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Welcome to the most widely watched and the longest-running dialogue on Carolina business, policy, and public affairs seen each and every week across North and South Carolina.

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And later on in the age of mega banks, FinTech, shadow banking, cryptocurrency, is there a community bank resurgence happening?

We are joined later by the CEO of Raleigh-based Dogwood State Bank, Steve Jones.

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On this edition of "Carolina Business Review," Andy Andrews of Dominion Realty Partners, LLC, James McQuilla from the Orangeburg County Chamber of Commerce, and special guest Steven W. Jones, chief executive officer of Dogwood State Bank.

(upbeat music) - Hello, welcome again to our program.

Thank you for supporting this dialogue over the last three decades or so.

We are grateful for that.

Andy, welcome back to the program.

James, I think your wardrobe consultant keeps getting better and better.

- I like that guy.

- And we've got a lot to learn from you, (Andy and James laugh) but thank you for coming up from Orangeburg as well.

Andy, you're in commercial real estate.

You're doing multifamily.

This is not new to you.

Can you still make money in multifamily now, which are apartments?

- Yeah, you can.

You can, but I just finished saying a little while ago this is sort of like '10 and '11.

It's just a little bit of a gray area.

We call it a hiccup.

But you know, the nice thing about '24 is it's changed from '23 when construction pricing went through the roof.

It had escalated at a ridiculous amount and for no unknown reason.

And now we've seen a drop in that.

So we've seen some savings in stick construction pricing of about 15%, and that's in the last 60 days.

- Does that offset the cost of funds?

- Yeah, it really helps because the cost of the interest rates had gone up, and they're at about 8 1/2 on the borrowing side.

So that's pretty stout.

And what's happened is we're seeing tremendous traffic at our apartment complex.

So people are still moving here.

Kids are still graduating.

They're going to school.

They need a place to live.

Nobody's buying houses, so to speak.

There's not enough volume there.

And those cost of funds to buy a house are pretty expensive, so they need to rent.

So there's still traffic out there, but there was a tremendous amount of product being delivered in '23.

So all those that were being delivered in '23 started construction in '21 and '22, and they're finishing in '23.

So we had in the Triangle area about 11,000 units.

In Charlotte, there's probably 14,000 units.

That's a lot of units to get at one time.

So there's a little suppression in those rental rates.

Once those things fill up, then the rental rates will go back to increasing a little bit, about 3% a year.

And you know, that'll be in '25 when they start really filling up.

You know, with hopefully the Fed making a good decision in September and hopefully- - Not trying to lead that, are you?

- No, well, I mean, you know, we're hoping to praying and wishing and thinking that they're gonna come down in September.

And if they do, that's gonna open up a lot of windows for people that think there'll be a resurgence.

Interest rates come down and then cap rates will come back down to where, you know, where they're a little bit more aggressive.

- We may have to unpack this cap rate thing.

Before we do that, James, when you hear Andy, and when you see multifamily coming out of the ground in places like Columbia, Charleston, Charlotte, Raleigh, Raleighwood, Raleigh, sorry.

That's the right way to say that.

- Old name.

- Yeah.

But my point is, is that happening in Orangeburg?

Do you have multifamily?

- Not yet.

We're kind of recruiting for that to happen.

There's a lot of development going on as far as the industries, right, on the economic development side.

But we do need more multifamily housing.

We have to find the right developers.

And I think one of our hurdles is that we have to get local government to be willing to buy in and participate with any assistance that's gonna be needed because we don't have the infrastructure quite where it needs to be.

- So is the institutional part of that, the public-private partnership, the public part, is that an important part of that?

And Andy, I'm gonna ask you that question the same in a second.

- I think it's an extremely important part.

I kind of mentioned the PPP previously in some other conversations that I've had.

In Orangeburg, I think it's absolutely necessary that we have local government buy-in.

- Andy.

- Small towns like you're talking about really struggle with being able to come out of the ground with apartments, and the reason for it is the developer, there's no track record.

There's nothing there that can prove it can work.

And so there's enough risk in apartments as it is 'cause we're building an empty building, and we're hoping and praying it fills up.

