Monarch Financial Holdings Inc.'s planned expansion into North Carolina's Outer Banks would move the Chesapeake, Va., company outside its home state for the first time.
But some observers wonder if the Outer Banks, a popular tourist destination, can continue to support more banks when deposit growth is slowing and the housing market is softening. Banks have opened seven branches along the 100-mile sliver of land in the last three years. The $408 million-asset Monarch plans to open one next month and another next year.
"It's getting a tad bit crowded," said Arthur H. Keeney 3rd, the president and chief executive officer of the $623 million-asset East Carolina Bank of Engelhard, which has six branches on the Outer Banks. "When will we reach the tipping point?"
Samuel Caldwell, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said that even though the Outer Banks is the only North Carolina market east of Raleigh "where anything is happening," the economy there has cooled of late.
Demand for second homes has slowed, so banks are making fewer construction loans, he said, and according to Federal Deposit Insurance Corp. data, total deposits in the market rose less than 4% in the year that ended June 30 after growing by an average of 12% in the previous four years.
"It's going to be tough to get the loans and the deposits at this point in the cycle with activity slowing there," Mr. Caldwell said. "It's going to take a lot longer for the branches that you build to get to break-even than it did, say, two years ago."
The eight-year-old Monarch, which announced plans to expand into the Outer Banks last week, will open a branch in Kitty Hawk next month. That branch and the one that will open next year will operate under the name OBX Bank.
Monarch currently has seven branches, all in the Hampton Roads area, which borders the Outer Banks.
Brad Schwartz, its chief financial officer and chief operating officer, said the company decided to expand into the Outer Banks because "there were a lot of folks having success down there," and "it's a good growth market that is contiguous to Hampton Roads."
According to Mr. Caldwell, the key to Monarch's success in the new market will be its ability to hire lenders with connections and experience.
Monarch took a big step toward that goal when it persuaded W. Ray White, who has 37 years of experience in the market, to come out of retirement and become OBX's chairman. Mr. White, who was a regional president at Royal Bank of Canada's RBC Centura Banks Inc. of Raleigh before retiring in 2002, will spearhead Monarch's efforts to establish a lending team and board of directors in the market.
"The immediate goals, I think, are to try and get back to some of the community-type relationships: customer … [relationships], quick service, quick turnaround, and a dedicated group of employees," Mr. White said.
The Outer Banks are made up primarily of two counties — Currituck and Dare — with a combined residential population of 58,000, according to the Census Bureau. But the region's economy is sustained by tourism. During peak season the daytime population of Dare County swells to about 220,000, or nearly seven times its full-time population, according to the Outer Banks Chamber of Commerce. Currituck County's population experiences similar trends, the chamber said.
The vitality of the tourist-based economy continues to attract banks to the Outer Banks, even though the market is growing more competitive.
The $1.2 billion-asset Gateway Financial Holdings Inc. of Elizabeth City, N.C., opened its first branch in the Outer Banks in 2002 and has opened three more there since. The mortgage subsidiary of the $714 million-asset Commonwealth Bankshares Inc. in Norfolk, Va., opened an office in the town of Kill Devil Hills in May.
Overall, there are 10 banks, with a total of 33 branches, competing for small-business and second-home construction loans while scrambling for their piece of the $1.06 billion deposit market.
The $23 billion-asset RBC Centura has the top market share, with 28.02% of the deposits in the two counties. Wachovia Corp. of Charlotte, East Carolina, Gateway, and Bank of Currituck in Moyock round out the top five.
Steve Jones, RBC Centura's market president for eastern North Carolina, said that even though the Outer Banks market is competitive, it is strong enough to support future growth, and even additional banks.
Because the area is so beautiful, and since some baby boomers may not want to go all the way to Florida to retire, the Outer Banks is "always going to be a destination of choice," Mr. Jones said.
"In the end, the new competition will benefit the banks," he said. "We welcome competition, because it keeps us on our toes and makes us better."
Still, East Carolina's Mr. Keeney said that Monarch can expect "intense" competition when it enters the Outer Banks. "We intend to give no quarter."
