2007, but industry observers expect some major deals, especially among the dozen or so banks with about $1 billion in assets. Those banks are competing in the same regional markets, says Tony Plath, associate professor of finance at UNC Charlotte. "They're all in the Triangle. They're all in the Triad. They're all in the western part of the state. There's just nowhere for those guys to expand."

Smaller banks seeking less-crowded markets might want to open branches in Virginia and South Carolina. "Those markets aren't quite as competitive and filled with banks as the North Carolina urban markets are," Plath says. The crowding is due, in part, to a spurt of startups. Though only three banks were chartered in 2005, 11 were in 2004 and nine had been started in 2006 by early November. And they're entering a market where even established banks are feeling the squeeze of higher interest rates. BB&T cited that as a reason third-quarter net income dipped 6% below the same period in 2005.

Despite the competition, many Tar Heel banks were on track for a good 2006. Through Sept. 30, BofA reported net income of $15.9 billion, up 23% from the period in 2005. In November, it briefly overtook New York-based Citigroup as the world's largest bank by market capitalization. Wachovia reported record net income of $1.9 billion in the third quarter and increased its North Carolina market share nearly a percentage point to 41.6% as deposits in the state grew 8% to $81.5 billion.

Plath expects 2007 to be another good year, just a little tougher. If the housing bubble pops, its impact could reach North Carolina. Home prices never skyrocketed here the way they did in other places, so there isn't as far for them to fall. But home building is down and there are some stressed borrowers in residential real estate, which could increase pressure on their lenders.