New Banks Amid the Pandemic: Challenges and Opportunities Coexist

When Triad Business Bank opened on March 16, the United States was just beginning to realize how the COVID-19 pandemic would disrupt the economy and daily life. The North Carolina-based bank received its charter in March, becoming the newest bank in the nation, serving the areas around Greensboro, Winston-Salem, and High Point.

"I joke with people that it was a little bit like watching Harrison Ford run out of 'Indiana Jones and the Temple of Doom' with the whole palace collapsing behind him," Triad Business Bank CEO Ramsey Hamadi told Banking Dive, referring to his experience of launching a new bank as the economy began to unravel due to the pandemic.

"Very quickly, within a week, we were completely focused on the Paycheck Protection Program (PPP)," Hamadi said, referring to the Small Business Administration's pandemic relief program designed to help small businesses weather the economic downturn caused by the pandemic.

Starting a business in any period is no easy task, let alone a bank. But industry leaders say the timing presents both challenges and opportunities.

"Actually, it's a good time to start a bank now because you won't have any problems. Technically, you have no loans on your books," Paul Schaus, president, CEO, and founder of consulting firm CCG Catalyst, told Banking Dive.

Schaus noted the issue lies in attracting the capital needed to start a bank.

Capital requirements are set by regulators and vary based on market size and the bank's business plan. Since the 2007-08 financial crisis, capital requirements have increased significantly, posing a major obstacle to new banks even before the pandemic broke out.

Schaus said that unless there are financially strong investors, raising capital for a new bank is a challenge even without the threat of a global recession. He has been involved in the creation of 19 new banks during his career.

Depending on their stage, several new banks have already felt the impact of the pandemic on fundraising.

Triad Business Bank expected to raise more than $55 million before opening, or stop fundraising once it reached the cap, Hamadi said. The bank had already exceeded the $48 million minimum requirement in early February. "We were oversubscribed," he said.

Before the pandemic halted fundraising, the bank was in an active capital-raising campaign. It ultimately raised $52 million before opening. "We noticed the impact on the capital markets," Hamadi said.

The pandemic has caused some early-stage new banks to adapt to the new economic reality, which may affect their opening timelines.

Hitting Pause

RockPoint Bank, a proposed new bank in Chattanooga, Tennessee, had to pause its $30 million equity raise due to the pandemic—the raise had launched in mid-February. President and CEO Hamp Johnston told Banking Dive the bank still plans to open this year.

"There was a lot of interest in the community, [the equity raise] started very quickly, and then the world changed for all of us," Johnston said. "We basically just hit the pause button. We felt it wasn't appropriate. People have other priorities, and we have other priorities. We understand that."

The pandemic's impact has also slowed the $50 million capital raise for Chicago-based First Women's Bank, a startup bank focused on the women's economy.

"But we still have confidence in our ability to achieve our opening goals," said Marianne Markowitz, who served as acting administrator of the Small Business Administration under President George W. Bush and is now the bank's CEO. The bank is still answering calls and receiving commitments from interested investors, Markowitz said.

The pandemic could also affect the bank's opening timeline, she said. The new bank filed applications in September with the Federal Deposit Insurance Corporation (FDIC) and the Illinois Department of Financial and Professional Regulation to obtain an Illinois state bank charter.

"The current environment may affect our opening timeline, but it has not diverted our focus," Markowitz told Banking Dive.

The bank has the flexibility to wait for the right conditions to open, she said.

"Because we are still in the 'organizational stage,' we are flexible and able to adjust activities to conserve capital," Markowitz said. "Our fixed expenses are limited, so we can maintain flexibility to handle unexpected delays."

Competitive Advantages

Schaus said pandemic-related economic uncertainty will bring unease to new banks, established banks, and nearly all businesses in the coming months.

"But for those willing to take risks and with the capital to do so, now is a good time to start a bank because you start with a clean asset portfolio," he said.

For new banks with clean balance sheets, entering the market now could give these newer financial institutions an unexpected advantage.

"You don't have non-performing loans, and you don't have any troubled companies or businesses because guess what? You don't have customers yet," Schaus said. "You've just opened, which means you'll get the best parts because you have money to lend. But you need to be very selective about who you lend to. You want to make sure they are solid businesses with revenue and liquidity."

The current economy presents a "tremendous opportunity" for new banks like First Women's, Markowitz said.

"As a new bank, First Women's Bank will open with fresh capital, zero credit losses, and risk-mitigated SBA lending tools—all in a market with less competition and pent-up demand for small business loans," she said.

For Triad Business Bank, the bank began offering PPP loans shortly after opening, and the ability to provide forgivable loans brought in new account openings as some customers, dissatisfied with how their previous banks handled the PPP process, decided to move their business elsewhere.

"We gained a lot of loyalty during that time," Hamadi said. "New accounts significantly boosted our non-interest-bearing business (the bank's core checking accounts). These accounts are hard to get, so it was beneficial in that regard."

New lenders can also benefit from an economic environment that has led established banks to operate more conservatively.

"From a competitive standpoint, it's beneficial that bankers have suddenly pulled back and become more conservative in lending," Hamadi said. "They've become less competitive."

In many ways, the pandemic accelerated Triad's strategy by three to four years, Hamadi said.

"I think it's too early to tell how far things will go, but having a clean balance sheet today is certainly a good position," he said.

"The Missing Middle"

For New York City-based Piermont Bank, which received its bank charter in July and began opening accounts in September, its mission has always been to serve what CEO Wendy Cai-Lee calls the "missing middle."

"Many banks have become quite large, even regional banks," Cai-Lee said. "Then you have some truly small banks that don't have real commercial lending capabilities, products, and knowledge. And larger banks struggle to build one-on-one customer relationships."

The current crisis has validated Piermont's goal of serving small and medium-sized businesses with borrowing needs between $1 million and $10 million, Cai-Lee said.

Piermont's clean balance sheet has allowed it to be an active lender while other banks have been forced to pull back, she said.

"There are quite a few banks in the market that have stopped or slowed new lending," she said. "But for us, because we have a very clean balance sheet, strong capital, and cash position, we are one of the few banks actively making new loans. This has been very helpful for Piermont to build assets as a new player."

The challenge for Piermont lies in how quickly it can sustainably scale to meet the growing demand for small business loans, Cai-Lee said.

Johnston said the pandemic may help more small businesses see the value of local community banks.

"RockPoint Bank's strategy of serving small and medium-sized businesses is very different from big banks," he said. "There are many good banks and good bankers, but for customers who are looking for the best fit, I think they will understand this better now."