New Century Financial is taking the concept of trying to succeed where others have failed to an extreme.
The commercial finance company, based in The Woodlands, Texas, filed a de novo bank application in July with state officials at a time when startup banks are nearly extinct. Furthermore, New Century is an asset-based lender, offering factoring services to firms that cannot obtain unsecured bank financing. Several lenders with specialties like that have unsuccessfully tried to get bank charters in recent years.
On top of everything else, New Century shares its handle with a subprime mortgage lender that went bankrupt at the beginning of the crisis and a bank that failed this year.
That a nonbank with a niche focus would pursue a bank charter against such apparently long odds speaks volumes about the post-meltdown financial industry.
Despite an improvement in funding conditions and access to the capital markets since the nadir of the crisis, getting a charter still appears to be an attractive route for nondepositories because of the lower cost of funding through deposits.
Traditional funding for nonbank lenders might cost 400 basis points more than the London interbank offered rate, but bank deposits are at about Libor, said Terry Keating, managing director at Amherst Partners, an investment bank in Chicago.
"Bank deposits can make those businesses a lot more profitable very quickly," he said.
Keating said that the climate for specialty lenders to gain approval for bank licenses remains challenging.
"It is not any easier for these guys to start banks than it was a year ago. Regulators have continued to be tough," he said. "But it also kind of depends on the industry. If you are a traditional lender it might not be as difficult. If your business has anything to do with subprime, you can forget about it."
Still, some observers said niche finance companies like New Century are wise to try the de novo route first.
"For them to buy an existing bank, they would have to shut off some of the operations and start from ground zero" to bring the bank in line with the acquirer's model, said Dan Bass, managing director at the investment banking firm FBR Capital Markets. "It's better to start from scratch."
The company's application, a copy of which was obtained by American Banker, said it plans to form New Century Financial Bank with at least $10.4 million in capital and target small businesses by offering factoring as well as commercial and consumer transaction accounts.
New Century, founded in 1985, had $15 million of assets and generated $400,000 in revenue in 2009.
It calls its accounts receivable financing "just-in-time cash"; another slogan invites businesses to "think outside the bank."
Some observers were surprised that the company plans to pass the "New Century" name on to its proposed bank after the brand was tarnished by other institutions. A major subprime lender in Irvine, Calif., called New Century Financial Corp. filed for bankruptcy protection in April 2007 and a New Century Bank failed in Chicago in April. This prompted another New Century Bank in Phoenixville, Pa., to seek to change its name to Customers USA Bank.
Officials at the New Century in Texas did not respond to interview requests.
There are greater concerns in getting the green light from regulators.
"The biggest hang-up with the regulators is whether there is a need in the marketplace for" this type of lending, Bass said. "The caveat is that they've been around since 1985 and they're successful at doing it."
Analysts agreed that nonbank lenders have picked up business during the past year as traditional banks became skittish about lending.
But entering the business through a startup bank is not easy, as regulators had only approved two de novos this year through Aug. 18 — Lakeside Bank in Louisiana and First Republic Bank in San Francisco, according to Federal Deposit Insurance Corp. data. (Former managers of the $20 billion-asset First Republic, backed by private equity, repurchased the bank from Bank of America Corp., which had inherited it from Merrill Lynch & Co.)
That is a significant drop from 29 de novos approved last year and a far cry from the 192 approved in 2006.
Many in the industry say regulators are being tougher, but a Texas official said that is not necessarily the reason. The lack of de novo applications "is a reflection of the downward economy" in that no one is willing to start a bank when the future is uncertain, said Robert Bacon, deputy commissioner for the Texas Department of Banking.
Aside from one shelf charter and New Century's application, no other de novo applications have been filed in Texas this year, according to Bacon. The last de novo bank established in the state was more than a year ago, when R Bank Texas in Round Rock opened in June 2009.
"Do we need a new charter when we've got a number of institutions that have problems?" Bacon asked, in explaining regulators' general thought process. He declined to answer any direct questions about New Century's application.
The FDIC has officially denied only one application in the past 10 years, but many withdraw their applications when the approval process drags on and success seems unlikely.
In the case of specialty lenders that filed de novo applications mostly in 2008-9 after capital markets dried up, some had succeeded in getting approvals. But most were not able to pass the muster for regulators, and some would-be buyers ended up becoming sellers.
That was the story for Mercantile Capital Corp. in Altamonte Springs, Fla., a financier that specializes in making loans backed by the Small Business Administration. The company, along with the $375 million-asset Old Florida National Bank in Orlando announced last week that Mercantile would be acquired by Old Florida.
Mercantile received approval from the Office of the Comptroller of the Currency in late 2008 to charter a bank, but it was unable to get deposit insurance, said Christopher G. Hurn, the chief executive of the company in a voice message. It withdrew its application in early 2009, but didn't lose its hunger for bank deposits.
"With the interesting challenges of the economic environment it has become more and more obvious that we needed to get into a bank structure," Hurn said. "We've received three or four offers since then, but decided to accept this one."