Chattanooga-area banks prepare to merge with others in the region

Craig Holley, Chairman, President, and CEO of CapitalMark Bank & Trust
Craig Holley, Chairman, President, and CEO of CapitalMark Bank & Trust

In Chattanooga's changing banking market, some of the busiest workers will soon be those making and installing the signs that display the bank brands on local offices.

Four of Chattanooga's biggest community banks are merging with larger banks in the region this year, and most will take on new names over the next year with the ownership changes.

The new bank names will be familiar to many, but not because they are major national banks. The banks buying into the Chattanooga market all come from elsewhere in Tennessee and Georgia and are buying or merging with the local banks to gain a stake in a nearby market and boost the economies of scale possible from larger institutions.

"Chattanooga is a strong banking market that we, like many others, knew we wanted to be in as we expand our business," says Terry Turner, the CEO of the Nashville-based Pinnacle Bank which is buying CapitalMark Bank in the biggest of the Chattanooga bank deals. "Finding our way to Chattanooga is a critical component to our growth strategy and we think we are joining with one of the best banks in the state."

Pinnacle, which previously operated in only Nashville and Knoxville, is buying banks in Chattanooga and Memphis this year to become Tennessee's second biggest bank holding company based in the state, behind only First Tennessee Bank. Pinnacle will pay $187 million to acquire CapitalMark and $83 million to buy Magna Bank in Memphis.

Another Middle Tennessee bank, the Lexington-based FirstBank, also is expanding into the Chattanooga market through its purchase of Northwest Georgia Bank. FirstBank, a subsidiary of First South Bancorp, Inc., entered the Chattanooga market in 2008 when it opened a couple of Chattanooga branches. The purchase of Northwest Georgia Bank and its nine branches will add nearly $300 million more of assets to FirstBank, which has about $2.5 billion in assets elsewhere in Tennessee and northern Alabama.

The Ringgold, Georgia-based Northwest Georgia Bank was started in 1904 and expanded into Tennessee a decade ago, only to be hit by the housing slump during the Great Recession in 2009-2010. FirstBank was bought in 1984 by nursing home developer Jim Ayers, who has grown FirstBank over the past three decades from $14 million to $2.5 billion in assets. Ayers said his bank will bring extra capital and back office efficiency to Northwest Georgia Bank.

The two other pending acquisitions of Chattanooga banks are closer to mergers of equals.

SmartBank, a Pigeon Forge, Tennessee-based bank, plans to merge with Cornerstone Bank in Chattanooga to create a combined bank with nearly $1 billion in assets. The Smart Bank name should go up on the Cornerstone Banks next year. But Cornerstone Chairman Miller Welborn will be chairman of the combined bank, which he expects could grow by 30 percent within its existing footprint of 12 branches between the two banks.

"And we're in a solid position to talk with other independent banks about mergers and acquisitions in the future," Welborn says.

FSG Bank, which was recapitalized with more than $90 million of new capital last year, is merging with the Atlanta-based Atlantic Capital Bank. Atlantic is paying about $160 million in stock and cash to acquire FSG and its 26 branches. But FSG will keep its name after the merger is completed.

"Each bank brings complementary strengths that will only be enhanced by the combined size and geographic reach of the merger," says Doug Williams, the chief executive for Atlantic Capital.

Urge to merge

Julapa Jagtiani, a researcher at the Federal Reserve Bank in Philadelphia who studies bank mergers, said stricter regulations and growing paperwork requirements are pushing more community banks to merge "to spread those costs over a larger base." From its peak in the 1980s, at 14,500 banks, the number of U.S. banks has dropped to about 6,000, even with a flurry of new banks started before the Great Recession.

"Generally, after banks merge they are able to realize more economies of scale and become more efficient," Jagtiana says.

Chattanooga's three biggest banks - First Tennessee, SunTrust and Regions - are regional banks based in Tennessee, Georgia and Alabama which have grown by acquiring community banks across the region. Collectively, the big three have just over half of the $8.5 billion in deposits in metropolitan Chattanooga, according to the Federal Deposit Insurance Corp.

