Why Charter A New Community Bank? By Dr. Douglas V. Austin
ibat.org

What are the major reasons new community banks have been chartered in recent years? It would be nice to say that the principle reason was to promote competition and to provide quality services within a community that has lost one of its hometown banks. Unfortunately that is probably only the second best reason why new banks are chartered.

The main reason new banks are chartered is that a newly chartered commercial bank, operating efficiently and profitably within the right market, over time will make tons of money for its investors. New banks make money for investors by providing high-quality service to the public and the community in which they operate.

Another reason new banks are chartered is that they provide employment for former bank management who have found themselves terminated due to the acquisition of local banks. Being rich and counting coupons might be lots of fun for about three months.

If the individual is not ready for retirement, still is in good health, and bank management comes around trying to decide what to do next - guess what? They try what they do best - run another bank. Thus the nexus for the new bank may be the sale of the former bank within the community, permitting shareholders and senior management to achieve the financial resources to start a new bank or thrift. Viva la capitalism!

Should you start a new community banking institution in your town? The answer is not easy. You need to research whether there is a need for a new bank. If you build it - they may not come. Examine various elements to determine whether a need is evident:

1. Has there been more than one merger or acquisition in the market recently?

2. How many local banks or thrifts still remain within the community?

3. Have the local bank personnel been eliminated from the merged financial institutions?

4. Have new banks or thrifts moved into the market with de novo branches to fill a void?

5. Have banks had their names changed, and are their policies now being directed from outside your community or state?

6. Is the banking market growing, or have deposits remained relatively flat so that growth is reflected only by Federal Home Loan Bank advances?

7. Are banks and branches operating profitably within the market, or are the available institutions cutting each other's competitive throats for new customers?

8. Are those within your banking market (i.e., businesses and consumers) unhappy with the current banking environment? Just because there has been a bank merger does not mean that there is dissatisfaction - are you hearing minor gripes or a groundswell of opposition?

9. Do you have the personnel available to start a new community bank that will be accepted by the population and thus make it a profitable operation?

10. Can you raise the money from the local market in order to start the new bank? Do you need to go into the national market to raise capital, bringing in professional investors who will care little about your community but a lot about their financial return?

Table 1                                                                             NEW BANK CHARTERS
YEAR 1991 1992 1992 1994 1995 1996 1997 1998 1999 2000	NATIONAL 18 9 12 19 27 51 65 52 54 ___	STATE 53 21 34 30 74 95 134 138 177 ___	TOTAL 71 30 46 49 101 146 187 190 231 192

The past decade has seen the largest number of new bank charters in the history of banking. Table 1 outlines the number of state and national commercial banks that were chartered during the 1990s and into 2000. Recent activity has slowed as the economy and the stock market have declined; thus the climate is not favorable toward new bank charter financing.

Why have so many new financial institutions been started? The answer can be seen in Table 2, which shows the number of bank mergers that took place during the 1990s. There have been almost 4,000 commercial bank mergers within the decade. The total number of banks declined from 14,435 in 1980 to 8,315 as of Dec. 31, 2000. Many communities have room for new community banks, and the growth of certain communities nationwide has precipitated the need for new commercial banks to meet the needs of the communities they serve.

For example Las Vegas has seen 11 new community banks in the past five years. The reason is simple - Las Vegas has almost doubled in population over the past decade. Where you find growth, you will find new financial institution offices, including the establishment of new community banks. In some areas, like Illinois and Michigan, the regulatory agencies have commented that saturation may have been reached. In November 2000, the Federal Deposit Insurance Corp. noted that between Illinois and Michigan, there might not be a great deal of room for new banks.

This situation may or may not be true in your state, which is a good reason for a pre-filing meeting with either the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the state regulatory agency and the FDIC in order to determine their feelings concerning the approval of a new charter. For example if the FDIC feels that in your state there is no room for a new bank, you may be pushing a rock uphill trying to get approval. On the other hand, if the regulatory agencies believe that new bank and thrift charters are reasonable under the proper circumstances, then filing for a new charter may be appropriate.

