Now is the Time to Charter a New Bank

The banking industry is in need of new community banks. At the beginning of 2010, there were 8,021 active banking charters across the United States. As of early May 2018, there were 5,585 active banking charters. That is a reduction of nearly 2,500 banking charters through acquisition, failure, or charter consolidation within a common parent organization in less than nine years. Historically, when there have been periods of consolidation, even periods less drastic than the industry has experienced since the recession, there have been subsequent periods of de novo applications and resulting de novo banks. Unfortunately, this has not been the case post-recession. Since the beginning of 2010, there have been only 11 new banks opened, which is approximately one-tenth of the average number of new banks formed per year in the five years leading up to the recession. The industry needs new community banks, and our firm believes now is the time.

Recent Activity and the FDIC’s Efforts

Although there has been a severe lack of de novo banks of late, our firm expects this number will increase. There have been 15 applications for new banks filed in the past 12 months, two of which have been approved but not yet opened. We believe this activity will continue in the coming years—largely because of the vacuum that has been created by industry consolidation, but also spurred along by the FDIC’s efforts in the past couple of years, most notably the Handbook for Organizers of De Novo Institutions. This document was released to the public for comment in December 2016, which followed the agency’s April 2016 decision to reduce the de novo “enhanced” supervisory monitoring period to three years instead of seven years.

Interestingly, though our firm believes the FDIC’s document was largely positive for the banking industry, the FDIC’s efforts were met with criticism by the Office of the Comptroller of the Currency. Specifically, the then-acting Comptroller of the Currency, Keith Noreika, publicly stated his belief that the FDIC was purposefully stalling out de novo applications to an extent constituting an effective denial of the de novo application without having to actually make a decision. In other words, allegedly the application intentionally sits in limbo so that the FDIC does not have to take responsibility for a decision.

It is certainly rare for two banking regulators to go toe-to-toe on an issue in the public forum, and in our opinion, these criticisms were unhelpful noise. The industry, for the most part, wants and needs the FDIC to take a close look at new applications. Ideally, any slow moving by the FDIC in the short-term will result in healthier de novo institutions that can quickly become profitable, safe, and sound. A period of heightened critique in the application process may not be ideal, but it is certainly a step in the right direction and better than having no new charters at all.

Even if the FDIC has been dragging its heels a bit, the past year of applications is more than the previous seven years’ applications combined. On the whole, the FDIC has made clear with its release of the Handbook what the process is for organization. That process is more detailed and cumbersome than it was ten years ago, but at least now everyone knows the rules of the game and what is required in order to charter a new organization.

How to Capitalize on the Times

In our firm’s opinion, the current environment is the perfect time to form a new bank. First, FDIC staff has had some time to familiarize itself with the process and guidance. Second, capital has become much more available for bank startups than was the case eight years ago. Even if starting a bank is likely to continue to require higher levels of capital, we are still in a better position than during and immediately following the recession. Third, the industry as a whole is also healthier than it was. Fourth, the general expectation in the industry is that smaller community banks will continue to benefit from regulatory relief in the form of new legislation and revised regulations.

How, then, should individuals and groups interested in forming a new bank proceed? For starters, reviewing the FDIC’s Handbook for Organizers of De Novo Institutions and staff guidance are required reading. Beyond that, our firm believes there are a few key issues to keep in mind as you begin the process.

Make sure you have the right people involved. The FDIC Handbook focuses a significant amount on assembling the right leadership team for the new bank. This includes the organizers, Board of Directors, and officers of the proposed bank. The Handbook indicates that the FDIC will consider the background and experience of the team members, but one of the soft spoken issues in this regard is that if your team of people has an individual who was previously a part of a failed bank or had some serious financial issues (such as bankruptcy), you could have problems from the start. The FDIC, and each regulator for that matter, is very hesitant to let such individuals become affiliated with a new bank. This is the case even if the individual has been active in an existing bank for some time. We have seen acquisition transactions, bank holding company reorganizations, and the like hit a wall because a member of management or the Board had some past dealings with poor results.

