In a world awash with cash waiting to be put to good use, dollars seep into every crack and pool in unusual places.
A global boom in mergers and acquisitions and leveraged buyouts is perhaps the most obvious sign of the liquidity glut that may be in its last stages. But in the banking industry, where legal and regulatory restrictions sharply limit credible bidders, the collision of dollars looking for purpose and opportunity looking for dollars has taken on a decidedly entrepreneurial bent.
Fifteen years ago, new banks on average opened with less than $4 million of capital; so far in 2007, they have opened with an average of $19.5 million, according to data from Carson Medlin Co. and SNL Financial LC.
Founders are seeking mounds of capital to establish credibility in an instant. They are no longer bound to the one-branch community bank, and are pursuing new models that absorb more capital than traditional ones. Regulators, too, are feeding the trend in a bid to guarantee that only well-qualified organizing groups secure new-bank approvals.
The increasing demand for capital, and its abundant supply, has forced a wholesale reconsideration of de novo banking. Between 1993 and 2003, nine start-ups opened with more than $20 million of capital. There were 31 of that size in 2006, and 13 more in the first quarter of 2007 alone.
The totals have still managed to surprise just about everyone — including the bankers themselves.
"The capital expectations of the bankers and the organizing groups have grown larger and larger every year," said Stan Taylor, who helped found three community banks before opening Bank Capital Group, which acts as a consultant to bank organizers. "We're involved in capital raises of $40 million and $50 million, whereas just three years ago those numbers were unheard-of. The numbers have gotten a little crazy."
How crazy? Try Atlantic Capital Bank, an Atlanta de novo that raised $125 million for its June opening. Even with conservative leverage of 8 to 1, that's enough capital to support a billion-dollar bank. Atlantic Capital is only the most recent and most visible of a new wave of capital-rich start-ups.
TriState Capital Bank in Pittsburgh opened in January with $85 million. Last October, it was American Momentum Bank of Tampa, which raised $100 million. Square 1 Bank in Durham, N.C., opened with over $100 million of capital in August 2005.
The mega-de novo trend is a far cry from the typical experience a decade ago, when even high-powered founding groups had to pound the pavement to scrape together $10 million.
"There is an enormous amount of liquidity in the world, and given the returns we've seen in the public markets over the last several years, a substantial portion of that liquidity is looking at alternative investment opportunities for higher yields and higher returns," said Doug Williams, the president and chief executive at Atlantic Capital. "The realization has developed that the returns in banking have been good generally, particularly in de novo banks" and "we were able to capitalize on a secular trend."
The growing awareness of start-up success has in fact birthed a cottage industry of funds that invest in nothing but organizing banks.
"Five years ago, I could not talk an institutional investor into investing in a de novo bank; they'd hang up on me," said Lee Bradley, a managing partner at Samco Capital Markets. "Now they all want to buy."
Mr. Taylor, who has worked as a consultant for de novos for the past six years, said he and several partners intend to launch a $50 million fund to invest in them.
Well-heeled institutional money has meant that organizing groups have been able to raise capital through private offerings, rather than registering public offerings with the Securities and Exchange Commission. And though institutional money tends to be itchier than the community-based investors of the traditional bank start-up, the new breed of de novo banker is not intimidated by institutional demands.
De novos must have "patient money, because you don't become profitable in year one," said Bill Schenck, the president of TriState and the former secretary of banking for Pennsylvania. "Nevertheless, the expectations that we set for ourselves as a management to satisfy our investors are quite the same" as when the company goes public, which he said will occur in three or four years.
Bank founders are satisfying these investors by reaching profitability faster and offering shorter waits before what they and their investors politely refer to as "liquidity events" — frequently a public offering that allows early-stage investors to cash in. And obviously, de novos are not immune to consolidation, and dealmaking is a particularly profitable method of monetizing investments.
"The days where you could ask the hometown folks to invest in the local bank and put the shares into a safe-deposit box are gone," said Gray Medlin, a managing director at Carson Medlin.
"The old generation was less forthcoming about liquidity events," Mr. Medlin said, but more recently "we have seen the same management teams, the same organizing directors, and the same primary shareholders start, build, and sell, in some cases multiple times."
Founders still have a local bias in raising capital, because owners make good customers, but they are increasingly willing to go out of market to secure the capital necessary for business plans that transcend the usual community bank.
Atlantic Capital is aiming for the middle market, where businesses are said to be neglected by the big banks and have needs that can't be met by community banks. Restriction on loans to one borrower means that a bank with $10 million of capital tops out at $1.5 million; a bank with $100 million can extend $15 million.
The strategy at TriState in Pittsburgh is similar, though perhaps more extreme.
"We're focused 100% on middle-market lending with no retail distribution whatsoever: no branches, nothing at street level, no tellers, no cash, and a vault that is the size of a breadbox," said Mr. Schenck.
"This bank in its lending capacity, in its product set, and the sophistication of its people is truly the equivalent of a middle-market-lending unit inside the country's biggest banks."
But Mr. Schenck said the imperative to bring in plenty of start-up capital is about more than lending limits: Big numbers "get the attention of people that we want as employees and customers," he said. "It gives you real credibility when you go out to hire experienced, middle-market-lending bankers."
BankCap Partners, which is advised by Texas Capital Bancshares Inc. in Dallas, has made substantial investments in both Atlantic Capital and TriState. It is a private-equity fund that invests solely in organizing banks.
"We back teams that are targeting $2 million to $15 million loans with a sophisticated group of lenders that in almost all cases come from big banks," said Brian D. Jones, BankCap Partners' managing partner.
Now that the big-capitalization trend has established itself, some observers worry it is already played out. They note major changes in the market in just the past quarter.
Mr. Taylor said he knows of organizing groups that in recent weeks have scaled back expectations, even going so far as to refile charter applications stipulating lower capital.
Mr. Bradley said he is seeing the same thing.
"There are a lot of de novos out there trying to raise money over the past 90 to 120 days that have found it tough going," he said.
And he has concluded that's not an entirely bad thing. "I think that some of the mega-de novos are raising too much capital and are going to struggle to get a decent return," he said. "Long term, that might hurt future de novos trying to raise capital."