You go down there, and you don't have any data that says it's gonna fill up.

What you need is some participation by the local municipalities to donate the land into the project so that then the developer can come in and build it for a less price and charge less rent.

- And I don't want- - I agree.

- I'm sorry, Andy.

I don't wanna make this all about Orangeburg, but when you look at Orangeburg between... You know, is Orangeburg in the Midlands, or is it in the Lowcountry?

It's a little bit of both, but you know the growth is there when you drive down I-26.

- Let me give you an example.

We're gonna do something in Sanford, North Carolina.

You know, the population in Sanford is... 1996, Holly Springs was 450 people.

Today Holly Springs is 43,000.

So when somebody built something when it was 450 people, where was the data?

- Right.

- But you knew it was coming.

We know it's coming to Sanford.

You know it's coming to your place.

You need to incentivize people like me and others to go down there and take that leap of faith 'cause truly, it's a leap of faith.

And the reason it's a leap of faith, it's just not me leaping.

You gotta have your equity that's believing in the leap of faith, and you gotta have your banks who gotta believe it's a leap of faith, and it's gonna work.

But what happens in the municipalities, they don't believe that they have to participate, number one.

And then the second main thing is a lot of these small town participations don't exist because they don't want apartments.

There's a big roadblock for the word apartments.

- Do you hear that?

Do you hear that, that, "No, don't want it near my neighborhood"?

- Do I have to answer that?

(laughs) - Well, I'll answer it for you.

- It's okay.

- I'll answer it for you.

We've done 23 rezones.

- I am the chief person.

- We've done 23 rezonings, all right, in three states.

At every one of those conversations, it will be said by some counselor, "I don't want the apartments, period."

- Yeah, of course.

- Period, okay.

And everybody that's renting one of our apartments, believe it or not, is making, dual or single income, is making between 75 and 150 or whatever the upside is, but 75 is about the minimum.

Well, those are good individuals, and everybody's got kids that has to go into an apartment.

So why would you not want 'em?

I just took a $3 million piece of tax revenue land, and I turned it into a $100 million asset.

You're getting a lot more revenues off of that 100 million.

- Yeah, municipalities like that.

Let's pivot to inflation.

- Yes.

- Seems like now of course higher prices are here.

You know, just the inflation is moderating doesn't mean that we still don't have inflated prices.

But it does seem like some retailers are meeting that need and dropping some prices.

Walmart talked about rolling back all of these different prices, and they're a proxy for that.

But James, do you get the sense that inflation in a place like Orangeburg and the Midlands and some rural South Carolina is being met now with some kind of sympathy?

- (sighs) To a certain extent because when you're in a small town, and Orangeburg the city, 13,000 folks, the entire county, 84,000 folks.

Still, you know, 1,100 square miles.

And so you have different franchises.

You have other stores in different places, and folks are gonna do the best they can to meet the need of your citizens.

We are a rural community.

So where you mentioned a second ago, $75,000 for an individual working, that's not where we are, right?

So Walmart and TJ Maxx and some of the other stores, they have to be concerned about folks making $40,000 a year- - That's right.

- $45,000 a year.

I think that some of the retail establishments are starting to recognize that they have to perhaps take less of a profit in order to maintain the relationship that they have with the citizens.

- So maybe- - 'Cause it's gonna grow.

- Maybe green shoots of sympathy at this point in retail?

Or would you even call it sympathy?

- I wouldn't call it sympathy, but I would just say that they have a good understanding of what community they're in and what's necessary because I think that they're gonna continue to benefit from it.

They have to do the things that will keep folks shopping in a small place like Orangeburg versus going to Columbia and going to Summerville or Charleston.

- So they wanna captivate, keep those dollars captive.

- Yeah.

- Thank you, gentlemen.

We're gonna meet our guests in just a second.

Before we do that, it's an encore presentation because not only did she have a lot to say, but the momentum around economic development in the Carolinas is epic to say...

It's an understatement.

Michelle Baker Sanders is the secretary of commerce in North Carolina.

And we will run that encore presentation.

Also coming up is a deeper dive around all things AI, and it's not just a passing dialogue.

We're gonna get into it with our panel.