The unfortunate reality is with so many banks having failed and so many people having experienced financial trouble as a result of the recession, many of the individuals with the experience to start a bank are likely also “tainted” in some way. This is an issue of which you need to be aware from the start. If there is a specific individual with a negative banking history proposed to be involved in the bank, the organizing group needs to have mitigating factors and likely a wealth of supporting information to justify the individual’s role in the new bank. If the organization of the new bank is fully dependent on the involvement of one individual with a tainted banking past, then the application may be a step in the wrong direction from the start.

Make sure you have an appropriate business plan. The core of any good de novo bank application involves the issues of management discussed above and the development of an appropriate business plan. The key here is that it be an “appropriate” business plan. Because of the heightened review from regulators, business plans that promise pie in the sky results, dramatic returns, immediate profitability, and the like are likely to be viewed with a healthy dose of skepticism. A successful business plan will not necessarily be one that demonstrates rapid growth, tons of new customers, unique products and services, or other non-traditional factors. For example, if you are proposing a business plan and are trying to convince the regulators that the bank will be viable because it will make money so quickly because of the tremendous growth you are expecting in the hot market where you want to put the bank, then you may find the regulators coming back to you and asking if you are able to double the amount of capital you were originally planning to have to start up the organization because they believe appropriate capital levels cannot be sustained if you really experience the growth you are expecting. More often than not, a “reasonable” business plan with moderate growth levels, appropriate consideration for loan losses, and honest evaluation of the market and associated competitive factors will be much better received as being “realistic” than business plans that promise the world. So, although it may sound elementary, your business plan needs to show reasonable asset growth, but likely only modest earnings, and you must demonstrate that you can maintain heightened levels of capital during the period of extra scrutiny, which will be at least three years.

Be patient. The last point we want to make is that even with the FDIC’s Handbook and processes in place, organizing a new institution is still going to take time. The Handbook states that applications will generally be acted on within four to six months after “acceptance”, but it could take one to two months or more after the initial filing to submit all of the supporting documentation the FDIC deems relevant in its review and have the filing formally “accepted.” This means that the approval process would normally take at least six to nine months, assuming no hiccups or unforeseen issues. That does not, however, include time to prepare the application, build the business plan, gather the financials and people necessary, etc. The business plan alone is a significant endeavor that will take a fair amount of back and forth with a professional that has an understanding of the FDIC’s expectations and unwritten “guidelines.” Although the FDIC indicates that there is no need to have professional help associated with the application (they say the same thing about responding to regulatory criticism), , our experience has revealed that the de novo process is not one to tackle on your own. There is too much capital involved and too many moving pieces to waste time figuring it out as you go. Our firm has put together a typical de novo organizational timeline and we are happy to share a copy of it with you if you are interested.

In light of the current environment, we believe now is the perfect time to charter a new community bank. If our firm can assist on a start-to-finish turnkey basis or help with any of the myriad of individual tasks and projects, please let us know.

For more information, contact Jeffrey C. Gerrish, Philip K. Smith or Greyson E. Tuck at 901-767-0900 or email at psmith@gerrish.com.

GERRISH SMITH TUCK, PC, ATTORNEYS GERRISH SMITH TUCK CONSULTANTS, LLC
700 Colonial Road, Suite 200 700 Colonial Road, Suite 200
Memphis, Tennessee 38117 Memphis, Tennessee 38117
(901) 767-0900 (901) 767-0900
EMAIL: jgerrish@gerrish.com EMAIL: jgerrish@gerrish.com
psmith@gerrish.com psmith@gerrish.com
gtuck@gerrish.com gtuck@gerrish.com

Greyson E. Tuck

About Greyson E. Tuck

Greyson E. Tuck is a member of the Board of Directors of Gerrish McCreary Smith, PC and Gerrish McCreary Smith, Consultants, both of Memphis, Tennessee. Mr. Tuck’s legal and consulting practice places special emphasis on community bank holding company formation and use, community bank mergers and acquisitions, regulatory matters, corporate reorganizations, corporate taxation, general corporate law and community bank strategic planning. Mr. Tuck is a current faculty member at a number of banking schools across the country, and is a dynamic speaker that is a frequent presenter at state and national bank association conferences. Mr. Tuck can be reached at (901) 767-0900 or gtuck@gerrish.com.

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