Most community bankers view credit unions and regional banks as their chief competitors, but McCall Wilson, the president of Bank of Fayette County in Tennessee, is more concerned about start-up banks.
New banks these days are opening with more capital than ever, Mr. Wilson said, and with little pressure to make money at the outset, they can afford to offer better-than-average rates.
Mr. Wilson said the $123 million-asset Bank of Fayette County, in the Memphis suburb of Moscow, has adjusted its rates in response to the competition, but not enough to keep some of its more rate-sensitive customers.
"What we are seeing are new banks entering the market, and to establish themselves they lower rates on loans and raise rates on deposits so they can grow quickly," Mr. Wilson said. "This really messes up the balance of the market."
Tom Wiley, the president and chief executive of the $856 million-asset Flag Bank in Atlanta, said the situation is similar in his market, where 12 new banks have opened in the last two years.
Mr. Wiley said that Flag is generally not adjusting its rates to keep pace - focusing instead on providing top-notch service - but he acknowledges that it has raised rates on loans and lowered them on deposits for customers who have threatened to move their business to a rival start-up.
Start-up banks are less of a worry to bankers in slower-growing markets. But in areas such as Atlanta, Memphis, Nashville, and south Florida, heavy consolidation has spawned waves of start-ups that are often headed by established bankers with extensive local contacts.
And unlike three or four years ago, when the average bank opened with roughly $8 million, many banks these days are coming out of the gate with two, three, even four times as much.
Banks are raising so much capital lately because they are regarded as good investments. Bob Turicchi, a start-up bank consultant with the American Bankers Association, said banks have a simple business model that investors find attractive. Also, he said, banks have been fetching top dollar in recent years; many investors buy into them hoping they will sell themselves in a few years.
In Bank of Fayette County's backyard, Paragon National Bank in Memphis started in January with $25 million of capital. Great Florida Bank in Miami was founded in June 2004 with $50 million of capital, and Sonobank of Richmond, Va., opened in April with $30 million. Georgia Derrico, Sonabank's CEO, said back then that she did not want to start with any less because she wanted the bank to grow quickly.
The surge in capital is not only allowing start-up banks to offer more attractive rates, it has also given them the ability to make larger loans. A bank with $8 million of capital has a lending limit of about $1.5 million, Mr. Turicchi said. A bank with $20 million of capital can make loans of up to about $4 million.
"It's not unusual for a bank to start with more than $15 million in capital," Mr. Turicchi said. "This lets them immediately make large loans and pick up customers the executives had at prior banks."
Many start-up banks have said candidly that profits are secondary to growth for now.
For example, Great Florida Bank has $614 million of assets and aims to have $5 billion of assets by 2010. Its return on equity at June 30 was minus-8.02%, but that has not stopped it from opening six branches this year or altered its plan to add 10 more next year.
Community National Bank in Great Neck, N.Y., opened in April with $30 million in capital in hopes of picking up small-business customers from the large regional banks that dominate the market. And Square 1 Bank in Durham, N.C., opened in August after raising a whopping $105 million. Its CEO, Robert Casey, said in August that the bank raised that much so it could compete in the venture-capital lending business.
Mr. Casey headed the emerging-growth division at Imperial Bancorp in Inglewood Calif., when Comerica Inc. acquired Imperial in January 2001. He has brought in many of his former Imperial colleagues to compete for business in several technology hot spots, including Durham, Austin, and Silicon Valley. Many bank organizers from small banks do this sort of recruiting.
Kevin Olson, the president and CEO of the $163 million-asset Grundy Bank in Morris, Ill., said that is why he worries more about start-up banks than about credit unions or larger banks. Competition is especially fierce in suburban Chicago, where 10 banks have opened in the last two years.
"Community banks compete on relationships and making fast decisions," Mr. Olson said. "When these new banks have people coming in and doing the same thing, you are forced to try and differentiate yourself, and you try and keep an eye out for a new way to compete in the marketplace."
He said that to stay competitive, Grundy is keeping close tabs on its businesses customers, making more phone calls and visits than it ever has.
The $390 million-asset Western Bank in St. Paul cannot adjust its prices to compete with the 11 start-ups that have opened in the Minneapolis-St. Paul region in the last two years, so it is stressing service in its marketing. Among its tag lines: "Big Solutions for Small Businesses" and "Banking on People."
"We continue to spend much money on marketing and community support to remind people of the stability of our name and the stability of our employees," said Steve Erdall, Western's president and CEO.
Kenneth Thomas, a Florida bank consultant and the founder of BranchLocation.com, said start-ups are not the threat community bankers make them out to be. Their rates are enticing, he said, but people who so readily switch banks are not necessarily the best ones.
"Clearly," start-ups "are taking away business from their competitors, but they are taking away customers who are chasing rates," Mr. Thomas said. "These are not always the most desirable."
