Bank Opening in Louisiana Demonstrates De Novos Are Still Doable

Until Lakeside Bank in Lake Charles, La., threw open the doors to its double-wide trailer recently — the bank is so new, its building isn't ready yet — no start-up banks had gotten off the ground in the entire country this year.

Though other de novo groups are eyeing failures and concocting grandiose plans for roll-ups, Lakeside, with its $12 million of capital, plans a "vanilla" community bank in a parish that has managed to stay strong through the recession.

Interest in start-up banks has not disappeared during the financial crisis, industry experts said. Those still kindling hopes are wary because of the dearth of others sprouting up, but Lakeside shows that building a bank from the ground up may still be realistic.

"Hopefully, Lakeside will be proof that the (Federal Deposit Insurance Corp.) is willing to consider quality applications with quality management teams. It will show that there is no moratorium. I really hope they are not the exception to the rule," said Adam Taylor, the president of Bank Capital Group, an investment bank in Atlanta that assisted Lakeside. "There would be more interest if the groups knew they had a chance of succeeding."

The FDIC has asserted throughout the downturn that there is no moratorium on granting deposit insurance to start-ups. Still, the pipeline has largely dried up. In 2009, 19 de novo applications were approved, including Lakeside's, which was OK'd in October. This was one-fifth the total approved in 2008. Once approved, a de novo has a year to get off the ground. When Lakeside opened in July, it was the only de novo to do so this year, excluding those used as part of failed-bank deals, the FDIC said.

Though FDIC data show that all the applications filed in 2007-2009 were approved, experts said that the FDIC strongly encourages many applicants to withdraw instead of rejecting them. Data about 2010 applications was not available.

Tales of regulatory limbo and tough capital markets have dissuaded other groups, with many of them turning to struggling banks as their point of entry. For instance, last month Chicago's GreenChoice Bank, a start-up group approved for a thrift charter in 2009, opted to buy Family Federal Savings of Illinois, a small but deeply wounded mutual in Cicero, because it could not raise the amount of capital the FDIC wanted it to have before granting deposit insurance.

Others are just afraid of wasting their time, said Jeffrey C. Gerrish, a partner in the Gerrish McCreary Smith PC law firm in Memphis.

"There is definitely interest in starting banks," Gerrish said. "But who wants to ramp up, spend thousands of dollars and months on something if no one else is getting through?"

Perhaps more investor groups would be willing to give it a try after a conversation with A. Hartie Spence, chief executive of Lakeside.

Spence described the process as fairly smooth but still harder than he expected.

"We didn't know that we are unique until June," Spence said about being the only pure de novo to open in 2010. "There might be some who are upset with FDIC but not us."

Spence, the former chairman and president of Hancock Bank of Louisiana, joined the organizers of Lakeside in August 2008.

As Spence and the organizers see it, Calcasieu Parish had 10 banks, only two of them local, making it a fertile ground for expansion. The area has also done well. Its unemployment rate was 7.8% in June, compared with the nation's 9.5%, according to the Bureau of Labor Statistics.

Lake Charles is northwest of the area affected by the oil spill in the Gulf of Mexico. Also, companies like Northrop Grumman Corp. and Shaw Industries Inc. have growing presences in the area.

The group began raising capital late last year after gaining approval from the FDIC. Though capital-raising has been tough for the last couple of years, it was particularly dismal at the end of last year, said Taylor, the Atlanta investment banker.

The group set up meetings with local investors. There were breakfast meetings and luncheons, never more than an hour long, Spence said.

"We didn't want to waste anyone's time," he said.

The group's cachet in the local community helped a lot, Taylor said.

"It wasn't particularly tough to do. You have a great management team with a ton of local ties," he said.

He added that investing in de novos is still an attractive bet, if not safer than seeking upside potential by investing in a struggler.

"It is one of the safer investments out there. De novos have to follow their business plan closely," Taylor said. "They don't have a single bad loan on their books. They don't have anything in" foreclosure.

For Bank Capital Group, the start-up process provided a trip down memory lane. It had advised a few dozen de novos earlier in the past decade; now, it mostly advises existing banks looking for capital.

"This one took a little longer than it did in the good years, but it did bring back some nostalgia," Taylor said. "It is nice to see them get open."

The path was not without its pitfalls, though. The failure of Statewide Bank in Covington in March, the only bank to fail in Louisiana so far this cycle, spooked some already skittish investors. Luckily, though, the group had hit its funding target before the oil spill, which put a damper on much of the capital-raising efforts along the Gulf Coast.

More than 90% of Lakeside's investors live in the same ZIP code as the bank, and roughly 95% are from Lake Charles itself. The smallest investment was $25,000, and none of the 150 investors owns more than 15% of the company.

That was an important safeguard to keep the bank independent.

The new office should open in the next two years, Spence said. In the meantime, the double-wide is built to withstand 125-mile-per-hour winds and even has a drive-up window.

"It is pretty luxurious," Spence joked.