De Novos: A Recipe For Success or Heartburn?

Long time community bank attorney (and former FDIC Regional Counsel) Jeff Gerrish created his recipe for cooking up a new bank charter.

The number one ingredient is cash, and plenty of it. Because FDIC policy is that de novos need meet an 8% leverage ratio by the end of the third year, "if your new bank is going to be $250 million in total assets at the end of its third year, you will need to raise about $20 million in order to obtain the charter. And that is the minimum. If FDIC determines there is some unique risk in your proposed charter, then the requirement could be higher."

My somewhat jaundiced take is that the FDIC will frequently find additional risk, so for planning purposes, count on 10%.

Jeff's second main ingredient is seasoned senior management and an impressive board of directors.

[Y]ou need to find a seasoned CEO of an existing community bank or previously healthy community bank that sold. You also need to find a couple of other seasoned senior officers, as well as a board of directors that, while not maintaining quite as much “seasoning,” still has some folks on it who have possibly been directors of community banks previously, or know something about the industry. The era of establishing a board of directors of a new bank, anywhere from 8 to 15 people typically, made up of individuals who are simply pillars of the community with no banking experience is over.

Jeff also observes that getting FDIC, as well as other regulatory, approvals is "daunting and time-consuming" (He thinks 12 to 18 months from the first meeting of the organizing group to discuss the concept among the members is "good; I'd call it "optimistic."). I think that he and I would agree that in addition to raising money for capital contributions, the organizers need to raise a decent chunk of cash to fund organization expenses, including expertise needed to prepare and shepherd the necessary applications through the FDIC and the state or federal chartering authority. Depending upon how the organizers intend to raise capital, additional expertise will be needed (and expense incurred) in those efforts.

I would throw a couple of additional ingredients into Jeff's recipe. One is a convincing argument that there is a need for a new bank in the community that it is intended to serve. The few de novo applications that have survived the "gauntlet" in the past half-dozen years have been intended to create a bank in a well-defined and targeted community that the organizers have argued convincingly is not being served by existing financial institutions. I'm not saying that that everyone has to have a "bird in hand" like serving the Amish community, but the applicants ought to have at least two-in-the-bush that can serve the same purpose. Unless you can show a need other than you'd just like to be in the community banking biz, I don't think that the regulators will see much upside in granting you a new charter.

A related ingredient is a combination of a well-thought-out and well-prepared business plan that is as close to conventional as it can be, and a feasibility study that demonstrates that, "By Gum, we can make money running this thing!" In other words, assume that you're a guard taking the rock to the iron for a thunder-dunk and the FDIC is Hakeem Olajuwon towering in the post screaming "Don't be bringing that internet-only, CRE-centric, lowering-our-payday-lending-conglomerate's-cost-of-funding-through-the-use-of-insured deposits garbage into my house!" right before he pile-drives you into the floor with a flagrant 2 foul. Moreover, spend some time and money securing help from folks who have actually carried water to the bench in this arena, so you have at least a fighting chance of surviving the initial hurdle in any such endeavor: the laugh test.

I remain skeptical about a "thaw" in this freeze. Others are more buoyant. I think a threshold question you have to ask yourself is how early in the "thaw" do you want to put out into open water. Is it better to let others blaze the trail and learn from their success (and/or failure), or is time "a wastin"? If you think you've got the necessary ingredients, including plenty of cash, patience, and persistence, then maybe the time is finally right to cast off. I would recommend that you initially paddle slowly and carefully, though.