Regulators Need to Approve New Types of Banks: N.C. Banking Commish

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Federal bank regulators should embrace new types of bank charters, according to Ray Grace, North Carolina's banking commissioner.

Grace, who has spent more than four decades in various regulatory roles, told attendees at a recent conference hosted by the North Carolina Bankers Association that the banking industry has the potential to be a "laboratory for change."

But regulators need to assist in that transformation, he said.

"Regulators need to shake themselves up," Grace said in response to an audience member's question on the status of bank charters. "I'd like to see new types of innovative banks formed."

Grace pointed to two North Carolina banks as prime examples of pioneering institutions: Square 1 Financial in Durham, which was sold last year to PacWest Bancorp in Los Angeles for $849 million, and Live Oak Bancshares in Wilmington.

Live Oak, which is among the nation's biggest participants in various Small Business Administration loan programs, "has knocked it out of the park," Grace said. (Live Oak, which also created cloud technology firm nCino, went public last year.)

Obtaining new charters has proven difficult since the financial crisis, as the Federal Deposit Insurance Corp. balks at signing off on new banks. Only two banks – Primary Bank in Bedford, N.H., and Bank of Bird-in-Hand in Pennsylvania – have successfully navigated through the approval process in the last four-plus years.

Grace acknowledged "caution" on the part of federal banking regulators, adding that "the economic drivers haven't been there" to start a wave of applications. "I'd like to see a stronger economy" before de novo activity accelerates, he said.

Consolidation could be another factor when it comes to creating demand for new banks, Grace said. Since 2010, nearly 40 banks in North Carolina have sold themselves, including seven last year, based on data compiled by Keefe, Bruyette & Woods.

As an aside, Grace noted that assets and loans supervised by his office have increased, but only because of acquisitions by BB&T, BNC Bancorp and First Citizens BancShares and a charter conversion by HomeTrust Bancshares. Otherwise, supervised assets and loans have been flat in recent years.

There has been speculation that there are groups that want to form new banks, but few documented instances in recent years.

A group led by the Gallaher family of Windsor, Calif., filed documents earlier this year to form Blue Gate Bank, to be based in Costa Mesa, Calif. The group, which has raised $30 million, hopes to receive regulatory approval in the second quarter. The Gallaher family is the principal shareholder group of the $957 million-asset First Community Bank in Santa Rosa, Calif.

California regulators approved a request last fall from private-equity firm Carpenter & Co. to form a corporate entity and raise capital for a new state-chartered bank. Carpenter & Co., which is affiliated with Carpenter Bank Partners, a $3.9 billion-asset company that owns several other banks in California, is looking to form an institution called Core Commercial Bank.

The Office of the Comptroller of the Currency, meanwhile, has received inquiries from fintech companies, including a virtual currency firm, about applying for a banking charter, Chief Counsel Amy Friend said during a recent panel discussion at George Washington University Law School's first FinTech Forum.

Grace, meanwhile, said he is "already hearing some chatter from folks at least asking questions" about charters in North Carolina. "It's going to come slowly … but I'm beginning to sense we're coming to a pivot point" for new banks, he said.

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