Hartford Business Journal

22 HARTFORDBUSINESS.COM | August 15, 2022 Maureen Frank is the CEO of New Haven Bank, which is the last startup bank to launch in Connecticut. It debuted in 2010. PHOTO | CONTRIBUTED Barriers to Entry 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 By Skyler Frazer sfrazer@hartfordbusiness.com 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-in- sured 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 Commis- sioner 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 tech- nology 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 commu- nity banks face the challenge of competing with fintech companies as well as larger, well-capitalized money- center banks. Meanwhile, regulatory and tech- nology 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 consoli- dation 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, partic- ularly 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 FOCUS: Banking & Finance

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