If banking climates were described in terms of ice cream flavors, 2023 might well be rocky road. Peter Gwaltney said recently that the year was a tough one for banks.
“It was certainly a historic year in terms of bank failures we experienced,” the president and CEO of the N.C. Bankers Association said. “What I hope the general public and policymakers learned is there’s a difference between those unique circumstances – three idiosyncratic banks that were fast-growing and highly focused in specific markets (cryptocurrency, venture capital and startups) – and the vast majority of banks in the country. The majority, including North Carolina Banks, are highly capitalized, highly liquid, profitable and safe and sound.
“Of course, there was a lot of concern when those events took place that there would be contagion: a run on banks or widespread failures downstream,” Gwaltney continued. “We didn’t expect them because we know the industry, but we couldn’t control the public response. We were able to tell the story about how those were highly unique situations, however. That was the truth, and it has played out nicely through the rest of the year.”
In 2023, the other stones in the path were caused by the rapid rise in interest rates that started in March 2022 and continued well into 2023, Gwaltney said.
“These are problems the banks that failed had,” he said, adding that the constant inching up of interest rates not only exacerbated the failing banks’ other problems but made for a problematic asset management climate for all financial institutions.
Gwaltney pointed out that banks haven’t had to struggle with rising rates for over a decade, since the flatlining of interest rates after the downturn of 2007-08.
“The lack of [interest rate] movement is not healthy; it’s not normal,” he said. “We’re now in a more normal interest rate environment, and banks are adjusting. But there’s an impact on individual banks, on borrowers and savers and on the economy.”
So what about banks’ active efforts to increase their deposits to increase their lending capacity and provide a bigger cushion against potential future shocks?
Last month, Rocky Mount-based First Carolina Bank, which has a branch in Wilmington, forged a partnership with online financial technology firm BMTX. That essentially launched a new line of business for First Carolina that immediately boosted its deposit portfolio by nearly $450 million, expanded its customer base and gave it more lending power. Its partner? New Jersey-based BMTX Inc., a financial technology company and subsidiary of BM Technologies Inc.
The new five-year partnership makes First Carolina the exclusive provider of nearly 290,000 deposit accounts for college student customers of BMTX’s BankMobile Vibe. Those accounts total more than $431 million in FDIC-insured deposits.
“First Carolina Bank is no different than any other bank in the country,” Gwaltney said. “Interest rates went up on deposits through competition. Consumers and businesses expect greater return. At the same time, Treasury rates on T-Bonds went up. There were days when the two-year Treasury was about the same as a one-year CD. Banks are competing for money with the government and with anyone who can offer the investor or consumer a place to put their money that’s safe and gives a good yield.”
Because BMTX is an online financial technology company and not a bank, it cannot offer FDIC insurance for those deposit accounts, according to First Carolina President and CEO Ron Day. So, it was looking for a small bank to be a haven for its student accounts.
“FDIC insurance is available only through a bank, which must pay for that insurance,” he said. “[BMTX] is not a lender; it’s a fintech involved in the business of gathering deposits and has a contractual relationship with one-third of the colleges and technical colleges in this country.”
Day said BMTX serves low- to moderate-income students who receive some financial aid or government grant. The grant money initially comes to the school to cover specified expenses, but some is forwarded to the student as spending money. The student can put the money into an existing bank account or open a digital account with BMTX. Those accounts now reside with First Carolina Bank, which covers the accounts with FDIC insurance, services the accounts and manages fraud risks.
When those students need a car loan, a mortgage or other financial product, Day hopes they will turn to First Carolina, with which they already have a relationship.
“What First Carolina did that is unique is that, through a third-party relationship, it found a whole new source of deposits beyond the traditional sources,” Gwaltney said. “It’s connecting people who have needs with a bank that can meet those needs. That’s the kind of creativity that’s required today: Change has been so rapid and dramatic that you have to be on the balls of your feet every day.”
Another reason banks need to be nimble, Gwaltney said, is to respond to new regulations.
“In 2023, we’ve had more proposed regulations than I can recall any time in my 30-plus year career,” he said. “All banks have to read and understand [the new regulations] and determine how to comply when their compliance day arrives. That is chewing up a lot of resources.”
But there are blue skies in North Carolina, Gwaltney said. Turning again to ice cream flavors, Gwaltney has a mostly peaches-and-cream 2024 forecast for banking in North Carolina.
“North Carolina is CNBC’s No. 1 state for business two years in a row now,” he said. “Companies want to come here. The economy is growing and thriving. We have a number of banks moving into North Carolina, and they are doing it by opening commercial loan production offices, not the customary retail branches. They are being led and staffed in the state by experienced bankers lifted out of other banks.”
There are two local examples: Tennessee-based Paragon Bank scooped up several local bankers from Select Bank when First Bank acquired Select about two years ago to staff its new Wilmington location. And Pennsylvania-based Customers Bank opened an LPO in Wilmington at about the same time, staffing it with Brad Neigel and several other area bankers.
Unlike many new-to-the-state banks that choose Raleigh or Charlotte for their first footprint, Customers Bank decided to debut in Wilmington. It has since established a second office in the Lake Norman/Huntersville area.
Neigel said he agrees with Gwaltney’s forecast and that the health of the state’s economy and its robust growth curve is why Customers Bank chose to come to North Carolina.
“Our experience has been very positive,” he said. “We have our team in place, well-positioned to achieve success. This past year has been interesting, to say the least, but we are looking forward to a more normal 2024 in terms of loan growth, deposit growth and customer acquisition. We don’t see any issues that concern us, especially in North Carolina. This is where the growth is and where businesses and people want to be.”