BOOM TIME

Northwestern Financial Review, Jan 1-Jan 14, 2004 by Bengtson, Tom, Dullum, Justin

New banks are popping up in record numbers, but is the end of the cycle approaching?

If Harold Wahlquist has his way, Annandale, Minn., will become one of the next communities to feel the effects of the "de novo boom" that has swept the country in recent years. Wahlquist, a long-time banker at the old Northwestern National Bank of Minneapolis before buying the First National Bank of Bertha-Verndale in 1989, has applications in to start a new national bank in the vacation community of 2,000, just 50 miles west of the Twin Cities. Capitalized with $3.5 million from his existing Midwest Bancorporation, Wahlquist hopes to have the bank open this spring.

No one questions the fact that the de novo market is hot. In the 14 Upper Midwestern states covered by this magazine, there were 21 new banks started between Oct. 1, 2002 and Sept. 31, 2003. While final numbers for the year 2003 remain preliminary, Minnesota alone saw at least eight new banks. The trend goes back to 1997, when 138 new banks were chartered across the country - that's about 1.5 percent of all the banks in the country. In 1998, there were 141 new banks, and the phenomenon peaked in 1999 when 177 banks opened their doors.

New bank numbers remain robust - 149 in the year 2000 and 140 in 2001 - but some experts say the trend may be cycling back toward mergers and acquisitions. While new banks have been the rage, in the mid-1990s, M&As were in vogue. In 1994, there were 411 bank mergers or acquisitions, according to the Austin, Texas firm of Alex Sheshunoff Investment Banking. In 1998, there were 388 deals, and every year in between there were 300 or more deals.

"I predict the number of M&As will pick up in 2004," commented Curtis Carpenter, director of mergers and advisory services for the investment banking firm. "I would be surprised if there were less than 250 transactions."

The balance between bank transactions and start-ups is clear, according to Carpenter and others. "When you have consolidation, that creates restlessness," said Richard Hoel, an attorney with the Minneapolis law firm of Winthrop and Weinstine. Both noted an abundance of well-heeled people willing to invest in a new bank.

Consider the scenario after a large bank buys a smaller one, Carpenter said. "Typically, the banker who sold out goes to the new company for a year or two and decides he doesn't like the way the bank is doing things. He has a lot of money from the buyout, so he goes out and starts his own bank. And he probably takes three or four of the big bank's top business development people with him."

Neil Beckman had worked at MFC First National Bank in Marquette, Mich., for nine years when it was purchased by Wells Fargo & Co. After two years under new management, Beckman left to become president of the start-up Gogebic Range Bank in Bessemer, Mich. Although he was never an owner at MFC First National Bank, he was able to take advantage of market conditions caused by industry consolidation. Gogebic Range Bank's two offices are former branches of First of America Bank, which went on the market when the Kalamazoo, Mich.-based bank was purchased by National City Bank of Cleveland, Ohio. Gogebic Range Bank opened on May 20, 2002, nearly two years after the application for a state charter was filed. In the interum, organizers raised $3.7 million in capital by selling 37,000 shares of stock at $100 a share to 150 investors. By July 2003, the bank was profitable. With assets now at $25 million, Beckman said they are exploring options for initiating another capital drive.

In Roscoe, Ill., where investors opened the Gateway Community Bank in October of 2002, they got a head start by buying the loans from a South Beloit, Ill., loan production office owned by St. Louis-based First Bank. Tom Heepke, who was in on the start-up of Gateway Community Bank, had worked at the LPO for three years. Figuring that much of the business would follow Heepke to the new bank, First Bank sold the $15 million loan portfolio to the new bank and closed its doors in that area. Building on that base, Gateway Community Bank concluded its first year of operation with $34.6 million in assets, about twice what its business plan projected.

All the new banks seem to benefit from the experience of its founders. And there seems to be a lot of experience to go around. The Community First Bank of Howard County in Kokomo, Ind., is headed by Mike Stegall, who worked 21 years for the bank's chief competitor before leaving to start the new bank last February. At the United Bank & Trust in Marshalltown, Iowa, the average amount of banking experience among its staff of 16 people is 20 years. Leo Herrick, its president, has been in banking for 47 years. And a number of Minnesota start-ups all feature experienced bankers: Dale Bowers, president of the Community Bank Owatonna, which opened in January of 2003, has been in banking for 30 years; Lee Ashfeld has the same length of service to the industry and he is now heading the Eagle Community Bank, which opened its doors in Maple Grove on Dec. 12, 2002. Fizal Kassim, who opened Maple Bank in Champlin, Minn., last August, has work experience that goes back almost 30 years. And Wahlquist, the man starting the bank in Annandale, plans to serve as president of the bank, leveraging his 40-plus years of industry experience.