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For New Banks, Starting Up Is Hard To Do

Would-be bankers are finding plenty of regulatory resistance, particularly in hard-hit regions of the country.

By: David Ellis,

NEW YORK ( -- What's harder than running a bank these days?

Try starting one of your own.

Even as enterprising bankers try to benefit from a less competitive industry landscape and Americans' new-found love for Main Street banks, many industry hopefuls have had their dreams deferred.

Nearly a year ago, Cindy Delaparte, a veteran of the Florida banking community, had visions of striking out on her own, establishing a de novo, or new bank, in the suburbs of Jacksonville.

Things started out smoothly enough as she and her partner quickly raised the roughly $12 million in start-up capital for their new venture: St. John's Bank.

But with costs mounting by the day and no indications that their business plan would be approved anytime soon by federal and state regulators, Delaparte withdrew her application in March.

"We still believe it would have worked," she said.

Starting a new bank has never been a simple undertaking. Would-be bankers not only have to secure millions of dollars from investors and find a management team with years of experience, but they also have to undergo significant scrutiny from both state and federal regulators. From start to finish, the entire process has known to take two years or more in some instances.

So given the backdrop of the current crisis, industry experts suggest that regulatory scrutiny over prospective banks is as high as it has ever been.

Would-be bankers in states where the local economy has suffered greatly or endured a rash of bank troubles now face a particularly tough time in securing new charters, notes Jerry Blanchard, a partner in the financial institutions practice at the Atlanta offices of the law firm Bryan Cave.

Georgia, for example, was once a virtual boom town for new banks, averaging 14 per year between 2006 and 2008, according to FDIC data. After becoming the nation's leader in bank failures during the crisis, regulators have placed a virtual moratorium on new banks in the state.

"[Regulators] are trying to figure out what went wrong," he said.

But regulators have put the brakes on new banks in other ways. For example, experts believe the Federal Deposit Insurance Corporation, which has the final say on new ventures by choosing whether to extend deposit insurance, has demanded that new lenders raise more capital than they might have in previous years.

Officials have also been vigilant about firms intending to accept brokered deposits or building much of their business through commercial real estate loans, practices that have been problematic.

"You have to have a very solid business plan," said Carey Richardson, director of sales for the Dallas-based Bankmark, which consults de novo banks. "Regulators want to see that an institution is profitable by the end of its second year."

Tougher scrutiny
In a sign of just how reluctant regulators have been to sign off on new banks, about two thirds of the 32 firms that applied to the FDIC for deposit insurance have had their application rejected, according to the most recent agency data.

Compare that to the pre-crisis environment of 2006 and 2007, when four out of every five new bank applications were approved.

Faced with such grim statistics, some bankers have gotten creative in an effort to launch their business.

When plans to open last year came unraveled because of the economic and regulatory environment, Richmond, Va.-based Xenith Bank agreed in May to a merger with First Bankshares (SUFB), which already operated institutions.

What helps keep so many would-be bankers interested, according to experts, is that new institutions can choose to make loans that are safer and more lucrative, particularly as credit remains tough to come by.

That prospect has also helped bring in plenty of private capital to banks looking to launch in the future.

In just three short months of fundraising, Scottsdale, Ariz.-based Paradise Valley National Bank has raised $11 million of the $15 million to $17 million the firm hoped to raise, said company CEO Gary Hickel.

For Hickel, a long-time Arizona banker, this will be the second bank he has launched, the first coming in the mid-1990s. If all goes according to plan, his new venture, which will offer a variety of business, real estate and consumer loans, will launch this spring.

"It is different today than it was back then," he said when comparing his two efforts to launch banks. "We are still meeting with a lot of receptivity, so that is encouraging."


© 2009 CNN Money