Bank of Bird-in-Hand's chief executive says regulators put organizers through the ringer before approving the first new bank in three years.

Regulators were keenly aware that the Pennsylvania de novo's approval would set a precedent for future applicants, says Brent Peters, who is also the bank's vice chairman and president.

"They wanted to be thorough," Peters says. "They wanted to put into place something that will be used as the standard" for de novo applications.

The regulators were particularly insistent that Bank of Bird-in-Hand's board include members who not only had previous experience as company directors, but experience specifically as a bank director, Peters says.

"They weren't looking for just capital," he says, noting that organizers raised $17 million. "They were looking for prior bank board experience when it came to loan, audit, compliance and governance committees. They were looking for a very well-rounded board."

Bank of Bird-in-Hand's approval spurred some industry advocates to chide regulators for being overly zealous in their reviews of bank applications. Worries abound that the process is discouraging some investor groups from applying for charters.

The Independent Community Bankers of America and the American Association of Bank Directors sent a letter on Monday to Federal Deposit Insurance Corp. Chairman Martin Gruenberg expressing those concerns.

Organized by a group of Amish businessmen, Bank of Bird-in-Hand will primarily serve a small farming community located just east of Lancaster, Pa.

The bank's board has Amish and non-Amish members with banking experience. Those directors include William O'Brien, former chief operating officer at National Penn Bancshares (NPBC) in Boyertown, Pa.; and Elmer and John Stoltzfus, who were original investors in HomeTowne Heritage Bank, in Intercourse, Pa. National Penn bought HomeTowne in 2003.

The bank's shareholders are evenly split between Amish and non-Amish investors and consist primarily of individuals in the Lancaster area, Peters says. Some of the investors are executives from another Pennsylvania community bank that Peters declined to identify. Bank of Bird-in-Hand did not use an investment bank to raise its capital.

Peters isn't a newcomer to de novo banking. He was the founder, president and CEO of East Penn Financial, which sold itself to Harleysville National in 2007. When East Penn filed its bank application in 1991, regulators were strict, but didn't demand as much up-front documentation, he says.

This time around, regulators wanted more details about the bank's long-term business plan. "The review of the business plan was far more intensive," Peters says.

When East Penn filed its application, the papers measured about 3 inches thick, says Nick Bybel, a Lancaster, Pa., lawyer who advised Peters on the East Penn and Bank of Bird-in-Hand applications. This year, the initial application document was about 18 inches thick, he says.

The heightened rigor of application reviews is discouraging potential applicants, to the detriment of the public interest, Camden Fine of the ICBA and David Baris of the AABD wrote in their letter to Gruenberg. The groups highlighted two concerns: insistence that applicants include seven-year plans, instead of three-year plans, and requiring startups to have a leverage ratio of at least 8% for the first seven years.

Organizers of a de novo who project having $300 million of assets after seven years would be required to post $24 million in up-front capital. That amount "is beyond the reach of many in communities where it is virtually impossible to attract capital from outside sources," Fine and Baris wrote.

Many communities need the access to capital that community banks provide, but the FDIC's policies have frozen the market for new banks, Baris and Fine added.

The FDIC provides deposit insurance; it does not charter banks, says spokesman Greg Hernandez. He says current requirements have been in place since 2009, while referring to a 2005 FDIC report that discusses the inherent risks associated with de novo banks, especially tied to real estate lending.

There have been "very few traditional deposit insurance applications" filed in the last three years, Hernandez adds. "It takes great resources to start up a bank. … Private investors are looking for properties already established in the markets of interest."

Industry observers list numerous reasons for a dearth of applications.

Returns on equity are below "pre-global financial crisis levels," Allen Tischler, a senior vice president at Moody's Investors Service, wrote in a report issued this week. "Modest returns and difficult prospects explain why the business remains unattractive to newcomers."

Pennsylvania, which has more than 200 banks based in the state, could use more institutions, says Glenn Moyer, secretary of the Pennsylvania Department of Banking and Securities. Though Moyer doesn't expect a tidal wave of applications, he says some groups are taking a hard look at forming new banks.

"We may well see additional charter applications, but certainly at a much lower and slower pace" than in the 1980s and 1990s, Moyer says.

"Given the economic diversity that's growing in Pennsylvania," Moyer says, "in my mind there is room for a limited number of additional de novo banks, if they are really well-thought-out, well-run and well-capitalized."

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