At Carter Bank & Trust in Martinsville, Va., 2018 is likely to go down as the year the company stopped competing with one hand tied behind its back.

The $4.2 billion-asset bank is in the midst of a comprehensive overhaul of its operating system that, when completed in the third quarter, would allow it to offer mobile and internet banking for the first time. And catching up to the rest of the industry in digital banking should accelerate Carter Bank’s effort to attract more low-cost deposits while reducing its reliance on more expensive time deposits, said Litz Van Dyke, its new CEO.

“You can imagine if we’re in a branch today trying to sell a business checking account and we don’t have online channels. That is a pretty hard sell,” Van Dyke said.

A number of commercial borrowers are primed to move their accounts once Carter Bank goes digital, Van Dyke added.

“You can imagine if we’re in a branch today trying to sell a business checking account and we don’t have online channels. That is a pretty hard sell,” said Carter Bank's new CEO, Litz Van Dyke.

“I met recently with a commercial client in one of our markets that has been borrowing money from us for five or six years,” he said. “They have a great deal of loyalty to the company. They love the way we service their credit needs. They’re simply waiting on us to have the online channels to move all their operating accounts."

The new direction Van Dyke is charting amounts to nothing less than a sea change for the 43-year-old Carter Bank.

Van Dyke, who is 54, has implemented a whole host of changes since taking over as CEO in April, following the untimely passing of company founder Worth Harris Carter Jr.

Along with rebuilding its new operating system, Van Dyke has beefed up the management team with several senior-level hires, launched a major foray into mortgage banking and closed or sold more than a dozen branches, all in an effort to thrust Carter Bank into the 21st century.

It’s a tall order, and it is why Van Dyke, who worked as a consultant and chief operating officer before joining Carter Bank as executive vice president in 2016, is one of American Banker’s Community Bankers to Watch in 2018.

Carter Bank celebrated its 43rd anniversary in December with a ceremony remembering Carter, who was 79 when he died of cancer, and highlighting the renovation of its original branch in Rocky Mount, Va. Sid Mason, a founding member of the company’s board, recalled suggesting to Carter that they should reschedule the grand opening from its Dec. 13, 1974, target because it fell on an inauspicious date.

“Worth,” Mason recalled saying, “we can’t open on a Friday the 13th.” Carter’s response: “Watch me.”

From that modest beginning, Carter built his bank into one of the 10 biggest in Virginia without the benefit of an initial public offering and with just one small, government-assisted acquisition in 1982.

But he did it following an idiosyncratic recipe: He offered simple, meat-and-potatoes banking products for consumers, and then used their deposits to fund a loan book that skewed heavily toward commercial real estate. The balance sheet was fundamentally conservative, with strong capital levels and a loan-to-deposit ratio that seldom exceeded 60%.

Carter also eschewed the levels of spending for technology and marketing that are taken for granted at most other banks. It’s safe to say Carter Bank is the only bank its size in the country that does not have internet banking.

For decades, the model worked. Though costs for functions like marketing and technology were held to the absolute minimum, the company experienced virtually no losses during the financial crisis, exiting the recession with a full head of steam. Annual profit peaked at $39.2 million in 2015 and Carter Bank netted $135 million from 2012 to 2016.

“A lot of people put their faith in Worth Harris Carter and were rewarded handsomely,” Van Dyke said. “To build what he built was remarkable given the structure he had and the amount of responsibility he [handled]. … What you‘ve got to respect about Worth — I certainly did — was that he didn’t do it like everyone else did. Banks are guilty of being kind of lemmings. We follow the crowd even if it’s over the cliff. Worth didn’t do that. He did things his own way and he was successful with it.”

In 2016, however, Carter’s formula began to show signs of wear and tear.

In August of that year, it agreed to a consent order requiring it to significantly strengthen its Bank Secrecy Act and anti-money-laundering compliance. At the same time, stricter risk-management policies implemented by Van Dyke resulted in a spike in chargeoffs, which totaled $29.6 million through Sept. 30, or nearly triple what the bank reported for all of 2016.

Not surprisingly, profits dried up. Through the first nine months of 2017, Carter earned just $4.4 million, down 77% from the $19.4 million in earned in the first three quarters of 2016, according to Federal Deposit Insurance Corp. data.

Van Dyke is hopeful the worst of Carter Bank’s problems are behind it.

“When any bank starts emphasizing, increasing — whatever terms you want to use — its credit risk infrastructure, the credit metrics get worse before they get better, because we’re obviously opening closets and looking under rocks that weren’t opened or looked under before,” he said. “I am confident we’ve identified the majority of our credit issues and have taken the appropriate actions to address them. That’s not to say that there aren’t other smaller credit problems that could bite us, but we’ve attacked the big problems and dealt with them.”

Carter Bank has also made progress dealing with its BSA-AML issues, by reorganizing and beefing up staff and improving its training. The next step is to invest more heavily in technology that could better flag BSA issues.

“The regulators have been very positive about our progress, but ultimately we’ve got to have an automated system that will help us track and monitor account activity at the level required by the regulators. The platform we were on wasn’t sufficient to do that,” he said.

Van Dyke has also moved quickly to expand the senior management team, hiring a new chief lending officer, chief strategy officer and chief information officer — all positions that did not exist under Carter.

To counter a historical reliance on commercial real estate lending and spread income, which still accounts for nearly 90% of the $88.1 million in revenue generated through Sept. 30, Carter Bank has moved to enter the mortgage lending business, hiring Richard Owen, a longtime mortgage banker in Virginia, to head a new residential lending division.

The new business is a prelude to a move to seek membership with the Federal Home Loan Bank of Atlanta, Van Dyke said. He acknowledged many banks are exiting mortgage lending, citing increased regulatory burden, but for Carter Bank, residential lending fills some major needs. It provides the mortgage-related assets necessary to meet the Federal Home Loan Bank System’s entrance requirements and adds granularity to a loan book that needs it.

“We believe that mortgage represents a flagship financial product that a household is going to have, and it’s a gateway into that relationship,” Van Dyke said. “When we get a mortgage application, we’re going to have financial information that would allow us to assess needs and help determine where that relationship may lead in the future. We felt, when done right, having a more robust mortgage program would position us to become more of a problem-solver.”

With electronic banking on the way, Van Dyke has moved to shrink Carter Bank’s branch network, which had grown to 123 locations under Carter. The company announced plans to sell its office in Hot Springs, Va., to Highlands Community Bank in Covington, Va. It also closed a dozen underperforming branches. For now, no additional sales or consolidations are planned, Van Dyke said.

“We really are focused on this conversion,” he said. “I don’t see us doing much around the branch rationalization piece. … We’re going to wait, probably until later next year, to really get into that. We have too many resources focused on other things.”

When all is said and done, Van Dyke’s changes are meant to answer the biggest question that arose from Carter’s passing: What will happen to the bank he built? More than anything else, the new direction is meant to signal that Carter Bank, in all likelihood, will remain an independent company into the foreseeable future.

Of course that could change. First Citizens BancShares in Raleigh, N.C., which has a tendency to acquire small institutions, applied last year to build a 9% stake in Carter Bank.

“When I met with Mr. Carter in 2016, the questions I needed answered before I joined were: Do you want this company to survive beyond your tenure? What do you want to do with it; and if you want it to remain independent, will you empower me to do the things that need to be done to achieve that?” Van Dyke said.

“From my perspective, he gave the right answers on all fronts," Van Dyke added. "Mr. Carter wanted the bank to survive him. He wanted it to grow and continue to be an independent community bank that successfully served its customers, employees and shareholders. That is the charge we are committed to.”

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