First Tennessee entered the Chattanooga market in the 1970s through its purchase of the failed Hamilton National Bank; SunTrust acquired Third National in the 1990s after that Nashville bank earlier bought Chattanooga's American National Bank; and in 2006 Regions Bank acquired AmSouth, which had assembled the former First Federal Savings & Loan, Inter Federal Savings and Loan, and First American Bank, among others.

The pending bank mergers this year will leave Chattanooga with only one bank headquartered in the city - First Volunteer Bank and Community Trust & Banking Co.

But other independent banks are headquartered in nearby Dunlap (Citizens Tri-County Bank), Ooltewah (Community Trust and Banking Co.) Dayton (Community National Bank), Fort Oglethorpe (Capital Bank), LaFayette, Ga., (Bank of LaFayette) and Cleveland, Tenn. (Bank of Cleveland).

Banking on mergers

* CapitalMark, formed in 2007, will be acquired by the Nashville-based Pinnacle Bank for $187 million. * FSG Bank, formed in 2000, will be acquired by the Atlanta-based Atlantic Capital Bancshares Inc. for $160 million. * Cornerstone, started in 1985, will merge with the Knoxville-based SmartBank in a stock deal valued at * Northwest Georgia Bank, established in 1904, will be acquired by Lexington, Tennessee-based FirstBank of Tennessee. Terms were not disclosed between the two privately held banks. * United Community Banks, based in Blairsville, Georgia, will acquire Palmetto Bank in Greenville, South Carolina for $240.5 million. * Southern Heritage Bank in Cleveland, founded in 1999, was acquired in 2014 by First Citizens National Bank in Dyersburg, Tennessee for $32.2 million.

While some regional banks are buying into the market, others are opening their own offices to grow their own share of the 29-bank market in the 6-county Chattanooga metropolitan market. Southern Community Bank of Tullahoma expanded into Chattanooga last year and BancorpSouth Bank, one of the biggest banks in Mississippi, opened a bank office in downtown Chattanooga in April.

Pruning branches

Even as new offices open up from new entrants in the market, most of Chattanooga's banks are consolidating or closing some of their branch offices. Consumers are increasingly shifting from tellers to telephones and other electronic devices to conduct their banking business.

"A growing number of our customers, especially younger people, rarely visit a bank branch anymore," says Keith Sanford, market president for First Tennessee Bank. "They do their banking electronically and don't need to visit a bank office or see a teller. There are still a lot of folks who want that personal service in a branch, but we also have to keep pace with new technologies for those who prefer electronic banking."

The shift to online and phone bank transactions has encouraged local banks to close nearly two dozen branches across the region in the past decade. Even with new banks and branches, the total number of bank offices operating in metro Chattanooga last year, 161, was down by 18 from the peak level of 179 branches operating in the market in 2009.

Banks are likely to continue to operate with fewer full-service offices in the future as online banks and services become increasingly popular and are able to avoid most of the building and staffing expenses of maintaining a branch. But closing a bank office can meet with opposition, as SunTrust Bank found earlier this year when it proposed to shut down its East Third Street branch, one of the last remaining financial institutions in East Chattanooga. Customers complained, three members of the Chattanooga City Commission spoke out against the closing and SunTrust revised its earlier decision and agreed to keep the branch open indefinitely.

Pinnacle Bank is planning on adding an additional branch every year in Chattanooga after its purchase of CapitalMark.

"There are a lot of trends in which people are using non-traditional bank channels to transact their businesses with phones or remote deposit capture devices and the need for brick-and-mortar is not what it once was," Turner said. "But if you ask people why they they chose their bank, one of the top reasons is convenience and having a branch location near where they live or work. It seems to us to be an important part of how you build our business strategy."

Ready to lend

Local banks have had to look for ways to pare expenses in recent years as interest margins have shrunk on their loans and deposits have remained relatively flat. over the past four years in metro Chattanooga, according to FDIC data. Bankers say they bankers say they are trying to generate more loan volume, albeit with more cautious lending than before the Great Recession.

During the 2009-2010 housing slump, bankers learned again that sometimes the value of homes and properties decline and once-healthy businesses and consumers can quickly get into trouble when the economy stalls.

"We have money to lend and you're seeing the market open up again with more activity," said Frank Perez, the new chief financial officer at First Volunteer Bank. "But I think all of us are a bit more careful compared to some of the lending activity before the recession."

This story originally appeared in the June 2015 issue of Edge magazine.

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