With over a quarter of a century experience in the banking industry, our guest has held significant leadership roles, including chief banking officer at Yadkin Financial before being acquired by FMB Corp. And also he was at RBC.

He seems to understand that nexus of innovation and technology in the small community bank.

That's an important distinction.

Joining us now is Steve Jones, the chief executive officer of Dogwood State Bank based in Raleigh.

Steve, welcome to the program and thanks for hauling it down here from- - Absolutely, thanks for having me.

- Down east as we say here in Charlotte about Raleigh.

- Absolutely.

Thank you.

- Steve, let's unpack this thing that you're in.

20 years ago in banking in the Carolinas, it was all about, "Let's start up a bank.

Let's roll it into another one, make money, and start up another small community bank."

Is that's what's going on in that one-to-$10 billion banking space now?

- In today's market, no.

The barrier to entry, Chris, is so high to get in banking.

Back in 20 years ago, you could start a bank and raise five to $7 million, and you were off to the races.

But in today's environment, it's 25, 30, $40 million to have enough capital and the ability to help your communities.

So like for example, when we tried to start Dogwood de novo, we raised 15 to 20 million from friends and family but went to New York to try to get institutional capital.

They didn't like the expense ahead of revenue, so we ended up recapping Sound Bank out of Morehead City to get started.

So there's only been two de novo banks started in North Carolina in the last eight or nine years.

- So what's what's different about community banking now than it was besides the expense?

I don't wanna say it this way 'cause it would sound like it wasn't to begin with.

Is it more sophisticated?

Is the barrier, because of the regulatory oversight, is the scrutiny much higher?

Is the confidence of the investor not there?

- Well, you hit it on the head, it's two things.

The regulatory environment is a lot different.

And the cost to be able to operate in this regulatory environment's significant, and technology.

When we started Dogwood, we felt like we needed to raise $100 million, and we invested $3 million in our treasury platform, for example, to be able to compete with the larger banks.

- Andy, question?

- Steve, you know, what a great job you've done, and Dogwood is an amazing bank for Raleigh to have as a headquarters.

But you know, the big banks, a lot of cities like Raleigh and Charlotte need community banks.

- Well, Andy, that's a good question.

I was telling Chris before we got on the show, in the last two or three years, the big banks have really shifted small businesses under 25 million in revenue to call centers.

And PPP kind of started the whole wave of having a community bank, somebody you can pick up the phone and call as opposed to a call center.

So I think having community banks and even regional banks in the market really have helped the economies in a lot of our communities that we operate in.

- I just wanted to mention, at the Chamber, we do quite a bit of business consulting, and one of the things that I mentioned is that there are four pillars to owning a business the way I see it.

And I say that each small-business person, they need to have a business lawyer who understands their industry.

They need to have a CPA or bookkeeper who understands what they're doing.

They need to have someone in the insurance industry who knows how to protect what they're doing, and they need to have a personal relationship with a banker.

Small business continues to grow.

Everyone wants to be an entrepreneur.

Do you think that what you offer is that personal relationship?

Is that something you still focus on?

- I believe in that, and that's why we started Dogwood.

- Okay.

- And we make local credit decisions local, not by some out-of-state credit department.

And I tell everybody that having that personal relationship with your banker when things like PPP, that you can pick up the phone, and they can actually do something for you- - And this was the COVID lending?

- PPP, correct.

- Emergency lending.

- And we made another big investment when we started Dogwood in our SBA division based here in Charlotte.

We're 27th nationally in small-business lending, SBA.

And so I think at Dogwood, we have all facets to be able to handle somebody starting a business, acquiring a business, you know, all the way up the scale to $100 million-revenue company.

- Unpack this idea around SBA lending.

I know a lot of people talk about that.

Why is that important for you to be in?

- Well, I think this hits another segment of small businesses.

You know, our value proposition, Chris, is to be the bank for business, business owners, professional, and their employees, which is a small consumer component.

But there are so many businesses out there that need an SBA solution where the SBA guarantee 70% of that loan.

And not that we're making bad loans with that, but it's still another enhancement to be able to have somebody, if they want to acquire a franchise, or their business just needs a little bit more support because in SBA, it's on 25-year amortization versus a traditional 15-year amortization.

