The steady flow of bank startups that dried up when the recession struck hasn’t revived even though the economy is on the upswing.
No new banks have been formed in North Carolina since 2009, when Coastal Bank & Trust of Jacksonville was chartered, according to the state Office of the Commissioner of Banks. By contrast, in the five-year period that ended in 2008, 28 new state banks were established – including a half-dozen in the Triangle.
“I think we are at the end of an era,” said Tony Gaeta, a banking attorney with Wyrick Robbins Yates & Ponton in Raleigh. “I don’t think we are going to have any startup banks anytime soon.”
Bank startups typically suffer during a recession, then bounce back when the economy improves. But this time is different.
“Unlike previous economic downturns,” state Commissioner of Banks Ray Grace said via email, “we have not seen a resurgent interest on the part of investors or other groups to start new banks on the upside.”
What’s happening in North Carolina is part of a national phenomenon.
Last year, just one new bank nationwide – Bank of Bird-in-Hand, which caters to the Amish community in Pennsylvania’s Lancaster County – was formed. That was the first new bank startup to open its doors in the U.S. since 2010.
The lack of bank startups – known in the industry as de novo banks – can be traced to a confluence of factors.
New hurdles erected by federal regulators are seen as a prime culprit. A tough business environment for banks, lack of interest among investors and a scarcity of bankers willing to run the regulatory gantlet also are at play.
“We just don’t have the industry conditions that favor entrepreneurship in banking,” said Tony Plath, a banking and finance professor at UNC Charlotte.
Some, including Grace, the state’s top banking regulator, worry about the long-term impact on the state’s economy given that the startup drought has coincided with a wave of smaller community banks being acquired by larger banks.
Although this industry consolidation is a way of pruning out the weaker banks, “I think it will ultimately prove detrimental if it means either the dearth or the diminished prevalence of community banks,” Grace said. “The loss of these banks will inevitably be detrimental to the economies and vibrancy of the communities they serve.”
Of 29 new banks chartered from 2004 through 2009, Grace noted, nine were acquired and two others are scheduled for mergers. In addition, one failed and one presided over its own liquidation.
Plath also decries the lack of new bank startups.
“In the good old days of community banking, if you got turned down at a big bank (for a loan), you could always go to a smaller community bank that maybe had less strict lending standards or maybe had specialized lenders in a particular area or they know your business better than the big bank knows it,” Plath said.
The reduction in banking options, said Plath, is bad for consumers and businesses alike.
“The little banks give the industry flavor,” Plath said. “They are different from big banks. … Big banks are all homogeneous in the way they act and the way they look and the way they think.”
State banking regulators generally get high marks from area bankers. But federal regulators are considered by many to be an impediment to startups, and they’ve gotten stricter in recent years as the problems at some of the nations largest banks helped usher in the recession.
“The pendulum has swung to such an extreme – and it hasn’t completed its swing as yet,” said Thad Woodard, president and CEO of the N.C. Bankers Association.
Little investor interest
All banks, whether they are chartered by the state or by federal regulators, must obtain deposit insurance from the FDIC. And the FDIC has “raised the bar for any new banks,” Grace said.
Still, even if the regulatory environment was startup friendly, the investors needed to supply the crucial ingredient for any new bank – capital – aren’t interested. The problem is that many investors in the last wave of startups haven’t fared particularly well, and the prospects for future returns aren’t great either.
“I just don’t think there is any real strong investor money out there available for de novos,” said Jim Beck, CEO of Raleigh’s TrustAtlantic Bank. “You’re going to have to see some people over time make some money on community banks before you are going to see them jump back in on de novos.”
Higher capital requirements and the costs of complying with regulations have made it tougher for small bank in general.
“The industry is decidedly oriented towards banks that have larger scale,” Plath said. “That’s why you see all these guys merging.”
Nor are there a lot of seasoned bankers who are itching to roll up their sleeves and get involved in a startup.
Given the regulatory burdens that startups face today, “the comment I have heard from more than one banker is, it’s just not fun anymore,” Gaeta said.