Georgia, a graveyard for de novo banks during the financial crisis, could get its first new charter in nearly seven years.
An investor group has applied to form Pacific Metro Bank in Johns Creek, Ga., in hopes of tapping into the fast-growing Chinese-American population around Atlanta. The investors, largely comprised of Chinese-Americans, are looking to raise up to $15 million in capital.
Pacific Metro is one of at least five de novos hoping to open next year in states such as California, Oklahoma and Tennessee. But this bank's application is worth watching because the institution would be based in an area where more than 90 banks have failed since 2007, earning the 50-mile radius around Atlanta a reputation at one point as the banking industry's "ring of death." Failures peaked in the state in 2009 with the bulk of them occurring by the end of 2011.
While some risks remain, bankers and regulators said they have learned vital lessons from their pre-crisis mistakes.
Regulators in Georgia, for instance, realize that it became too easy to raise capital to form banks, which was mistakenly viewed as demand for new institutions and led to the creation of more than 120 de novos from 1997 until the last recession, said Kevin Hagler, the state's banking commissioner. Recent history has caused Hagler and team to reevaluate the rationale for creating a new bank.
"We're thinking more clearly about the convenience and needs angle," Hagler said. "Is there a need for a bank in the market? Will it provide additional convenience? We had taken that for granted since so many were able raise capital."
Bankers claim to have learned their lessons, too.
"There were contributing factors related to the crisis that will be avoided on this next pass through," said Jerry Lewis, a veteran Georgia banker who was recruited to become Pacific Metro's president and CEO.
Nationwide, bankers and regulators took their time digesting what went wrong during the crisis. Only four bank charters have been approved since 2011, according to the Federal Deposit Insurance Corp.
FDIC Chairman Martin Gruenberg said during July testimony before a House committee that the agency "remains supportive of the formation of new financial institutions and welcomes applications for deposit insurance." He said new banks help support the community banking sector, fill gaps in certain markets and provide credit to overlooked communities.
Hagler, for his part, said his department is "very excited about the idea of having some de novo activity," adding that – for the "first time in forever" – his team participated in a recent conference about new charters.
Regulators are "open to well-prepared applications that make good sense," Lewis added.
Despite positive rhetoric and a small uptick in applications, interest in de novos remains low.
Several factors must change before activity picks up, said Lee Burrows, CEO of Banks Street Partners, an Atlanta investment bank. First, interest rates need to rise in a way that allows for wider net interest margins. A low-rate environment challenges de novos that initially tend to pay up for deposits and charge less for loans.
Low margins, coupled with high capital requirements for new charters, cut into returns on equity, Burrows said. Finally, publicly traded banks with less than $500 million in assets are trading at less than tangible book value, creating a disincentive for investors who might be better off buying an existing bank.
There is hope for de novo activity, Burrows said, but it would require a substantial increase in the premiums being paid in bank acquisitions.
Georgia's banking industry was hit hard during the financial crisis after scores of new institutions, backed by brokered deposits, focused largely on loans for residential developments that blew up with the housing market tanked.
"We had a real estate bubble that burst," said Chip MacDonald, a lawyer at Jones Day in Atlanta. "There were too many banks competing for the same business."
Regulators will likely take a closer look at any proposed bank's management team and board to make sure they have the expertise to properly run a bank, said Jonathan Hightower, a lawyer at Bryan Cave in Atlanta. Regulators may also check in when management after a bank opens to keep them focused on their proposed expansion plans.
"You will see regulators push on banks to keep that growth closely managed and within a reasonable margin of their projections so we don't have that out-of-control growth that we saw in some de novos," Hightower said.
The approval process will also take a closer look at whether a need exists for a new bank. More than 90 banks compete in the Atlanta area. That raises the bar for a group to claim it is going after an underserved market, Hagler said. Still, he left open the possibility that a de novo could have a plan for better serving an existing market.
Regulators are likely to "dig down deeper" into the convenience and needs issues, Hagler said, taking a look at whether existing banks are meeting the needs of certain segments of the population, such as small businesses or minority groups.
Pacific Metro, which is seeking the first charter in Georgia since Community & Southern Bank was formed in January 2010 to buy failed institutions, is making the argument that it will address a specific need.
The proposed bank's investor group, led by Atlanta businessman Jinsong Yang, noted in its FDIC application that more than 42,000 ethnic Chinese live around Atlanta. Pacific Metro "will concentrate on marketing to the established local Chinese population, while also becoming the preferred bank of new immigrants to the area," the application said.
A niche focus may help Pacific Metro differentiate itself, which could provide an advantage attracting deposits and customers, said Chris Marinac, an analyst at FIG Partners. The key will be management execution, he said.
"Deposits are where the rubber meets the road in terms of creating value," Marinac said. "That can be very important."
Lewis, who helped form NOA Bank, a Korean-American institution in Duluth, Ga., in 2008, said he believes focusing on the Chinese-American community will contribute to Pacific Metro's success.
The veteran banker, who has been involved with four previous de novos, said the process this time around has been more "deliberate, both from our standpoint and from the regulatory perspective." Notably, regulators want more details and have placed an increased focus on areas such as information technology and cybersecurity.
"I think that's a good thing," Lewis said. "It makes us all look at the business plan in a more realistic fashion."
Lalita Clozel contributed to this article.
