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Consider Perth Blake, a family physician who has rented a building in Eustis for a decade. Three years ago, he took the first step toward his dream of constructing a building for his practice and borrowed money to buy a parcel of land. Last October, having paid off more than half his land loan, he went back to his bank and said he was ready to start building. His bank declined to lend him more. So Blake figured out how to shave some $130,000 off the construction cost and applied again. Still no dice. Three banks later, he got the same result. Then LaRoe came along. "It befuddles me," says LaRoe. "We looked at it, and it underwrote fine."
It's not just business owners who benefit. Last fall, Ivan Lefkowitz, a tax attorney in Orlando, says he got a letter from Morgan Stanley telling him his $150,000 home-equity line of credit was being frozen. He was current on his account and owned his home free and clear — though the value had dropped from $800,000 to about $625,000. Now he has a line of credit with New Traditions National Bank, another start-up. "Were it not for the financial crisis, we wouldn't have grown to the size we are," says CEO David Dotherow, who after 6½ months finds himself at the helm of a bank with $148 million in assets — a size he didn't expect to hit for at least a year and a half. (See the worst business deals of 2008.)
For banks moving down the chute now, though, winning clearance is decidedly tougher. LaRoe's First Green was the last bank to be approved by the FDIC, and getting that blessing was "without a doubt the biggest challenge of my career," says LaRoe. He drew up a spreadsheet of potential customers and how much each would probably deposit or borrow, hiding their identities. The FDIC sent the list back, wanting to know names. "Keep in mind, these are start-up businesses," says Mark Schmidt, the FDIC's regional director in charge of the Southeast. "We ask a lot of questions about how they're going to carry out their business plan when the economic headwinds are against them."
You don't have to leave Central Florida to understand why regulators are so cautious. An hour's drive north of Eustis, up in horse country, sit a handful of CenterState Bank branches. Until Jan. 30, the signs outside said Ocala National. That was the day FDIC agents swooped in and took over. For years, Ocala had ridden the real estate boom for all it was worth, indiscriminately lending money to home buyers (often speculators) and to builders putting up more houses. The bust took the bank down, and the FDIC is spending some $100 million to clean it up. "The system is imploding," says RBC's Cassidy. "Regulators are in batten-down-the-hatches mode. Opening up new banks is the last thing on their mind."
If the same fraction of banks fail this time around as did during the last downturn — the S&L crisis of the late 1980s and early '90s — we will eventually see a thousand-plus banks close, Cassidy figures. Since mid-January, the FDIC has been shutting down a couple a week. Yet at the same time, the system could use the extra capital. Since October, the government has plowed hundreds of billions of dollars into banks to bolster their balance sheets. Last year the average start-up bank brought more than $18 million of fresh capital into the system, according to SNL Financial.
That juxtaposition makes things particularly frustrating for Geoffrey Longstaff. After months of getting nowhere, he and his colleagues at Mercantile Commercial Capital in Altamonte Springs, a suburb of Orlando, decided to give up on the idea of starting a bank. "We were willing to put $37 million in capital into a new banking organization with no past-due loans," says Longstaff. "If we want to foment new lending, wouldn't it be nice to have those investor dollars instead of taxpayer dollars?"
The answer is yes. That's not to say the FDIC should simply bless every application. But this is how the downslope of the business cycle is supposed to work — weak companies get wiped out, and fresh ones rush in. Dropping millions of dollars here and there is hardly going to cure the banking system's sickness. But it might make it a little easier for a few more doctors to set up shop.