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It’s a Wonderful Life
Rowan’s Community Banks Stay Close to the George Bailey Ideal of Trust and Respect

Folks in Rowan County know that it makes good sense to minimize “food miles” – the distance between farm and fork. We like our fruits and vegetables grown locally. That benefits area farmers, keeps us healthy and saves energy.

The same idea plays out in banking. Banks located closer to their customers, those with the fewest “bank miles” between headquarters and home, are more in touch with local issues, local opportunities, local risks and local people.

These neighborhood bankers are the modern equivalent of George Bailey, the lead character in Frank Capra’s film, It’s a Wonderful Life. George Bailey understood and cared for the citizens of Bedford Falls. He accumulated their deposits and loaned their money to others for homes and small businesses. His customers repaid him with interest as well as trust, respect and repeat business.

Four Rowan commercial banks - Bank of North Carolina, Community Bank of Rowan, F&M Bank and Bank of the Carolinas - come close to the George Bailey ideal. They are independent and locally owned and operated North Carolina state-chartered institutions regulated by the North Carolina Office of the Banking Commission. But that’s local in a “bigger than Bedford Falls” sense. The presidents of these banks may not be your next door neighbors, but they live and operate their businesses only in North Carolina - not Georgia, South Carolina, New York or anywhere outside the Old North State.

Of the four, Bank of North Carolina is the largest with 15 branches, 220 employees and $1.58 billion in assets. Headquartered in Thomasville, it has one branch in Salisbury where Mark Lewis is senior vice president and regional executive.

The smallest is Community Bank of Rowan with two Rowan branches. One is located in Salisbury and the other in China Grove. Combined they have 21 employees and assets of $146 million. Bruce Jones chairs the board and serves as president and chief executive officer.

In between are F&M Bank and Bank of the Carolinas. Nine of F&M’s 11 branches are in Rowan County – this has been their home base since 1909. They employ 137 people and manage assets of $687 million. President Dan Williams oversees operations from his office in Salisbury. Bank of the Carolinas, which began as the Bank of Landis, has nine branches in the state, two in Rowan County – Cleveland and Landis. Steve Talbert of the Landis branch is vice chairman of the corporate board of directors. Headquartered in Mocksville, the bank employs 113 with $570 million in assets.

One bank has an out-of-state connection. Community Bank of Rowan is one of 64 banks held by Capital Bancorp, a publically traded company headquartered in Lansing, Michigan. “Capital Bancorp put up 51% of the capital. We raised 49% from shareholders in Rowan County,” said Jones. The Michigan holding company gets local banks up and running, provides all of its back-office services, such as accounting, personnel recruitment and training, and can sell or consolidate its affiliate banks. “Lending authority and prices for loans are all made locally,” said Jones. “We are not a branch of Capital Bancorp. We are individually chartered in North Carolina and have our own local board of trustees.” Jones also manages Capital Bancorp-affiliated banks in Asheville and Rocky Mount.

There are advantages to staying local and small. Large banks might make bigger loans than any of the Rowan Four, but they “can’t compete with us in lending to small business,” said Lewis. Small is the opposite of cumbersome and bureaucratic.

“The biggest advantage F&M has over the mega banks like Citigroup and Bank of America is our ability to be nimble and quick in our decision making,” said Williams.

Jones added, “We don’t have to go through 30 people to get authority to make a loan.”

All four officers agree on one key advantage. Like George Bailey, they know and understand their customers. Personal service topped all other reasons for their success.

Small banks share at least one characteristic with their larger cousins. Like national banks, the Rowan Four have built-in protections for depositors. They are members of the Federal Deposit and Insurance Corporation or FDIC. That means interest-bearing deposits at any of them are insured up to $250,000 in the event of failure.

Unfortunately, failure is more of a problem with smaller banks, than national ones. Of the country’s 25 banks that closed their doors in 2008, 23 were small, regional banks. For 2009, banks are averaging one closing a week. All those that failed so far this year have been small, regional banks. Some analysts predict that another 200-300 banks will die before the Great Recession is through. That’s getting close to the more than 1,000 banks and savings and loans that closed in 1988 and 1989.

