The Wall Street Journal recently ran an article by Rachel Witkowski (paid subscription required) in which Ms. Witkowski sounded a note of optimism that the long drought of de novos might be ending. She cites as evidence the fact that eight applications for insurance of accounts for new banks have been filed with the FDIC in recent months "spurred by an improving economy and an expected deregulatory push by Republicans in Washington." She also quotes David Dotherow, who opened a new bank in 2008, sold it in 2015, and filed an application to start another de novo in December 2016. David thinks that the FDIC's recent change in policy towards de novos "tells me they're serious about groups starting a new bank." Other organizers state that the FDIC has been "helpful."
While I don't want to rain on anyone's de novo parade, the article also illustrates why no current or potential organizer of a new bank should risk herniating a disk doing backflips over the potential for a wave of de novos. First, Witkowski related the FDIC argument that de novos have been scarce because the "prolonged low-interest-rate environment has made it difficult to start a bank and prove their viability." While the Fed has taken baby steps toward increasing interest rates, the interest rate environment has not improved substantially. Moreover, while there's been much talk and political theater in the past month regarding a dramatic decrease in the regulatory burden imposed upon community banks, the past month has also demonstrated that "gridlock" in D.C. is not only not going away with a wave of a wand, it may be exacerbated by a combination of a dysfunctional executive branch, a president and majority party that, thus far, have a less-than-compatible working relationship, and a minority party in Congress that risks going not only off the rails but off a cliff with wingnut stunts to play to its supposed base. Thus far, 20017 has been too much talk and not enough action. Regulatory reform may, eventually, come to pass, but starting a new bank that depends on it is, in my view, flying on a wing and a prayer. Economic conditions and regulatory burdens still make it a tough business in which to make money.
Last year, only two de novos were approved. While that's 200% better than zero, and the best year since 2008, Witkowski observes that it's a far cry from ten years ago, when 250 applications were received and 237 approved. Since 2009, the number of banks in the country has been halved. As a California regulator notes, between failures and mergers, "there's a market gap to fill." There is also "a pool of talent to operate those new banks." So, why only eight applications in the pipeline? Why aren't there eighty?
One of the organizers of one of the two de novos approved in 2016 gives us a hint.
"It was definitely a challenge" to open a bank, said Molly Gallaher Flater, founder of Blue Gate Bank, which opened its doors in January after an eight-month application process. "By late August, I had doubts--and we spent almost $1 million to get it going."
I do believe the FDIC is open for business and wants applications for new banks that are qualified," she said. "I can't stress the word qualified enough."
I assume that the eight months ran from the date the application was filed, and did not count the considerable amount of time spent on organizing the initial acquisition group and management, preparing business plans, doing market studies to support the viability of the proposed bank, preparing the regulatory applications, raising capital, attending pre-filing meetings with regulatory authorities, and the myriad of other activities required before the formal post-filing application process kicks off. Thus, the entire process is both time consuming and expensive. If you have a year and a million bucks to spend, the FDIC is apparently open and will plug in the electron microscope with which it will examine, and question, every aspect of your group's business plan, executive management, and control group. Folks like David Dotherow are all-in, and apparently others are, as well. Others may decide to seek an existing acquisition opportunity, instead. Still others may decide to invest in businesses where the initial investment in start-up time, money, and brain cells is less debilitating. A final group may move to Colorado and fire up a fat boy.
As for us, we stand where we've always stood: buffeted by the gales of over-the-top optimism and abject cynicism. After 2016, only the insane claim certainty about anything.