The FDIC paper The Entry, Performance, and Risk Profile of De Novo Banks published in April 2016 reports that the number of de novo bank failures and acquisitions annually has drastically declined since 2010, primarily due to the fact that new bank formations have become nearly inexistent.
Cheryl Monk, a writer in New York, reviews the de novo environment in her article published in the July 2017 issue of Independent Banker. She writes that, while in recent years new bank formations have been at an all time low, an increase in de novo activity may be on the horizon.
In order to encourage new bank formation, the FDIC has shortened the number of years de novo banks are subject to de facto capital requirements, among other improvements to make de novo bank formation more appealing. In a press release on May 1st, the FDIC stated that it has “taken a number of steps to enhance the transparency and clarity of the deposit insurance application process.” Some of these changes include:
- 1. Reduced the de novo period from 7 years to 3
- 2. Issued 2 sets of answers to FAQs associated with the FDIC’s Statement of Policy on Applications for Deposit Insurance
- 3. Organized training conferences to improve the “coordination among state and federal banking agencies in the review of applications”
- 4. Hosted several industry outreach meetings to help prospective institutions better understand how to apply for deposit insurance
- 5. Published this robust handbook on May 1st to guide the application process
The small but notable increase in de novo bank formation activity suggests that the FDIC’s changes are being well received. Monk writes that there were 6 applications for deposit insurance in 2016. For perspective, a mere 4 banks have opened since 2011, and two of those were in 2017 alone: both International Bank of Commerce of Oklahoma City, OK, and Blue Gate Bank of Costa Mesa, CA, opened in January 2017.
Monk says there is still room for de novo bank formations, considering the lack of community banks in some areas or in areas with substantial population growth. For bankers considering starting a new bank, some of the hurdles you can expect include:
- 1. A low interest rate environment
- 2. Heightened capital requirements that must be met up front
- 3. Finding investors to raise capital is becoming Increasingly difficult; 10 years ago banks were selling at 2.5 - 3 times TBV but now are lucky to sell between 1-2 times TBV. Investors ROI could be upwards of 10 years.
- 4. It is time intensive. The process usually takes around a year, from application to opening day.
Monk’s article prescribes that prospective de novo bank organizers may have success if they have sufficient capital and time, involved investors and a capable management team and board of directors. Experience with this type of formation is imperative, so make sure your team knows the ropes.
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