New bank market crashes in Georgia

Georgia’s once-booming market for new banks has all but ground to a halt.

The number of groups seeking to open banks has evaporated amid a deepening recession and a financial crisis that has pushed many Georgia banks into the red.

The hardy few forging ahead, meanwhile, are finding it much tougher to raise startup capital and receive approval from federal regulators.

It’s a nationwide trend, but the impact has been acutely felt in Georgia, long known as one of the most fertile environments for new banks. Georgia has more banks than all but a handful of states. The metro Atlanta marketplace is especially crowded with banks that formed in recent years to feed the region’s home building boom.

The state’s banking community is buzzing with tales of prospective banks that have funding in hand and yet are unable to clear regulatory hurdles — efforts that in normal times would have been sure bets, experts say.

Some bankers say it has become so difficult to win approval from the Federal Deposit Insurance Corp. that a de facto moratorium is in place on new bank formation. For all practical purposes, banks cannot operate without FDIC insurance.

The FDIC is “having a difficult time regulating the banks that are already here, so I think there is a sense of safety in their minds if they don’t allow any new banks to start,” said D.R. Grimes, a longtime Atlanta banker who recently pulled the plug on his plans to open Perimeter First Bank in Alpharetta.

“I think it’s really misguided. And it’s inconsistent with the American system of free enterprise.”

FDIC officials in Atlanta and Washington said no moratorium exists, though they acknowledged the sinking economy has made it tougher for banks to pass muster.

“In order to get approval, we need a high degree of confidence a bank will be able to carry out their business plan — both generating a reasonable-cost deposit base and generating a sufficient quantity of good-quality loans,” said Mark Schmidt, head of bank supervision at the FDIC’s regional office in Atlanta.

“Both of those are more difficult to do in today’s economic environment.”

In many cases, bankers say, regulators are also requiring much higher levels of startup capital.

The drop-off in Georgia’s new bank activity has been steep. In 2007, 17 groups applied for a charter from the state Department of Banking and Finance, a figure that plunged to two in 2008. No applications have been filed since July.

To set up shop, banks must gain approval from a state or federal regulator, such as the Georgia Department of Banking and Finance or the Office of the Comptroller of the Currency. Banks seek separate approval from the FDIC for deposit insurance.

Nationwide, the FDIC approved 97 bank applications in 2008, down from 186 in 2007. The acceptance rate dipped to 65 percent last year, compared with 79 percent in 2007.

New banks have advantages over older institutions in the current financial crisis because they have clean balance sheets and know which sectors to avoid. Some experts speculate the FDIC may be trying to help existing banks by reining in the number of new institutions, limiting the competition for good loans.

The FDIC says “they don’t have a moratorium, but they certainly raised the bar substantially,” said John Kline, a banking consultant in Decatur who’s been working with three groups trying to open banks in Georgia.

“They feel it’s very difficult for them to approve a new bank for deposit insurance when so many other banks are struggling to bring in core deposits, and many banks are not profitable right now.”

Grimes, of the Perimeter First Bank group, said his bank planned to target a niche market by lending to small businesses. He began the effort to start the bank in 2007 and received approval last year from the Office of Thrift Supervision, a federal regulator. The bank was able to raise more than $20 million in startup capital.

But Grimes said the week before Christmas it became clear the FDIC would not approve deposit insurance for the bank. He sent money back to investors in January.

“It’s a real shame,” he said. “You’ve probably heard this expression, this calculation, before, that every dollar you introduce is multiplied five to seven times because it’s spent by others in turn. By my calculation, the FDIC cost Atlanta $2 billion to $2.5 billion and 800 to 1,000 jobs by not approving our bank.”

Grimes founded the online bank NetBank in 1996, leaving in 2002 before the company fell on hard times. The Alpharetta-based bank was shut down by federal regulators in 2007.

The list of prospective Georgia banks unable to win FDIC approval is growing. Tomorrow’s Bank in Doraville had raised $13.5 million in capital and planned to open early this year, but thus far the bank has failed to secure FDIC insurance. The company’s CEO, Joseph Moss, has left.

Meanwhile, the economic crunch has forced some groups to abandon efforts in the early stages of development. North Metro Bank in Cumming, for example, withdrew its application last month after realizing it would be tough to raise startup cash and convince regulators that the area could support another bank, said Kline, the consultant working with the group.

Georgia is not the only state seeing such a pattern. Bobby Schwartz, an attorney at Smith, Gambrell & Russell in Atlanta, said he’s been working with a group trying to start a bank in southwest Florida that raised $38 million but has been unable to get FDIC insurance.

“This particular group has the finest management, with an unblemished record of success in the industry,” Schwartz said. “They have an experienced board, and they have the capital. If they don’t get deposit insurance, I can’t imagine anyone will.”