As mentioned earlier, the number of new bank charters has slowed recently. One constraint is raising the money to get started. Almost half of all new banks never actually open. This figure is not 50 percent of new banks that think about starting - it is 50 percent of the banks that have received tentative charter approval by either the state or the OCC that never open because they are unable to raise the necessary investment capital requirements.

Today in the Midwest, there are several community banks that took more than a year to get their investments, whereas five years ago a new community bank could receive funding within three to six months. Potential investors are out there, but their financial portfolios are not as strong, and their appetite for a new community bank has been sated.

To start a new bank, make sure you have the necessary start up capital first. You can spend a lot of time, effort and seed money filing applications and preparing offering circulars. If you have no solid investment money behind you, you will waste all that time and effort. On the other hand, if you have investors, investment money or a sponsoring financial institution, then your chances of successfully starting a new bank are far greater.

If you want to start a new bank or thrift to get even because your favorite hometown locally owned and controlled bank or thrift was bought out by one of the big, bad money centers, you might want to spend the first several thousand dollars on a good shrink. On the other hand, if recent mergers and acquisitions within your community have led to inferior banking service, dissatisfaction by consumers and businesses, and a significant decline in economic development and financial leadership - there is probably room in your community for a new bank or thrift that can provide quality products and services, plus make beaucoup bucks for your investors.

Anyone who enters the bank chartering business without understanding that the purpose is to make money should be eliminated from the incorporator group immediately. Starting a new bank or thrift is not a left-wing, Utopian endeavor - it is the starting of a new financial institution for the express purpose of providing quality products and services and the furnishing of financial leadership that will result in significant rates of return on the investments of the incorporators. You can also lose substantial money, and the bank or thrift you charter may not be profitable or may even fail.

One bright spot about new banks chartered within the last decade is that they have had far fewer problems with failure than those in previous decades, although several have had regulatory problems and have merged with other financial institutions prior to failure, or are operating at a lower capacity than initially their potential performance level was believed to be. If you plan to start a new bank in your community, look carefully at how other recent charters have done within your banking market. Luck beats skill every time.

In 1989 Capital Bank was started in Toledo, Ohio, with $13 million in capital. It sold in 2000, having reached $1.2 billion in assets. In your community you might grow from zero to $100 million in the same period of time. It sure is helpful when other banks merge in the market at the same time, leaving local market people floundering. You cannot count on that scenario happening in your market, but you must be candid regarding potential growth and profitability forecasts in the first three to five years.

Investing in a newly chartered financial institution is a long-term investment, not a short-term trade. You must be committed to the reason for the chartering of the financial institution within your community, rather than simply focusing on the return of your investment.

No wonder the regulatory authorities do not want investors to borrow money as part of a newly chartered bank or thrift. They know that you need solid equity money tied up in a new financial institution for a long period of time in order to get back your initial investment or to achieve a substantial rate of return over time. Chartering a bank should be a reasoned decision, not a whim on behalf of the incorporators and shareholder investors.

Bio Info

Dr. Douglas V. Austin is Chairman and CEO of Austin Financial Services, Inc. (AFSI), a full-service, community-oriented, financial institution consulting and investment-banking firm located in Toledo, Ohio. Dr. Austin is a nationally known speaker who is in demand for his educationally oriented and humor-filled presentations and is the author of 17 books in the areas of banking and corporate conflict and over 700 published articles. In July 1989, Dr. Austin retired after 20 years of service with the University of Toledo, 14 of which he served as Department Chairman and 19 as a full professor. He is currently Professor Emeritus and teaches one semester a year.

Dr. Austin can be reached at 419/531-9559, or via E-mail at doug@bankguys.com. You can visit the AFSI web site at www.bankguys.com.