🔒Organizers have proposed state’s first startup bank in over a decade. Here’s why launching a new commercial lender in CT is so rare

Startups come and go on a constant basis in many industries. That hasn’t been the case in Connecticut’s traditional banking sector. But that could be about to change. The state Department of Banking last month granted a temporary certificate of authority to the founders of New Canaan Bank, who are working to launch a new commercial bank in Fairfield County. The financial institution would be the first new startup bank in Connecticut since New Haven Bank (originally known as Start Community Bank) launched in 2010. It would also be an outlier in a decadeslong trend of industry consolidation, with bank failures and mergers drastically outpacing new charters. New Canaan Bank organizers say they see a need for a community lender that will serve the needs of small businesses. But their attempts to open don’t necessarily signal a trend of new bank startups, although state and federal regulators would like to see more newcomers enter the market. Launching a traditional, federally-insured commercial bank is costly and complicated, and given the disruption in the industry — particularly the rise of financial technology companies offering similar and even more advanced services — it’s unlikely the state will see a flood of new bank startups, experts said. “It’s challenging opening a financial institution,” New Haven Bank CEO Maureen Frank said. “You have to have seasoned banking veterans who know how the system works and have been in the trenches, so to speak.”

Consolidation vs. startups

John Carusone, president of the Bank Analysis Center in Hartford, said there are 32 federal or state chartered banks currently operating in Connecticut, which is a huge drop compared to a peak of 87 during the 1980s. The Savings and Loans Crisis in the late 1980s and early 1990s led to a wave of bank failures and industry consolidation. M&A activity continued in the decades since. “Connecticut was well known for creating a plethora of startup banks during the 1980s, and thereafter well known for a plethora of bank failures and forced consolidations in the 1990s,” Carusone said. Carusone said following the Savings and Loan Crisis, the state tightened its regulatory standards, making it more difficult to launch new banks. Connecticut Banking Commissioner Jorge Perez has experience working at large and community banks, and now as a regulator. He said there hasn’t been as much demand for new community banks in recent years. Instead investors have poured money into financial technology companies that have aimed to disrupt the traditional banking business model. “It is a very risky business, it’s an expensive business and it’s an extremely competitive business,” Perez said of community banking.

Kyle Eagleson — CFO and first executive vice president of Guilford Savings Bank, which first opened in 1875 — said community banks face the challenge of competing with fintech companies as well as larger, well-capitalized money-center banks. Meanwhile, regulatory and technology investment costs continue to rise. All that creates a challenging competitive environment with high barriers to entry. “We’re facing competition not only from fellow community banks in the area, but also J.P. Morgan, Bank of America and these new competitors like Apple, Facebook and Venmo,” Eagleson said. Many smaller institutions have decided to merge with larger banks to achieve scale. “In order to make money in a competitive market, and compete against the fintechs, you’ve got to achieve efficiencies and you can do that through consolidation,” Perez said. Frank, of New Haven Bank, said consolidation has made it less attractive for new startup banks to enter the state because mergers allow companies to partner, pool resources, and potentially expand their markets without going through a startup phase. “It’s a competitive marketplace. Growth is slow sometimes, and you have to have the right people in the right places and right locations,” Frank said. Guilford Savings Bank CEO Tim Geelan said the state is much more likely to see continued bank consolidation rather than new players. “I would bet on more consolidation than new startups,” he said.

High costs

Opening a bank is also more expensive than it used to be, particularly after the Great Recession and banking panic from 2007 to 2009. The statutory minimum capital requirement to open a bank is about $5 million in equity capital, but Carusone — of the Bank Analysis Center — said the practical minimum requirement is generally about $10 million to $15 million in today’s banking environment. Further, bank organizers must have somewhere between $1 million and $2 million on hand for pre-opening expenses, he said. New Canaan Bank organizers — who include former bankers as well as a lawyer, real estate developer and doctor — have said they need to raise between $30 million and $40 million to get their venture off the ground. “It’s not cheap to start a new bank,” Perez concurred, before listing some of the many expenses. “Before you get off the ground, that’s about $2 million.” Because of the significant amount of industry consolidation, both the state and federal government have encouraged more community bank startups in recent years. But it’s a long road from idea to reality. Frank was hired as a consultant at New Haven Bank in 2012, two years after the bank launched. She was promoted to acting CEO in 2013, and formally took over that post in 2014. She said it took a few years to get chartered because of heightened regulatory attention following the 2007 economic crash. “(Regulators) want to make sure that they’re not making deals that could prove unfavorable to the institution in the long run,” Frank said. Carusone said the entire process for chartering a bank through pre-opening takes between nine months to a year, and that doesn’t include the time organizers spend raising capital. It’s legally intensive, he said. New Canaan’s application, which the Bank Analysis Center looked at on behalf of the state, took almost a year before reaching the preliminary approval stage. “Application materials are definitely more scrutinized than they were before,” Carusone said.

Community appeal

Now more than 10 years after opening, New Haven Bank manages about $165 million in assets and has its eyes on expansion. Frank said brick-and-mortar sites are important for smaller banks, and the institution is planning to open two new branches in greater New Haven within the next year. “For a community bank that’s trying to serve a smaller population of people, you definitely need that physical presence,” Frank said.

Guilford Savings Bank Senior Vice President, Director of Marketing and Cash Management Renee Pallenberg said her community lender has grown to eight branches with about $1 billion in assets. It has a goal to continue expanding statewide. Like Frank, she said customers appreciate being able to meet and work with employees in a more local setting. “We offer pretty much everything a commercial bank might offer, but I think the difference still comes down to the more customized and personalized approach,” Pallenberg said. Perez said community banks serve an important role in the economy and will continue to exist, even if they’re not as abundant as they once were. “As convenient as technology may be, people still want the personal touch,” Perez said. “So that’s why there’s always going to be room for community banks.” New Canaan Bank still has a long road before it can open. The temporary certificate of authority is not a full approval. Instead, it gives the bank founders 18 months to meet certain conditions — like getting Federal Deposit Insurance Corp. and other types of insurance, obtaining office space and raising capital — before a bank charter can be officially issued. Eagleson said he thinks there will be “a lot of eyes” on New Canaan because it’s unique to have a startup in the state’s current financial ecosystem. Regardless of the decline in new banks, Carusone said Connecticut has a strong financial sector. “Connecticut is unarguably among the most attractive banking markets in the country because of its comparative retail affluence … and its commercial dynamism,” Carusone said. “It’s situated between Boston and New York and it’s replete with a lot of businesses and high per-capita income.”