From 2000 to 2007—the seven years leading up to the recent financial crisis—the FDIC received more than 1,600 applications for deposit insurance, an average of more than 200 per year. More than 1,000 new banks ultimately were formed over this same period. During and following the financial crisis, however, de novo bank formations became almost nonexistent. The reasons were understandable. De novo banks failed during the financial crisis at a higher rate than similarly sized established banks. Regulators were more focused on problem institutions and systemic risk to the economy. Heightened regulatory oversight within the industry increased compliance costs. Low interest rates and narrow net interest margins reduced profits. And economic uncertainty dampened investor interest.
Over the past two years in particular, there has been renewed interest in establishing de novo banks as general economic conditions have strengthened and ongoing consolidation within the banking industry has created a large pool of experienced banking executives and professionals.
Consistent with these favorable conditions, the FDIC has signaled its support for de novo bank formations. The FDIC has acknowledged in public statements the importance of new banks “to preserve the vitality of communities, fill important gaps in local banking markets, and provide credit services to communities that may be overlooked by other financial institutions.” The FDIC also has taken several meaningful steps to help revive de novo bank applications. These steps included reducing the heightened supervisory period for de novo banks from seven years to the pre-crisis three years, and publishing a handbook titled Applying for Deposit Insurance: A Handbook for Organizers of De Novo Institutions to assist organizers with the application process.
Since the beginning of 2017, the FDIC has approved 14 de novo applications, including an Alabama state-chartered bank that opened in 2018. Two new applications currently are in process. While these numbers remain well below pre-financial crisis levels, the upward trend is clear. Now may be the time for interested organizers who have remained on the sidelines to consider forming a de novo institution. Those moving forward with plans should be mindful of the following key considerations of the FDIC in evaluating an application for deposit insurance:
Soundness of the Proposed Institution’s Business Plan
The business plan provides a guide for the first three years of the institution’s operations. A comprehensive, well-constructed, and well-supported business plan is required to demonstrate that the institution has a reasonable probability of success, will operate in a safe and sound manner, and will have adequate capital to support the institution’s risk profile.
Qualifications of the proposed board of directors and senior management
Selecting a qualified board of directors and management team is one of the organizers’ most significant responsibilities. The quality of management (including directors and officers) is the single most important contributor to the success of any institution. For this reason, it is important that candidates for director and officer positions have experience that corresponds to the proposed institution’s specific products and services, markets, and activities.
Adequacy of the proposed capital
Because each proposed de novo institution is unique in terms of its business plan, management team, market competition, and local economy, the FDIC does not prescribe a minimum dollar level of capital. Instead, the FDIC and the state or federal chartering authority consider the unique factors of each proposal and set a minimum capital requirement based on an evaluation of the proposed institution’s market dynamics, anticipated size, complexity, activities, concentrations, and business model. The FDIC and the chartering authority will require higher capital if the proposal presents more than routine risk or novel characteristics. The initial capital required for applications recently approved is in the $20-$40 million range. Importantly, most of these banks, including the Alabama-based bank, raised capital well in excess of the minimum requirement—another indication of strong market interest.
While each application is unique, in our experience, interested organizers should expect a timeline for approval of six to eight months after filing the application. A minimum of two to three months also should be reserved for pre-filing planning and preparation.
The process of forming a de novo bank today is different in many ways from the process that existed prior to the financial crisis, and it remains a challenging and occasionally agonizing endeavor. It is clear, however, that current economic and regulatory conditions are more receptive to bank startups than at any time since the financial crisis, which should be welcome news for interested organizers and investors.
Alan Deer is a partner with the Bradley law firm. Alan has broad experience in banking, financial services, and corporate law, with his primary focus on mergers and acquisitions, regulatory and enforcement matters, formation of de novo institutions, and capital-raising activities.