Hyannis-based Bank of Cape Cod is the newest bank to open in Massachusetts.
Entrenched community banks and slow population growth have separated much of Massachusetts and New England from the “blistering pace of new-bank openings” seen along much of the rest of the East Coast, according to a new report, although Cape Cod seems to buck the trend on both counts.
“There are far fewer new banks started in New England versus the rest of the country,” said David Danielson, president of Danielson Capital in Virginia.
Danielson Capital’s report on new banks for the second quarter of this year notes that six new banks opened along the East Coast, from South Carolina to Maine, in the quarter. Nineteen opened in the first half of 2006.
Two new banks opened in Massachusetts this year: the Woburn-based cooperative Patriot Community Bank, in April; and Bank of Cape Cod, a commercial bank in Hyannis, last month.
Investors plan to open yet another Cape Cod institution, New England Savings Bank, in Hyannis. That proposed bank received its Certificate of Public Convenience – the state’s determination that it will serve a public need – in July, meaning it has until next July to open.
In the past five years, just two other de novo banks opened in Massachusetts: Arlington-based Leader Bank, in 2002; and Commonwealth National Bank of Worcester, in 2001.
While the numbers pale in comparison to new banks in southern states, it seems once new banks open here, they do well: Leader Bank has expanded to four branches, and Commonwealth National just opened its fifth in July.
Bob Segal, chief investment officer at J. William Mantz Investment Advisors in Danvers, said that community-based banks “tend to be much more stable [and] in the community for the long term,” as opposed to a national bank that might want to “test the waters” with a local branch, then be quicker to close it if it’s not profitable.
Still, de novo banks in New England have a certain set of challenges to overcome before they begin, Danielson said.
“It’s a tougher environment,” he said, and others agree.
For one thing, Massachusetts has 210 established banks, and many have been around for decades. Many are mutual banks, which “merge with far less frequency” than banks in other parts of the country, according to Sean Mahoney, an associate with Kirkpatrick & Lockhart Nicholson Graham in Boston.
By contrast, the community banks in the nation’s South “are stock banks, so they are not going to be around [so long],” Mahoney said.
“It is much harder to find an underserved market in Massachusetts,” he added.
‘The Right People’
Another barrier to new banks is the amount of capital that state-chartered banks in Massachusetts have to raise in order to start up, said Massachusetts Bankers Association Director of Communications Bruce Spitzer. He and bank presidents interviewed said de novo banks have to raise more initial capital to open here (a minimum of $8 million) than in many other states.
Extensive experience is required to make a go at a new bank, added Mahoney.
“You need the right people,” he said, “people who know how to develop the business and who have run a business before. It’s definitely not low-hanging fruit.”
New England’s population is not growing quickly, which further slows the rate of de novos. In other parts of the country, such as the area near Washington, D.C., developers are tearing up farms and building 3,000-lot subdivisions, Danielson said. Some of the large counties there are growing by as much as 8 percent a year.
“It’s a very different market down here,” he said.
However, Cape Cod’s population has been growing faster than that in the rest of Massachusetts (which was the only state in the nation to lose population two years in a row – from 2003 to 2005 – according to the U.S. Census), as summer residents convert their vacation homes into year-round residences, or newcomers buy summer homes with an eye toward using them as a place to retire. The Cape’s population is also aging, according to a 1998 Trends Survey by the Cape Cod Commission, a regional planning agency.
In August, Massachusetts Bankers Association President Daniel Forte called the Cape’s growth a “mini-boom.” He also noted the loss of four native banks to mergers and acquisitions in recent years.
De novo banks, as a result, might see “opportunities to make some inroads” on the Cape, he suggested.
‘A Steady Growth’
That has been the Bank of Cape Cod’s experience. President and Chief Executive Officer Tim Telman, who has lived on the Cape for six years and worked in the Boston banking world for 16, said he and his start-up partners saw a huge opportunity when they looked into opening the bank.
“Twenty-five years ago there were 16 locally controlled banks [on the Cape out of a total of 20]. Today [after a number of mergers and acquisitions] there are four,” he said. “During that same time, the population here has nearly doubled and they are much more affluent.” That increase includes more year-round residents, he noted.
Total funds deposited in Cape Cod banks also nearly doubled, from $3.1 billion to $5.5 billion, in the past 11 years, Telman said. “And there have been no new-bank charters granted in that period.”
Telman said economic data shows the Cape’s population is expected to continue to grow, at about 5 percent per year, for at least the next five to eight years.
The fact that Bank of Cape Cod attracted senior managers away from stable jobs with major banks is testament to the “opportunity” all of them recognized in the new bank, he added.
Leader Bank President Sushil Tuli has found his own niche market in Arlington.
“We are the only Arlington-based bank with [its] headquarters in Arlington,” he said.
Like other community banks, Leader emphasizes personal service, according to Tuli.
“We have a local branch manager and local executives. We really try to market to our community,” he said. At his bank, noted Tuli – who also owns Leader Mortgage, one of the state’s oldest mortgage companies – “hardly a day goes by that I don’t see a customer looking for a commercial loan. Customers can come in and meet me personally.”
Like Telman, Patriot Community Bank founder and President John O’Donnell said he and co-investors felt that the number of recent bank consolidations in Woburn signaled the need for a community bank.
He said he’s found, so far, that his customers “like the personalized feel of a hometown bank.”
During the second quarter of this year, much of the new-bank activity was gathered around New York and New Jersey, and in the Carolinas. Some of those new banks also managed to raise impressive amounts of capital; BankMeridian in South Carolina raised more than $31 million, and Bank of New Jersey raised $44 million.
In Massachusetts, lately, there’s been “a lot of interest in new banks” this year, according to David Cotney, chief operating officer of the state’s Division of Banks.
“We received a new application in the last couple of weeks to open a new bank in Springfield,” he said. “And we’ve gotten more than two or three expressions of interest” for other locations. He did not go into specifics.
Cotney said the Cape Cod example is instructive.
“Over the last 10 to 12 years there have been 13 mergers on the Cape,” he said. “Usually after [a number of mergers] there is a trend of establishing community banks.”
Segal, of J. William Mantz, said he thinks that sequence is natural. Mergers and acquisitions of smaller banks by larger ones over the last several years might propel some to organize a new bank, he said, because “consumers would rather do business with a bank that is local.”
Of course, new banks have to “bring in new customers, have to get customers away from existing banking relationships,” he pointed out. “But I think, especially with mergers, people may not want to do business with a bank that is located out-of-state Â… customers like it, if they have a problem, that they can talk to someone face-to-face rather than on an 800 number.”
Segal reiterated that New England’s slow population growth has resulted in fewer de novo banks. “I would say more [banks open elsewhere because of] the growth prospects, because people are moving down South because of weather and housing.”
But Spitzer and Mahoney predict growth here will be stable.
“I think you’ll see a steady growth, not a breakneck speed,” Spitzer noted.
Mahoney said he thinks there will probably be “a couple” of new applications in the coming year.
