Interest in new banks is running higher than usual.

• Position: BANKING - Industry Overview

After the sale of Hendersonville-based MountainBank in September 2003, its chief financial officer, Greg Gibson, lost his job--but not his ambition. Eight months later, Mountain 1st Bank & Trust opened in Hendersonville with Gibson as CEO. It reached profitability in four months--a state record for banks. "We have a great market that really is hungry for the way we do business and the services we provide," Gibson says. "And the timing was good."

Others thought so, too. During the first 11 months of 2004, eight state charters were granted to bank startups. Four other banks were being organized. Only two new banks opened in 2003. In 2002, none.

Newcomers will challenge older banks for business. But with many North Carolina banks ringing up record profits and unprofitable banks down from 17.4% of the total in June 2000 to 6.6% in June 2004, the market seems able to handle more. "The amount of capital available for startups is really incredible," says Tony Plath, associate professor of finance at UNC Charlotte.

A combination of factors has fueled the resurgence in bank formation. The economy finally seems to be recovering. Mergers have created a pool of seasoned executives such as Gibson who are eager to launch banks. And investors are ponying up, having watched earlier startups pay off handsomely. "People watched friends and neighbors do well in the '90s, and they are projecting that trend into future," Plath says.

Deposits at federally insured banks in North Carolina have increased in each of the past two years, reaching $163.9 billion in June. "Deposits are one of the key driving engines for community banks," says Buddy Howard, president of Raleigh-based Equity Research Services. "As a result, community banks have grown very rapidly, and stock prices have done well."

Meanwhile, bigger banks have made lots of money, thanks to economies of scale from mergers. They also boosted income from services such as mortgage refinancing, and low interest rates have made deposits cheap.

Charlotte-based Bank of America has posted record profits despite costly missteps. In the biggest, the bank shelled out $125 million in fines and $250 million to investors to settle complaints that it gave special deals to big traders at the expense of small investors in its mutual funds.

But the bank's cost controls combined with a growing revenue stream--up 25% to $35.1 billion--produced $10 billion in net income for the first nine months of 2004. It netted $8 billion...