Startup banks face tough fund-raising environment
Charlotte Business Journal - by Will Boye Staff writer
The organizers behind United Partners Bank overcame a legal battle in their quest to launch a new bank here.
But they couldn't overcome what some are calling the most difficult fund-raising environment for banks in decades.
The United Partners group raised less than half of the $35 million in capital that regulators required of the proposed bank, which planned to provide correspondent lending services to community banks in the Southeast.
In the aftermath of the credit crunch, raising that money became more difficult than expected. Last week, the group returned the money to investors and joined Pacific Coast Bankers' Bank, a similar bank based in California.
"That was one of the major challenges," says Jon Ellis, who was slated to be chief operating officer of United Partners, regarding the fund-raising climate. "It's a tough sell for any new bank right now that's out trying to raise capital."
Other startup banks have noticed a shift since the credit crunch began in August, with investors becoming reluctant to put money into a new bank.
Michael Mayer, the chief executive of Colony Signature Bank, a proposed bank to be based in SouthPark, says his group has raised about a third of its $33 million minimum in startup capital. He feels fortunate to have that much.
"We're going to get there," he says. "It's just harder than it would have been. What we've heard is it's the worst market in 30 years to raise capital for a bank."
Colony Signature has not yet hired any outside firms to assist it with raising capital, but it is interviewing some, he says. Mayer expects to reach the capital goal within six months and open this year.
The banking industry took a beating in the second half of 2007, with bank stocks swooning on news of the subprime-mortgage meltdown and the related tightening of credit.
Although few community banks have direct exposure to those issues, the general woes of the banking sector and the economic downturn have still affected small institutions.
In the last 12 months, the stock prices of banks founded in the last 20 years along the East Coast, excluding Georgia and Florida, have dropped to 15.7 times earnings from 19.6 times earnings a year earlier, according to investment-banking firm Danielson Capital and SNL Financial. And the median return on equity of those institutions has fallen to 6.25% from 8.2%.
With earnings more difficult to produce and stock prices sagging, the investment appeal of new community banks isn't what it used to be, says David Danielson, president of investment-banking firm Danielson Capital, which assists startup banks with raising capital.
"It's not as attractive as it was a few years ago," he says. "You'd put your money in and double it in three years. That's just not happening anymore."
In particular, institutional investors who were drawn to the "de novo" bank market in recent years are shying away. As those funds and investment vehicles have pulled back, the organizers of new banks have to target individual investors -- and more of them.
"You have to see twice as many people," says Dan Hudson, a California-based consultant to startup banks. An investor who would have put in $50,000 a year ago is now likely to give $25,000 at most in today's market, he adds.
"If you go out there and think it's very easy and it's just going to roll in your front door, you're probably dead before you've started."
Last month, Founders Bank and Trust, a Leesburg, Va.-based startup, sold its assets to a rival Virginia bank after falling short of its capital-raising goal.
The United Partners group faced an early lawsuit from The Bankers Bank in Atlanta, their former employer, but it was dropped in June. Over the last couple of months, the group began talking with Pacific about joining that bank as employees. Ellis says because United Partners wasn't a typical bank startup, the group may have faced an additional hurdle when it came to selling stock.
"It was more of a unique story," he says. "In the institutional market, that was maybe a tougher sell."
But because the Charlotte economy has remained relatively strong, new banks here will have an easier time raising capital than those in other parts of the country, Danielson says.
"I'd expect a good management team with a well-connected board can still raise its capital and still do well," he says.
In Mooresville, for example, BlueHarbor Bank became the first new bank in the Charlotte region to launch in 2008 when it opened this week. The bank, which has a single branch in the Morrison Plantation shopping center, was required to raise at least $14 million in startup capital. It surpassed that, raising more than $20 million and returning some money to investors when it exceeded its maximum amount.
Jim Marshall, BlueHarbor's CEO, says the bank didn't take any money from institutional investors and had strong support from individuals in the Mooresville area. But he also acknowledges BlueHarbor's timing was good because it started raising money in the spring, before market conditions worsened.
"We feel fortunate," he says. "I think a lot of new banks trying to raise capital are having a tough time. I think all the stars were just aligned for us."
Al Bush -- the CEO of Legacy Bank, another Charlotte startup bank planning to open this year -- says he adjusted his business model slightly and now has a lower minimum capital goal.
The bank previously was required to raise at least $33 million, but Legacy no longer intends to build out its own auto-loan and credit-card businesses. As a result, Legacy now has to raise a minimum of $24 million and is about halfway there, Bush says.
The bank is scheduled to go before the N.C. Banking Commission at the end of March for a charter. Bush expects to open for business in the second quarter.
He believes the strength of the Charlotte market is a big benefit to local startups. Mayer of Colony Signature says he's grateful not to be raising capital for a bank anywhere else.
"You wouldn't want to be doing this in Detroit, Michigan, right now," he says.
GETTING STARTED
THE STARTUP CAPITAL REQUIREMENTS OF NEW COMMUNITY BANKS HERE:
2006
Aquesta Bank: $18 million required, $22 million raised
Bank of Commerce: $14 million required, $17 million raised
Park Sterling Bank: $25 million required, $44.3 million raised
2007
Carolina Premier Bank: $15 million required, $18 million raised
2008
BlueHarbor Bank: $14 million required, $20.2 million raised
Colony Signature Bank: $33 million required, about a third raised so far
Legacy Bank: $24 million required, about half raised so far
© 2008 American City Business Journals, Inc. and its licensors. All rights reserved.
