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Will there ever be new banks again?

De novos, nearly extinct, could resurge after rates rise

Will there ever be new banks again?

Where are all the de novo banks? 

For those of you who may not be familiar with that term, de novo is the fancy French term for “new,” as in newly formed banks—new charters. I actually believe I am one of the few industry “pundits” who believes we will have a resurgence of de novo banks.

What the past tells us

It seems historically that every time we have been through a period of industry consolidation as a result of mergers and acquisitions, vacuums have been created in various cities and towns, and de novo banks have been formed.

[These de novo banks were also formed because folks who have sold their banks are playing with “house money,” but that is another issue.]

Historically, de novo banks have been plentiful (some would argue too plentiful, at least pre-Great Recession). Since the year 2000, the following was the tally of de novo banks: 

            2000 – 180

            2001 – 120

            2002 –    88

            2003 – 104

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            2004 – 115

            2005 – 160

            2006 – 176

            2007 – 162

            2008 –    86

            2009 –    22

            2010 –      2

Between 2008 and 2010, approximately 76 de novo banks failed. Since 2011, another 60 have failed. (This does not include the 126 de novo banks that were merged out of existence between 2008 and 2013.)  In total, de novo bank failures accounted for approximately 27.81% of the 489 total bank failures between 2008 and 2013. Not a good statistic.

I recall one de novo bank prior to the Great Recession that I worked with that needed help figuring out what to do with its life. The bank was formed with approximately $35 million of capital. It was owned by 200 or 300 “heavy hitter” shareholders, and it failed before the end of three years.

At the front end of the Great Recession, we were in the process of attempting to form a number of de novo banks that would have opened in the 2009/2010 timeframe. Unfortunately, the FDIC was not in the business of approving any de novo bank charters then.

Each time we went to FDIC to talk to them about deposit insurance, the regulator would try to shove our investor group toward a “problem” bank that it was trying to get rid of without having a failure. At that point, FDIC did not seem to really care where the capital came from so long as it solved its own problem.

Some of our clients acquired the problem banks. Some simply walked away to think about a de novo another day.

De novo banking today

These days, de novo banks take a lot more capital (and a lot more time) to form. Since 2010, only two de novo banks have been chartered: Bank of Bird-in-Hand (Bird-in-Hand, Penn.) and Primary Bank (Bedford, N.H.).

Bank of Bird-in-Hand was formed with $17 million in initial capital. Primary Bank was formed with $25 million in initial capital. This level of initial capital is much higher than the regulators required pre-Great Recession. Even with that high level of capital, the two banks will still work through a seven-year (at least as of this date) de novo period, which, in addition to the initial approved business plan, requires the bank to maintain a Tier 1 Leverage Ratio of at least 8% over the entire seven-year period. In addition, it must prepare pro forma financial statements and business plans before expiration of the initial three-year period.

On top of an already burdensome regulatory environment, it is not too difficult to see why de novo banks have become scarce.

What’s the outlook for de novos?

In recent weeks, I have had a number of calls from potential clients who have interest in acquiring small banks. None of these parties seem to be interested, at least at this stage, in establishing a de novo bank because none of them want a lengthy regulatory approval process followed by a seven-year runway.

However, as I indicated at the beginning of this blog, I believe there will be more de novo banks in the future—probably as many as 30 or 40 a year as industry consolidation begins to taper off.

This, of course, depends on a number of factors, interest rates being one of the most significant.

There was actually a presentation at a Federal Reserve seminar sometime last year in which one of the presenters made the case that the lack of de novo banks was more closely tied to interest rates rather than regulatory pressures. It was quite interesting! 

In the meantime, be aware that there are still a large number of private investors who want to get into the community banking business. It is only a matter of time before that interest results in new charter applications. We will see what the future holds!

For some related thoughts, see Ed O’Leary’s blog, “Too many banks? Really?” 

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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