So it really helps cash flow for those small businesses.

- Do you hold onto those loans?

Or do you sell those into packages?

- So we end up selling.

- Yeah.

- We service 'em, so they're still Dogwood customers, but we sell the, you know, 75%.

We keep 25% on balance sheet.

- And let me do just a quick follow-up.

Sorry Andy, I know you probably want to get in here again.

Sophistication of that level of lender, of borrower, is it different now than it was even five years ago?

- Not really.

- Okay.

- It's about the same as it was.

You know, especially if you talk about SBA, I think you can't just dabble in it if you're a community bank.

You really have to have expertise, and we have a team of 50 people in that group that have been doing it for 35-plus years.

And really, it's a lot of documentation.

And so when you build it the right way, it's very complicated.

So we're able to help the small-business owner navigate that process in a very smooth, and make it really user-friendly.

- [Chris] Andy.

- 10 years ago, what's different in the banking versus today?

You know, there's seems to be, we've gone through a long 10 year period here, a lot of ups and a lot of downs.

And now we hope we're at the bottom of the bell curve coming up.

What's changed in your world?

- You know, Andy, to be honest with you, I think there's always change in your world or my world.

For me, it's all about relationships with people in the community, and that's the way it's been for 30 years.

You know, technology's obviously changed, and you've had to, for banks like us, have had to keep up and make investments in technology.

So I would probably say that's the biggest difference.

You know, we have our branch in Raleigh that's got a half a billion dollars in deposits, and we maybe do 500 teller transactions a month, and half of those are just people cashing checks.

- Right.

I'm gonna piggyback off of Andy for a second.

The future, let's look 20 years, 25 years down the road.

We talked, or we hear a lot about cryptocurrency.

I've dabbled in it, friends.

It's probably crazy, but it gives (laughs)- - [Andy] I haven't.

- I have, and I've lost.

- Right, mostly people do.

You just don't hear about the losing ones.

- Yeah, right, right, right.

But it's starting to look like people are trying to do their own banking, control their own money.

Do you see that as something that's problematic in the future for banking?

- You know, I don't have a lens on that.

Obviously I think blockchain's probably gonna be a, you know, in the future, but I think for community banks like us, we kind of let the big banks, are the early adopters.

And then we kind of figure out, or we have a lot of FinTech partners that we deal with like Canopy down in Wilmington that have spun out of Live Oak that we're really close with and see all the new FinTech technology.

And so we're aware of it, and we navigate it, but in terms of, you know, what the future looks like and when, I don't know- - Okay.

- Have a good answer.

- Yeah, so that's interesting, the FinTech and the shadow banking part.

There was a lot of angst and hand-wringing 10 years ago from major banks about the idea that this was, the shadow banking system was going to be the Wild West, and they would not just lose deposits, but lose control.

How that unfolded, FinTech and shadow banking?

- Well, you know, I tell you, you know, four or five years ago, FinTech was, you had to be in FinTech if you wanted to go.

And we started, you know, looking at different solutions to be able to help customers.

But recently there's been three or four banks that have gotten regulatory scrutiny, Blue Ridge Bank, and there's a bank out of Tennessee.

I can't recall the name, but the regulators are...

So you come, we'll use you, and open up 300,000 student checking accounts in this FinTech platform.

Well, how are the banks having oversight on those 300 customers?

So if you're gonna get into that game of having some heavy FinTech in a community bank or even a regional bank, it takes a lot of resource from a compliance perspective.

But from normal community banking, it hasn't affected us from a- - So not to single out or have you publicly state this, but things like Robinhood and Chime, do they face more political, possibly, but regulatory headwind because they are FinTech?

- I think so, absolutely, and you know, yeah, for sure.

- Yeah, okay.

- Yeah.

- [Chris] Andy, question?

- You started out, I believe, when we first met and ran across each other, and you were doing great things with RBC Bank.

And I would call that, you know, a top-five big bank, right?

What has changed, and how are you different when you're doing business at RBC, and you know, Scott Custer was the CEO of RBC America, and you saw what was going on, to how you're running your bank today dealing with what I would call the community bank customer?

