LI's new banks struggle with stiff regulations

For a while, it seemed like starting a new bank on Long Island in the middle of a crippling recession was a stroke of unintended genius - at a time when other banks weren't lending, new banks were a fresh face unencumbered by a legacy of bad loans and shoddy service.

But as the poor economy has persisted, most of the Island's handful of new banks are struggling to satisfy regulators who are particularly tough on new institutions.

"It's a very tough business model in the best of times, and these aren't the best of times," said Thomas O'Brien, chief executive of State Bank of Long Island, based in Jericho. His bank, founded in 1966, has expressed interest in acquiring struggling local banks.

"It's a much tougher regulatory environment than I can recall," said Douglas Manditch, chairman and chief executive of one of the new banks, Islandia-based Empire National Bank.

Manditch and others say that regulators in particular want the new banks to maintain higher capital levels. Regulators have been so hard-nosed that new banks feel they are being pushed toward consolidation.

In the past year, the Federal Deposit Insurance Corp. told Hanover Community Bank of Garden City Park to strengthen its management and raise more capital. Merrick-based Madison National Bank, after seeing its bad loans climb throughout the year, agreed last month to be acquired by a Manhattan investment group that will provide more capital.

Steven Schnall, chairman and chief executive of Great Neck's year-old Quontic Bank, said regulators are difficult, but serve a purpose.

"They're trying to accomplish something good, which is foster responsible lending and compliance," he said. "It does help, but it's kind of murder not being able to run a business the way you want to run a business."

In Quontic's case, he said its growth has been restricted - although it will open a second branch soon in Astoria - and it's been prevented from making certain kinds of loans.

Hanover's acting chief executive, Sangeeta Kishore, said that bank will have a brighter future once its permanent leader, Edward Petrovsky, takes over and it benefits from $8 million to $10 million in new capital from investors.

Monte Redman, president of Astoria Federal Savings and Loan, said several new banks paid too much to attract deposits, lent too much in an attempt to grow and depleted capital.

Several bankers say Madison exemplified all of these issues, which led to its proposed takeover. Some, including Manditch, said regulators may stymie the deal if they believe it won't solve the bank's problems. Madison officials did not respond to requests for comment.

Joseph Perri, chief executive of Islandia-based Gold Coast Bank, said his institution was cautious. It didn't offer higher rates on certificates of deposit and grew slowly to preserve capital.

He agreed that the less-healthy new banks could be takeover targets, probably by New Jersey or Connecticut banks looking to expand onto Long Island.

In the meantime, they look for ways to survive.

"Just being a community bank and working hard is not enough," Schnall said. "Everyone's doing that, including the existing banks, and they have a lot more capital than you do."