Tech-averse bank warms to digital banking

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Carter Bank & Trust in Martinsville, Va., is finally embracing technology.

The $4 billion-asset bank's namesake founder, who died in 2017, spurned technology such as online banking and ATMs in favor of what he called “eyeball-to-eyeball” banking.

Fast forward two years, and his successor has begun offering online banking in an effort that has taken off.

Despite minimal marketing, more than 10,000 Carter Bank customers have enrolled in “Carter-on-the-Go” since its Feb. 12 soft launch. More than 450 customers have opted for e-statements and 270 signed up for online bill pay, said Matthew Speare, the bank's chief information officer.

“There was a lot of pent-up demand,” Speare said. Carter Bank plans to build on the platform by adding person-to-person payment and treasury management modules later this year.

The initiative was "absolutely critical" to a strategy of lowering funding casts, said CEO Litz Van Dyke, who was hired as chief operating officer in mid-2016.

Time deposits, including CDs, make up 58% of the bank's total deposits at Dec. 31. Non-interest-bearing deposits have declined for two straight years, accounting for just 15% of all deposits at the end of 2018.

By contrast, noninterest deposits average roughly a quarter of total deposits at all banks, according to the Federal Deposit Insurance Corp.

Carter Bank’s customer base includes 60,000 single-product households, with most holding CDs. The goal is to entice a healthy percentage of those depositors to move their primary checking account to Carter Bank — but the bank needed online banking to have any chance of success, Van Dyke said.

A typical product at most banks, online banking represents a major upgrade for Carter Bank.

While the late Worth Harris Carter was averse to high-tech products, Van Dyke gives his predecessor, who founded the company in December 1974 and served as chairman and CEO until his death, credit for developing an effective, low-cost, low-margin business model.

That model, which relied largely on time deposits to fund commercial real estate loans, thrived for decades. Carter Bank emerged from the financial crisis without experiencing a quarterly loss, and profits rose sharply — the bank earned $181 million between 2010 and 2015 — when the recovery began.

The bank's fortunes began turning in mid-2016, as a trifecta of rising interest rates, credit cracks and issues tied to Bank Secrecy Act and anti-money-laundering compliance increased costs. Net income fell by nearly 60% in 2016 from year earlier, to $16 million, and the bank lost $681,000 in 2017.

Carter Bank's efficiency ratio — a major focus under its founder — jumped from 54% in 2015 to 78% in 2017, according to FDIC data. While the bank returned to profitability last year, earning $11 million, its 2.75% return on equity is off significantly from the 9.53% ROE it produced in 2015.

Nonaccrual loans were 2.09% of total loans at Dec. 31, down from a peak of 3.24% a year earlier.

Carter Bank made significant progress addressing asset quality and compliance issues last year, Van Dyke said. As a result, he expressed optimism that the bank might soon be freed from a BSA-AML-related consent order it signed in October 2016. At the same time, investors have responded positively to efforts to "cleanse our balance sheet."

The investor base includes First Citizens BancShares in Raleigh, N.C., which has permission from the Federal Reserve to own up to 9% of the bank's stock.

"I feel good about where we're at and still see a pretty good runway on this economy," Van Dyke said.

“We had to have digital channels,” Van Dyke added. “I can’t ask our folks to go out and sell checking accounts without giving them the features our competitors have.”

Carter Bank’s late-stage adoption of digital banking lends its core deposit campaign a unique twist. In a broader sense, though, it’s one of scores of small banks that are scrambling to secure cheaper funding after years of near-zero interest rates lulled them into a reliance on wholesale money.

At the $803 million-asset Katahdin Bankshares, bankers “are out turning over every rock and seeking every dollar,” said Jon Prescott, the Houlton, Maine, company's president and CEO. Total deposits at Katahdin rose by just 1% last year, totaling $657 million. Its interest expense jumped by 29%.

Katahdin had managed to reduce the ratio of wholesale funding to total deposits to 15% last year from 24% in 2016. But rising interest rates have created a sense of urgency to lower that percantage even more.

So Katahdin hired a relationship officer for southern Maine and has reemphasized the need to bring in low-cost deposits. Moreover, "expending additional resources [on the effort] isn’t out of the question,” Prescott added.

Carter Bank, meanwhile, has taken other steps to modernize.

In August, the bank unveiled a consolidated call center to standardize how it handles the 1,000-plus daily calls it receives. Prior to that, calls were dispersed to branches, “so the way they were addressed was inconsistent,” Van Dyke said.

Van Dyke recently hired a former colleague, Tami Buttrey, as chief retail banking officer. She will be responsible for bringing consistency to the bank’s 105 branches, an outcome that had never received significant focus. When the company organized a three-day session with the branch managers last month, it marked the first time that those managers had ever met together.

“We want to create a consistent customer focus throughout the footprint,” Van Dyke said.

While initiatives such as online banking, along with a plan to add Carter Bank to the Nasdaq, are moves the bank’s late founder never seriously considered, Van Dyke said Carter had accepted the need for change prior to his untimely passing.

“It was his wish and desire,” Van Dyke said.

The bank “had reached an inflection point,” Van Dyke added. “It needed a change agent, but because of Mr. Carter’s age and health coupled with regulatory pressures, he realized he couldn’t be that, so he brought me in to do it.”

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