It's a Great Time to Start a Bank
By: Jon Hilsenrath and S. Mitra Kalita
In late January, as U.S. bank stocks tanked on nationalization fears, tiny Hanover Community Bank on Long Island opened for business.
The Garden City Park, N.Y., bank was swamped with customers, and a push to lure $20 million in cash by selling certificates of deposit attracted $43 million. As investors fled the stock market, some brought Hanover as much as $1 million at a time according to bank officials.
While the U.S. financial system is going through its worst crisis since the Great Depression, it is a great time to start a bank, some observers say. Former Federal Reserve Chairman Alan Greenspan recently claimed he would open one himself if he were 50 years younger. The return on capital could be impressive, the 83-year-old Mr. Greenspan said in an interview.
In the past year, 78 banks have opened their doors in the U.S., according to the Federal Deposit Insurance Corp. That is down from 173 that opened in the previous 12 months and 184 a year before that.
One big reason for the slowdown in bank start-ups is the typical battery of tests of a new financial institution's capital, earnings prospects, management and risk profile. The recession is making it much tougher for some fledgling banks to clear all those hurdles, which is required in order to get FDIC backing on customers' deposits. Luring investors is also tough.
"We had a couple of applications that we approved and the applicants couldn't raise the necessary capital," said David Barr, an FDIC spokesman.
Still, it is significant that any new banks are opening in the U.S. given the industry's woes, including the fourth-quarter net loss of $26.2 billion by federally insured commercial banks and savings institutions. Nearly a third of financial institutions reported a loss for the quarter, according to the FDIC.
Start-up banks lack name recognition and customers. These days, though, they have one important advantage over just about every established rival: no crummy loans.
"We have that clean slate," said Robert Long, co-chairman and founder of Hanover.
Meanwhile, generally tight credit conditions are helping the upstarts be especially persnickety about choosing who gets their loans. And the gap between the cost of funds and the money that can be made on loans is widening, meaning the likelihood of good profit margins.
An uptick in bank openings could help the economy as their start-up capital is converted into loans to businesses and consumers, said Christopher Marinac, a managing principal and research director at FIG Partners LLC, a bank-research firm in Atlanta. While banks of all sizes have said they are making every good loan they can, some are weighed down by all the bad loans made when times were good.
With no black eyes yet, start-up banks also look appealing to depositors who are looking for a safe place to park their cash -- or are just tired of seeing their bank in somber headlines. A survey of 743 small banks released last week by the Independent Community Bankers of America found that more than half had seen deposits increase due to new customers, even after the financial crisis got much worse in September.
Hanover executives, who plan to target the Indian community around the bank's hometown, started raising capital in 2007. "We wanted to sort of go back to the old days" of small banks with close relationships with their customers, Mr. Long said.
Mr. Long and Geevarghese Mathai, another mortgage banker who helped launch the bank, thought it would take just 30 days to get FDIC clearance. Instead, it took nearly a year, and Hanover's organizers had to reformulate their plans a couple of times along the way.
"People would say to us: 'Why should I invest in your bank when I can invest in Citibank?"' Mr. Long recalled.
After raising $12.3 million so far, Hanover has lined up investors to take that to $15 million. Despite the iffy overall climate for capital-raising, bank officials are working on plans to try to raise another $7 million to $10 million toward the end of 2009.
Nuvo Bank & Trust Co., which opened in November in Springfield, Mass., is deciding how to increase its initial capital base of $13.6 million. That isn't easy, Chief Executive James E. Gardner said, but there is an immense need for credit among small-business owners, putting Nuvo in a strong position.
Nuvo held its ribbon-cutting ceremony with a stream of balloons and photographers. Ads for the bank encourage customers to "bail in" and touts the fact that Nuvo is "subprime free" and has "no baggage and no bad credits."
"It sounds funny to be excited because our nation's going through a hard time, but we can benefit from this situation," Mr. Gardner said. "We can ride the crest of what we hope will be the recovery."
© 2009 The Wall Street Journal