What is it about small banks that get them into trouble? It’s not subprime lending. Small town bankers have an innate aversion to falsifying financial statements and creating bogus appraisals – the practices that made home owners out of thousands of unqualified borrowers. “Community banks operate in their community and cannot risk the reputation of not using sound underwriting criteria for dealing with their customers,” said F&M’s Williams. Subprime loans may have helped bring down a few megabank Goliaths, but no little Davids went belly up for that reason.

Small banks have a different constellation of problems. Their bread and butter is loans for new construction, commercial development and small business expansion. In today’s market, anything, from office buildings and restaurants to new homes and golf courses, built on speculation could spell trouble for the contractor and the lender. “Speculation is probably the biggest culprit when small banks fail,” said Steve Talbert. “In an effort to grow business, some banks have made speculative loans that they shouldn’t have. We’ll make a construction loan to someone to live in a home, but we have backed off on speculative lending for new homes.”

“The biggest thing killing banks is subdivisions,” said Lewis. “Every subdivision loan is under water. The value of lots has been hit harder than anything else.” When commercial real estate is worth less than the value of the loan and no one is buying lots or houses, developers may default on their loan. Banks may try to sell the loans, but at a loss. That scenario may sink a small bank.

Small banks can also be brought low by changes in the industries that dominate their local economy. Take the Bank of Granite, the Caldwell County superstar that Warren Buffet once called “The best run bank in the United States.” Why did this steady and reliable bank lose $15.3 million in 2007 and another $11.5 million in 2008? “If you get caught lending in the wrong industry – textiles and furniture – and that market leaves, you are in trouble,” said Bank of North Carolina’s Lewis.

There are also internal reasons for failure. Williams: “A majority of the banks that fail attempt to grow too quickly by putting loans on the books that are not necessarily properly underwritten to safe and sound standards.”

Lewis: “If banks depart from sound lending practices in the name of competition, they fail.”

Jones: “If you make high risk loans some banks will fail.”

Competition can drive small banks to make high-risk loans. There are 13 commercial banks with 34 offices or branches in Rowan County. That’s one bank office for every 3,800 people. That means there is one bank office for every 79 Rowan County businesses. A lot of bankers are chasing the same rabbit.

Are there too many banks in Rowan County? Williams believes there are. His bank was established in Rowan County 100 years ago and has seen a lot of newcomers set up shop on their home turf. “There is only so much growth that can occur normally in a community,” said Williams. “Too many banks in a particular market make it very difficult for all of those banks to be successful.”

The other three bank officers disagree. They have made money in F&M’s backyard. “There is a need for everybody,” said Talbert.

“Each has its niche.” Lewis and Jones started their banks from scratch. “We hit profitability at the end of the 16th month,” said Jones. “There is plenty of room for all of us.”

In five and a half years, Lewis has generated $160 million in loans. “Everybody’s making money,” he said.

Profitability may spell good news for borrowers. All four are full-service banks offering mortgage and construction lending services. And they are lending and refinancing to qualified applicants. “There is plenty of credit available,” said Jones.

The money is there, but where are the buyers? “In October 2008, real estate sales stopped,” said Lewis. “Rowan County housing values decreased, but nowhere near other markets.” Housing prices were down as much as 60 percent in Arizona, Florida and California. “It hit them much earlier and harder than our area, and we expect to recover sooner,” said real estate agent Mary Arey. “Actually, home sales have started to pick up in Rowan County. Banks are lending and at good rates.”

Money magazine is predicting that housing prices will hit bottom in the Carolinas during the third quarter of 2009 followed by a slow recovery. “Housing prices are not expected to reach their 2006 levels again for another decade,” said Money in its April issue.

As home sales recover, all banks - from national to local - will get more creative and flexible with interest rates, closing costs and fees. Those who shop for a mortgage at a small bank will find that a George Bailey relationship comes along with a business transaction. That’s something money can’t buy.

For the purpose of this article, the neighborhood banks covered are those which are independent, locally owned and operated, North Carolina state-chartered institutions regulated by the North Carolina Office of the Banking Commission. There are many banks outside of this classification that serve Rowan County. According to the FDIC other banks in Rowan County include Bank of America, Citizen’s South Bank, CommunityOne Bank, Fidelity Bank, Fifth Third Bank, First Bank, SunTrust Bank, Wachovia Bank and Woodforest National Bank.