Pennsylvania has one of the highest concentrations of banks in the United States - 255 at March 31 - and the state's southeast corner is particularly crowded, with 156 banks in the Philadelphia area.

But the competition has done little to discourage start-ups: Eight banks were opened in southeastern Pennsylvania in the last 13 months, and another is to open by yearend. In all, 13 banks have been opened in the area in the last three years, mostly in the affluent Philadelphia suburbs.

There are two factors that are fueling the trend: consolidation and an unprecedented supply of capital.

David W. Darst, an analyst at FTN Midwest Securities Corp. in Nashville, said "lots" of in-market consolidation has occurred in southeastern Pennsylvania in recent years, and many displaced executives are going out and starting new banks - despite the view that the area is one of the nation's most overbanked markets.

"It's entrepreneurship at its best," he said.

In addition, willing investors abound for start-ups, according to John Stein, the president of the private equity firm Financial Stocks Inc. in Cincinnati. Though he prefers to put money into established community banks, he said, "people are throwing money at de novos."

Many start-ups are likely to struggle after they open, he added, given the yield-curve pressure and intense rate competition on deposits and loans. "This is a very tough time to start a bank," he said.

Richard D. Weiss, an analyst at Janney Montgomery Scott LLC in Philadelphia, agreed. "I don't think they're all going to be successful," he said.

Several analysts said the Philadelphia market has been particularly competitive. Mr. Darst said he noticed a bank paying 5% on one-year certificates of deposit and charging 6% for a five-year home equity loan. "That's only a 1% spread," he said.

Aggressive start-ups are at least partly to blame for the pricing pressure, the analysts said.

"The banks I cover in the Philly area say it's a very competitive market, and one of the things they point their finger at is the number of start-ups in the area. They pay more on the deposit side and charge less on the loan side," said Andrew W. Stapp, an analyst at Cohen Bros. & Co. in Philadelphia.

It is hard to gauge how successful the start-ups are because it typically takes several years for a new bank to become profitable.

Mr. Darst said Meridian Bank in Chester, Pa., is the only one of the 13 banks opened in the area during the past three years that is making money. Meridian, which was opened in July 2004, had $106 million of assets in the second quarter and a 0.33% return on assets.

"Most of these start-ups are still in high-growth mode. They're growing, and they're spending money to grow," Mr. Darst said.

However, "a handful of these have already gone back and raised capital a second time within the three years," he added, "so that does show you some of the success they're having."

Conestoga Bancorp in Chester Springs, Pa., opened its first branch in July and announced in August that it would buy PSB Bancorp Inc. in Philadelphia for about $87 million in cash. PSB is the parent of First Penn Bank, which has 13 branches and $562 million of assets.

Richard A. Elko, the president and chief executive officer of Conestoga, said the competitive landscape in Philadelphia influenced the decision to buy rather than build.

"The profitability ramp-up for a de novo bank and for de novo branches can be a two- or three-year proposition," he said. "Because we had the wherewithal with our capital base and being able to find an appropriate target, instead of losing $1 million next year, we're going to make $4 million."

The deal is expected to close within six months.

Despite the competition, Mr. Darst said, economic and demographic trends make the region attractive for start-ups. Its nine suburban counties have a lower unemployment rate and a higher median income than the state overall.

But Philadelphia County, which includes the city, is not doing as well as the nine other counties: Its 6.7% unemployment rate is the highest in the area and its median annual income of $38,168 is the lowest, according to data Mr. Darst compiled for a recent report.

Nevertheless, three banks were opened in the city in the last 12 months, and a fourth is on the way. (See story here.)

"The growth is certainly better in Chester County than in center city," Mr. Darst said, "but it's also where most of the de novos are going, so it's more competitive."


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