How to break into banking

David Zalik’s life has been in fast-forward since he set-up a technology company at the age of 14 and skipped high school to go straight to Auburn University in Alabama.

In the two decades since, he has founded a further four businesses, including a staffing agency and a real estate investment firm.

But the most impressive item on his curriculum vitae was added last year when, at the age of 33, he became a co-founder and director of RockBridge Commercial Bank in Atlanta.

Zalik got the idea of starting a bank from customers of another of his enterprises: a small account management company that provides bridging loans to small businesses. “Customers were complaining that they weren’t getting the service they needed from their banks,” he recalls.

Convinced there was a niche to be filled, Zalik reached out to his network of business contacts in search of people with the expertise and funds to set up a bank focused on lending to small and medium-sized enterprises (SMEs) in the Atlanta area.

He was helped by his business partner, Larry Smith, former general counsel at Home Depot, the Atlanta-based home improvement retailer.

By October last year, they had assembled 175 investors, each committing a minimum of $100,000 and a maximum of $500,000.

Backers comprised some of the great and good of Atlanta’s business community, including Bernie Marcus, the billionaire co-founder of Home Depot, and Charles Ackerman, a renowned real estate developer.

RockBridge opened in November with $36.6m in capital – almost $7m more than it had targeted.

While Zalik is unusual because of his age, he is among a growing number of wealthy investors drawn to the opportunity offered by so-called de novo banks – the name given to banks open less than five years.

Almost 180 banks were opened in the US last year – the highest number since 2000 – with much of the capital provided by individuals rather than institutions.

De novo banks are flourishing in the US as a reaction against the consolidation that has halved the country’s number of banks in the past two decades.

“It has become difficult for SMEs to maintain a good banking relationship when one bank after another is consolidated,” says Bud Carter, a director of RockBridge. “That creates an opportunity for us to come in and provide a more personalised service.”

As banks get bigger, Carter says they lose interest in smaller customers, citing the example of an Atlanta engineering firm that was ditched by Chase Manhattan after 90 years as a customer.

“Chase said the firm no longer fitted its portfolio,” says Carter, who chairs an Atlanta area business group. “No phone call. No personal visit. Just a letter giving them 90 days to find a new bank.”

Lauch McKinnon, chief executive of RockBridge, says credit availability for SMEs is shrinking in the US even as the sector’s contribution to the economy expands. “Loan officers at the big banks are compensated according to the size of their portfolios so they are not as interested in chasing smaller loans,” he says.

“I talked with a senior credit officer at a major regional bank who is interested in joining us because she wants to get back to the close relationship with clients that her bank has lost.”

Within three months of opening, RockBridge had made $30m of loan commitments – each worth between $1m and $5m – putting it on course to exceed its target of $100m of loans by the end of its first year.

“We’re very pleased with how things are going,” says McKinnon, a veteran banker who joined RockBridge from another small Georgia lender.

For shareholders, de novo banks represent a low-risk investment, with only four such banks having failed in the US in the past 10 years. “The bar is set high by regulators to get into the business,” McKinnon explains. “Once you’ve cleared that hurdle, the chances of success are very good.”

But for such a safe investment, the returns can also be impressive. Between 2002 and 2005, banks with assets under $500m generated compounded annual return on investment of 22.6 per cent, compared with 8 per cent for the banking sector as a whole and 9.5 per cent for the S&P 500 index.

“What looks like a fairly boring investment from a risk standpoint becomes very appealing when you add those rates of return,” says McKinnon, who heads 12 staff at the bank’s sole location in northern Atlanta.

But Zalik warns that investors must be patient. “It was made clear that we should not expect liquidity for five to seven years,” he says. “This is not about flipping the investment after a couple of years. This is about creating meaningful long-term equity appreciation.”

For RockBridge investors, “liquidity” is likely to come from either an initial public offering, allowing shares to be traded publicly, or from a sale to another bank.

Recent events at two other Atlanta-based de novo lenders show the possibilities.

Neighbors Bank, launched in 2003, held a successful IPO last year that generated a total return of 262 per cent for the original investors. Piedmont Bank, meanwhile, was sold to Private Bancorp of Chicago for almost three times the amount invested by its founders in 2001.

Atlanta is one of the most fertile banking markets in the US because of its vibrant economy and fast-growing population, making its de novo banks attractive acquisition targets for out-of-state lenders seeking a foothold in the city.

Georgia had the third largest number of bank start-ups in the US last year, behind California and Florida, with all three states gaining at least 20 new lenders.

Carter says RockBridge’s focus on business lending sets it apart from many smaller de novo banks focused on real estate construction loans. “Many de novos are a group of real estate developers and a couple of accountants,” he says.

But as the appeal of start-up banks becomes clearer, the amount of capital available to them is growing, with hedge funds and private equity firms increasingly among the investors.

Bob Turicchi, a start-up banking expert, known as “Dr De Novo” at the American Bankers Association, says: “Five years ago, the standard amount raised was $5m-$8m. Now you’re looking at $20m-$30m – and even more in large metropolitan areas such as Atlanta.”

RockBridge is already poised to lose its status as the largest start-up in Georgia’s history to another Atlanta-based de novo, Atlantic Capital Bank, which is expected to launch shortly with more than $100m of capital.

Turicchi says the increasing number of de novo banks is being fuelled by the availability of experienced bankers cast aside as the industry consolidates. “When a local bank is acquired, the chief executive typically gets a healthy pay-off and a one or two-year non-compete clause. Once that time has passed, he might get together with his old management team and say, ‘Why don’t we start again?’”

Almost a year after Atlanta’s Main Street Bank was bought by BB&T, Mark DiLuzio, one of its former executives, is setting up another de novo, Primary Bank. “The cycle will continue as long as there is consolidation because there will always be a niche for small, local banks,” Turicchi says. “Every time a small bank is bought by a larger one, a new opening is created.”

Chris Marinac, analyst at Fig Partners, an Atlanta-based banking consultancy, warns that competition is increasing among de novo banks at a time when the housing downturn and slowing economy are making lending riskier.

He also questions whether there are enough qualified executives and loan officers available to maintain high standards of management and risk control.

“A credit cycle has yet to truly test these new banks,” Marinac says. “As Warren Buffett says, it’s only when the tide goes out that you know who is swimming naked.”

Marinac believes most well-run de novo lenders will be successful in the long term but warns that their growing number is depressing the price potential acquirers are willing to pay.

“There are a bunch of de novos that are three or four years old that are not getting the bids they were hoping for because there are so many looking to sell.”

RockBridge insists it is in no hurry to decide an exit strategy. “Businesses that set out with a plan about when they are going to be sold and who they are going to sell to are often not successful,” says Jim Grien, a RockBridge director and partner with TM Capital, a boutique investment banking firm. “The most successful are those that focus on building a sound business.”

Carter says the challenge of creating a bank from scratch was part of the appeal of committing money to RockBridge. “It’s more interesting and involving than the average investment,” he says.

Most RockBridge directors invested the maximum $500,000, giving them a powerful incentive to make the bank successful.

Grien says: “Many of the directors and investors know each other but this is not a social experience. We’re not in it to make friends. We’re here to make money.”

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