Organizers proposed the state’s first startup bank in more than a decade. Here’s why the launch of a new commercial lender in CT is so rare

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Startups come and go constantly in many industries.

This has not been the case in Connecticut’s traditional banking industry. But that could be about to change.

The State Banking Department last month granted a temporary certificate of authority to the founders of New Canaan Bank, who are working to launch a new commercial bank in Fairfield County. The financial institution would be the first new start-up bank in Connecticut since the launch of New Haven Bank (originally known as Start Community Bank) in 2010. charters.

New Canaan Bank organizers say they see the need for a community lender that will meet the needs of small businesses. But their attempts to open up don’t necessarily signal a trend toward new banks, though state and federal regulators would like to see more newcomers enter the market.

Launching a traditional, federally insured commercial bank is expensive and complicated, and given the disruption in the industry — especially the rise of fintech companies offering similar and even more advanced services — it The state is unlikely to see a flood of new start-up banks, experts said.

“It’s hard to open a financial institution,” said Maureen Frank, CEO of New Haven Bank. “You need to have seasoned banking veterans who know how the system works and have been in the trenches, so to speak.”

Consolidation vs startups

John Carusone, president of the Bank Analysis Center in Hartford, said there are 32 federally or state chartered banks currently operating in Connecticut, which is a huge drop from a peak of 87 in the 1980s. savings and loans in the late 1980s and early 1990s led to a wave of bank failures and industry consolidation. Mergers and acquisitions activity continued in the decades that followed.

“Connecticut was well known for creating a plethora of start-up banks in the 1980s, and subsequently well known for a plethora of bank failures and forced consolidations in the 1990s,” Carusone said.

Carusone said that following the savings and loan crisis, the state tightened its regulatory standards, making it more difficult to launch new banks.

Connecticut Banking Commissioner Jorge Perez has worked at large community banks, and now as a regulator. He said there hasn’t been as much demand for new community banks in recent years. Instead, investors poured money into fintech companies that aimed to disrupt the traditional banking business model.

“It’s a very risky business, it’s an expensive business, and it’s an extremely competitive business,” Perez said of community banking.

Kyle Eagleson – chief financial officer and first executive vice-president of Guilford Savings Bank, which opened in 1875 – said community banks face the challenge of competing with fintech companies as well as large, well-capitalized central banks .

Meanwhile, the costs of investing in regulation and technology continue to rise. All of this creates a tough competitive environment with high barriers to entry.

“We face competition not only from other community banks in the region, but also from JP Morgan, Bank of America and these new competitors like Apple, Facebook and Venmo,” Eagleson said.

Many smaller institutions have decided to merge with larger banks to achieve scale.

“In order to make money in a competitive market and compete with fintechs, you need to achieve efficiencies and you can do that through consolidation,” Perez said.

Frank of New Haven Bank said consolidation has made it less attractive for new start-up banks to enter the state because mergers allow companies to partner, pool resources and potentially grow. expand their markets without going through a start-up phase.

“It’s a competitive market. Growth is sometimes slow and you have to have the right people in the right places and in the right places,” Frank said.

Guilford Savings Bank CEO Tim Geelan said the state is much more likely to see continued banking consolidation rather than new entrants.

“I would bet on more consolidation than new startups,” he said.

High costs

It also costs more to open a bank than before, especially after the Great Recession and the banking panic of 2007 to 2009.

The legal minimum capital requirement to open a bank is around $5 million in equity, but Carusone – of the Bank Analysis Center – said the practical minimum requirement is usually around $10-15 million. in today’s banking environment. Additionally, bank organizers must have between $1 million and $2 million on hand for pre-opening expenses, he said.

The New Canaan Bank organizers – which include former bankers as well as a lawyer, property developer and doctor – said they needed to raise between $30 million and $40 million to launch their business.

“It’s not cheap to start a new bank,” Perez acknowledged, before listing some of the many expenses. “Before we start, that’s about $2 million.”

Due to significant industry consolidation, the state and federal government have encouraged more community bank start-ups in recent years. But it’s a long way from idea to reality.

Frank was hired as a consultant at New Haven Bank in 2012, two years after the bank launched. She was promoted to interim CEO in 2013 and officially took over the role in 2014. She said it took a few years to get chartered due to heightened regulatory attention following the 2007 economic crash.

“(Regulators) want to make sure they don’t enter into deals that could prove unfavorable to the institution in the long run,” Frank said.

Carusone said the whole process of chartering a bank through pre-opening takes between nine months and a year, and that doesn’t include the time organizers spend raising capital. It’s legally intensive, he said. New Canaan’s application, which the Bank Analysis Center reviewed on behalf of the state, took nearly a year to reach the preliminary approval stage.

“Application materials are definitely more scrutinized than they were before,” Carusone said.

Community call

Today, more than 10 years after opening, New Haven Bank manages approximately $165 million in assets and plans to expand. Frank said physical locations are important for small banks and the institution plans to open two new branches in Greater New Haven over the next year.

“For a community bank trying to serve a smaller population of people, you definitely need that physical presence,” Frank said.

Guilford Savings Bank senior vice president, marketing and cash management director Renee Pallenberg said her community lender had grown to eight branches with about $1 billion in assets. It aims to continue its statewide expansion. Like Frank, she said clients appreciate being able to meet and work with employees in a more local setting.

“We pretty much offer everything a commercial bank could offer, but I think the difference is still in the more personal and personalized approach,” Pallenberg said.

Perez said community banks play an important role in the economy and will continue to exist, although they are no longer as plentiful as they once were.

“As convenient as technology can be, people still want a personal touch,” Perez said. “That’s why there will always be room for community banks.”

New Canaan Bank still has a long way to go before it can open. The temporary authority certificate is not a full trust. Instead, it gives the bank’s founders 18 months to meet certain conditions — like getting Federal Deposit Insurance Corp. and other types of insurance, securing office space and raising capital – before a bank charter can be officially issued.

Eagleson said he thinks there will be “a lot of eyes” on New Canaan because it’s unique to have a startup in the state’s current financial ecosystem.

Regardless of the decline in new banks, Carusone said Connecticut has a strong financial sector.

“Connecticut is hands down one of the most attractive banking markets in the nation because of its relative affluence in the retail business … and its commercial vibrancy,” Carusone said. “It’s located between Boston and New York and is full of businesses and high per capita incomes.”

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