- Well, I'll tell you, Andy, for us, it's really credit culture.

You know, when we started Dogwood, you know, we have a very tight credit box in terms of, you know, how we operate.

You know, you learn a lot from going through cycles as all bankers have.

And I think we're just a little more conservative.

Coming out of the gate, we had a very small loan portfolio.

So as we started doing commercial real estate loans, office or industrial or multifamily, we wanna know the people that we're doing business with that we've known for years.

And so I think that's the biggest takeaway from those years to what we've done at Dogwood and from just a credit kind of quality focus and perspective throughout the organization.

- [Chris] We have about three minutes.

- I definitely think you're doing the right thing there.

South State Bank, which was headquartered in Orangeburg, I knew that they were very conservative in what they were doing early on, and it helped them grow to the size that they are.

One of the things that they did, though, was reach out into the community to develop relationships, even if it wasn't banking.

They were in the schools, right?

They were visiting the business classrooms at the local university.

Do you see yourself doing something, or I don't know if you're doing- - We do a lot of financial literacy.

- There you go.

- And very active in all the communities with schools, community colleges.

And you know, our SBA group, for example, goes to a lot of the colleges and community colleges to help educate young entrepreneurs on how to get access to credit.

- What about high schools?

What about- - We do high schools as well.

- Is there a statute in South Carolina on financial literacy for high school seniors yet?

- I don't know, but I don't think so.

I do know that there are, because I go out and ask some of the bankers and some of the accountants in town to come to the schools and talk about financial literacy.

It is so important.

I understood that growing up, but a lot of young people today don't have that education.

- Let me come back to something.

You talked about the credit culture within your bank.

And I know, as we all know, if you've any been around a bank at all, credit is lending, and credit is important, and it is a main driver of revenue.

When you look at the portfolio, your loan portfolio now, do you see any signs of problem loans becoming bigger than they were 12 months ago, 24 months ago?

- Absolutely not.

I mean, and let me give you a perspective on Dogwood, Chris.

You know, we don't take big bites of the apple.

- [Chris] What would that mean?

- That means we like five to $12 million loans.

- [Chris] Okay.

- Now we do have a few larger ones, and most of the office we have are owner-occupied, you know, doctor's office type thing.

We do a little multifamily where we know people like Andy, and we'll take a small piece of deals that he's involved with.

But we have seen no stress in our commercial real estate portfolio.

Even stressing it, you know, rates going up another 200 basis points, it's just, we're not seeing it.

- Yeah, and this is probably not fair to ask you, and if you can't answer it, I certainly understand that, Steve.

But when you hear about some of the hand-wringing over commercial real estate, and I'm talking about urban cores that have these, what they call these shadow vacancy rates of well into 20%-plus-plus, does that concern you, or do you think, "It's a cycle.

We'll get through it"?

- I think it's a cycle.

We'll get through it.

You know, I think we operate in some of the best markets in the country, and I do think in some of those large urban areas, they're gonna have some stress.

And you think about 58% of all the loans that were made to office were not by banks, right, and insurance companies.

And so I just don't think people have seen the stress in the banking system from a credit perspective that they thought 12 months ago.

- Yeah, we've got 30 seconds left, and I know I wanna ask you this question, but I'm not going to because we probably need more time on the end of the show.

But the idea that you said 58% of the folks making loans on these commercial real estate are non-banks- - Yes.

- Will they have the patience that a normal bank credit committee would?

- Probably not.

I mean, I think they probably would not be willing to work with borrowers, and I think, you know, they'll just go ahead and sell the asset and write it off and move on.

- Okay, all right, Steve, thanks for joining us, making the trip, and we hope they pay you more so you can buy some socks.

- I know.

I haven't worn a suit, Chris, in a long time- - [Chris] Well, thank you.

- I walked out of my house, and I'm like, I looked at myself.

I forgot, not even wearing my belt.

I'm not gonna buy a belt, but anyway.

- Good to see you.

James, welcome to the program.

Drews, always good to have you.

- Great to have you.

- Thank you.

- Thanks.

- Until next week, good night.

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