Interest low in startup banks

Federal regulators are casting lines for investors considering opening a startup community bank in 2011.

However, analysts expect the Federal Deposit Insurance Corp. to find few, if any, takers in North Carolina even though banks here have weathered the financial crisis that began in late 2007 better than those in most states.

Only two North Carolina banks, both in Wilmington, have been taken over by the FDIC during the crisis.

Sheila Bair, chairwoman of the FDIC, has indicated that the agency would take a new look at applications from de novo, or startup, banks for deposit-insurance coverage. Such coverage is crucial to any startup bank opening its doors.

The FDIC criteria would include new banks "that are committed to establishing a core deposit base, that have a diversified business plan and good management, and that are well-capitalized."

Thad Woodard, president and chief executive of the North Carolina Bankers Association, said he does not expect a groundswell of interest in startups.

"But we have had some people to talk to us about it," Woodard said.

"It might seem right now like a climb straight up Mount Everest, but there are always explorers and adventurers in this industry."

In normal economic times, consolidation in the industry tends to spawn interest in startups.

The motivation tends to come from three sources: high-level executives at major banks wanting to run their own bank before they retire; investors hoping for a cash cow in five to seven years; and industry officials certain they can mine a particular market niche.

However, the financial crisis has dried up interest in startup banks in the past two years.

In 2008, the applications for deposit insurance of 101 banks nationwide were approved. In 2009, only nine applicants gained approval, and just three in 2010.

"I would expect zero startups in 2011 unless for a special, unique circumstance," said Chris Marinac, the managing partner of FIG Partners LLC in Atlanta.

"The FDIC and other regulatory agencies are still working to purge the industry of troubled institutions, and we expect the number of banks should decline meaningfully by attrition and merger and acquisition transactions in the next three to four years."

These days, the pendulum of power in the industry has swung sharply to potential buyers.

They know that many community banks are weighed down by higher loan-loss provisions on their bottom lines and are carrying the burden of commercial, retail and residential mortgages that have turned sour.

Banks' significant, if not desperate, need for cash infusions has created a buyers market for those wanting to gain critical mass in a market or region.

In such an environment, private equity groups "would likely want ground floor and board control" of a startup, which runs counter to the captain-of-my-bank motivation, said Joseph Gordon of Gordon Asset Management LLC of Durham.

"Raising capital is a huge hurdle because so much prior private equity is still illiquid and locked up since those deals were done at the top of the bubble," Gordon said.

Any sense of an improving economy could stir some investors, said Arnold Danielson, the chairman of Danielson Associates of Bethesda, Md., a bank consulting company.

"It is much harder to raise capital for new banks than it was, but this has not been tested much since it is more than a year since a de novo has been approved," Danielson said.

Investors in a startup in 2011 are likely to be more focused on long-term success than a short-term cash-out, he said.

Ron Wellman, the athletics director at Wake Forest University, was an early investor in TriStone Community Bank in 2004 before being elected to its board of directors. TriStone was the first community bank to originate in Winston-Salem since Southern Community Bank & Trust in 1996.

TriStone had started reporting consistent profitable quarters when it was bought for $10.8 million in August 2009 by First Community Bancshares Inc.

"My initial investment reflected the trust that I had in the bank's leadership, specifically Skip Brown," Wellman said. Brown was president of TriStone.

"Skip has had a very successful banking career and is a man of integrity," Wellman said.

"Those qualities, along with the economic conditions at the time, made my investment in the bank an easy decision. I would make the same investment today if the same conditions existed."

Tony Plath, a finance professor at UNC Charlotte, said that the most likely takers would be "nontraditional startups with focused business plans that exploit a few of the unfilled market niches in community banking that have developed as the industry has shrunk, restructured and consolidated."

Plath said that those niches could be small businesses, the mass-affluent market, or a particular industry sector or group, such as health care and technology.

"For these types of institutional owners and this sort of private ownership structure, raising capital isn't the problem," Plath said. "Convincing the FDIC that you've got the right business model, and the people to manage the risk of the business, is."

rcraver@wsjournal.com

(336) 727-7376