The process of establishing a de novo bank always has been complicated and time-consuming, and occasionally even painful. But since the beginning of the financial crisis, it seems that obtaining deposit insurance for a de novo bank has become a nearly impossible task. The Federal Deposit Insurance Corp. received 1,738 applications for deposit insurance from 2000 through 2008, and approved 1,258 of those applications—an approval rate of 72 percent. From 2009 through mid-2016, the number of applications was a paltry 49—33 of which were in 2009—and only three were approved—an approval rate of 6 percent.
Part of the reason for the dearth of de novos in the post-crisis decade has been the understandable recoil by the regulators from any action that could increase systemic risk to the industry. FDIC research reveals that de novos failed at twice the rate of longer tenured banks during the crisis. Further, with the number of problem institutions the regulators were working through, there were limited resources available to analyze and process de novo applications. As a result, the industry has gone nearly 10 years without real new bank creation.
However, the tide seems to be turning, and starting a bank from scratch may be a viable business endeavor again.
The FDIC clearly has signaled it is open for business. In numerous speeches over the past 12 to 18 months, FDIC chairman Martin Gruenberg has conveyed a supportive message on the topic of new bank formation. He has acknowledged the importance of new financial institutions in preserving the vitality of communities across America, especially those negatively affected by bank failures or branch closures resulting from consolidation. Further, Gruenberg has emphasized that new bank startups help preserve the vitality of the community banking sector, which is crucial to the future success of the banking industry. We should note that Gruenberg’s term as chairman ended in November 2017. However, we believe that his expected successor—Jelena McWilliams, chief legal officer of Fifth Third Bancorp—will carry on the outgoing chairman’s pro-de novo, pro-community bank policies.
The FDIC’s support for de novo bank charters goes beyond mere lip service from its former chairman. The agency has put its money where its mouth is by designating staff in each regional office to handle de novo applications, returning the heightened supervisory period back to three years, from the crisis-era seven, and importantly, publishing a new handbook for de novo organizers. The FDIC published the handbook, titled Applying for Deposit Insurance: A Handbook for Organizers of De Novo Institutions, in April of 2017. The handbook is divided into three main sections: Pre-Filing Activities, Application Process and Pre-Opening Activities. With less than 40 pages, it is concise and written in a manner that organizers of all levels of banking experience can easily understand. While it’s not a substitute for digging into the details of the applicable statutes and regulations, and seeking the advice of counsel and other advisors, it provides potential bank organizers with valuable information, considerations and guidance on assembling an effective board and management, developing the bank’s business plan, and navigating the application process, among other things.
Arguably the two most important factors affecting the success of a startup bank are access to sufficient capital, and identifying and hiring talented management. Based on the de novo banks opened over the past 18 months, the capital required to open likely will be in the $30 million to $50 million range, but a proposed bank’s business plan will significantly affect its capital requirements. Over the past few years, investors have shown a great interest in investing in community banks. From January 2016 through September 2017, community banks have raised over $7 billion in fresh capital. Potential startups can be optimistic that investors will have an appetite for their equity offerings.
Looking at the past two and a half years, more than 650 banks have been merged or acquired as the wave of bank consolidation continues. As a result, a large number of experienced, successful and talented bank executives and managers have become free agents. Many of these bankers are not yet ready to get out of the banking game and are looking for their next challenge. Certainly, organizers will need to do their diligence, especially when it comes to non-competition and non-solicitation agreements, but one or more successful de novo bank executives likely lies in this pool of displaced bankers.
The FDIC’s favorable change in sentiment toward bank startups, along with the availability of financial and human capital in the marketplace, should bode well for organizers looking to catch the next de novo bank wave.