Community banks are an essential function to creating a healthy and sustainable local economy. They support small businesses and entrepreneurs, they understand the unique value propositions of the communities in which they serve, and they reinvest locally. Here in the DMV, some of these critical institutions have stood by the local community for over a century of economic ups and downs, world wars, natural disasters, and pandemics. Then as now, community banks in the DMV are diligently focused on providing customers with the financial assistance and guidance they need for long-term success.
Alex Orfinger, market president and publisher of the Washington Business Journal, spoke recently with six local bank presidents about the role community banks play and why they are an important piece of the fabric of our business community, where they see the economy headed, and why this community is ripe for business opportunities.
National Capital Bank President and CEO, Jimmy Olevson was joined by, Ed Barry, CEO, Capital Bank; David Boyle, president and CEO, Burke & Herbert Bank; Brandon Lorey, president and CEO, Bank of Clarke; Martin McCarthy, co-founder, director, and CEO, Founders Bank; and Dennis Zember, president and CEO, Primis.
Following are excerpts from the discussion.
Why are community banks important to the local business community?
Ed: One thing I always am proud of is that community banks are filled with entrepreneurial people. You can’t underestimate their ability to innovate and come up with solutions and find ways to be relevant in today's world.
David: If you think about how we build a market, we generate deposits in our market, they stay in our market, and every dollar that we lend in our market comes back. That stimulates ongoing economic activity in our local markets. It’s important that we have a strong local economic infrastructure, and we’re the organizations that support that.
We live here, we work here, we go to church here, our kids go to school here. We are the very fabric of what our businesses are. That is the value of community banking. We’re here, we're accessible.
Martin: Accessibility. That’s the core of what community banks can provide that the larger institutions cannot. Many of these smaller businesses that we’re dealing with tend to have more credit needs. There’s more story to it; maybe more opportunities and issues that come along during a one-, three-, or five-year period of time.
Dennis: It’s all about pure economics for big institutions, whereas we are actually thinking more about the community. There’s an important piece that a community bank plays within that community that’s outside of just the lending piece.
In this post-Silicon Valley Bank world, what keeps you up at night? Are community banks in peril with overexposure to commercial real estate loans?
Jimmy: Cyber security and credit quality always keep me up at night. The biggest takeaway for me from SVB failing was that, unfortunately, it made sense.
Martin: Do we have exposure to commercial real estate (CRE)? Sure, we do. This is a 70%, 75% commercial real estate market. We're going to have exposure to commercial real estate, but it’s different exposure. We’ve diversified ourselves appropriately, whether it’s across the lending spectrum or just inside CRE where we have different asset classes. We don’t concentrate in office, for instance, or concentrate in hospitality, but we’ve done our jobs to keep our risk as diversified as we can.
Ed: We have to be diverse, and just by the nature of our size, we are much more granular. By granular, we do tend to know the customers better. Also, deal sizes are a bit smaller. I think that many of the problems that are coming are the big ones.
Where do you see M&A activity headed in the marketplace?
Ed: What’s going to happen on the funding and deposit side as the Fed drains liquidity from the banking system is that it’s going to put more pressure on banks both large and small. There’s going to be a lot of money flowing out of the banking system. You’ll see who’s exposed to not just grow, but to sustain the business they have. Then there’s an impact on capital, which is lurking.
Martin: I’ve been very involved with a lot of the investment bankers that are in town just trying to get a sense of what's going on in the market, as we’ve raised capital twice recently. In talking to them, I believe there are a lot of M&A activities that have simply stalled because of how crazy the market has been. It’s a very challenging time to actually execute on an M&A deal. Now that the fog is clearing a little bit, I would assume that many of the stalled deals will actually come to fruition in the next couple quarters.
Brandon: There hasn’t been M&A to any real degree over the last couple of years. You’ve got succession planning issues with both boards of CEOs. It’s going to happen. I agree, I think it’s within quarters, not years.
Dennis: I think there’s a big desire for M&A and there's a lot of fatigue. A lot of the banks that are fatigued and whose business plans have melted away have negative equity on a marked balance sheet. If you come to the market right now, you’ve got to raise hundreds of millions of dollars to recap a bank. Every quarter that goes by, that fatigue just gets worse and more intense. I think a lot of people feel stuck right now.
Jimmy: More merger than acquisition.
What is your economic outlook in terms of a hard or soft landing?
David: I think it’s going to be a hard landing, but it’s not going to be ’08. This cycle has been and continues to be drawn out by stubborn inflation despite repeated rate adjustments. An adjustment will occur at some point.
Jimmy: I don’t think you can raise rates this fast without consequences. We haven’t seen the effects of the rates.
Ed: I do think this cycle will go on longer than anticipated. I think people believe you have a correction and then it starts to bounce back. I think it’s going to be a slow phase of letting the air out. People will feel it. It won’t be a fatal event, but it’s not going to turn back to a positive cycle shortly thereafter.
Why is the DC community a great place to do business?
Ed: There’s a lot more surging on the technology side, and the global hotel industries based in the DC area. Over the years, it’s been taught to diversify away from the federal government, but you’re now actually starting to see the proof points that there are things that create meaningful opportunities for folks.
When I ask people outside the area to name the wealthiest places in America, they say Beverly Hills or Palo Alto or Greenwich or Upper East Side. I tell them Howard County and Loudoun County. The suburbs of DC. Providing services to the government has been extraordinarily lucrative as a business model for entrepreneurs. I think everyone here has capitalized on that in one fashion or another.
Brandon: The government will always get bigger. No matter who’s in power, it’s going to grow at some level. It may be a slower growth, but I think that it doesn’t really reverse.
Dennis: When you look at this area against the big cities, this place has a lot more going for it. Virginia’s taxes are not crazy. We went big on technology here. We’ve got the federal government. There’s momentum and there’s technology.
Martin: I’m a Washingtonian and I’m very proud of it. I think that downtown DC will come back. We’re still an international city. We’ve got three international airports surrounding us. It’s a big deal that we have all that data and fiber coming down from the north and now it’s over on the Maryland side, too. You read now about quantum computing. That’s the future. Those jobs are going to be here.
