In December 2012, the Walt Disney Company inked a deal to acquire Lucasfilm, LTD for a mere $4.06 billion. Now you might say, so what? Well, the “what” in your question is that it ensured to all Americans that capitalism was alive and well and that the Jedi would indeed return for our entertainment pleasure.
Speaking of returns, in the early years of my career in bank consulting (the early 1980’s), I had the opportunity to work in North Carolina. As I drove around the state, I noticed an unusual number of community banks that were about the same age and size. Upon further inquiry, I found that many of the banks had similar beginnings. It seemed that over the previous several years, a number of larger community banks, NCNB (the forerunner of today’s Bank of America), Wachovia, and First Union, had been on buying sprees and acquired a large number of banks in North Carolina. Over the years following the acquisitions, directors and investors were deluged with complaints from friends and past customers about how bad bank service had become. Of course, First Union and Wachovia are long gone and NCNB has since become Bank of America.
Fortunately, America has become great because of creative entrepreneurs who saw an opportunity and seized it. That same brand of entrepreneur sprang up in North Carolina and a whole new generation of community banks was born across the state. In fact, the same scenario was happening all across the country. New banks, or de novo banks, sprang up everywhere. It seemed like every lawyer or successful real estate agent thought they should be in the banking business. Brokered funds or 1-800 accounts (i.e., non-core deposits) became the rage and the number of new charters mushroomed. As industry consolidation picked up speed through M&A, so did new charters, and the mania continued well into the new millennium. In fact, of the nearly 1,800 banks chartered since 1987, 57% were chartered between 2000 and 2008, the year the economy began its free fall and we entered the Great Recession.
In fact, of the nearly 1,800 banks chartered since 1987, 57% were chartered between 2000 and 2008, the year the economy began its free fall and we entered the Great Recession.
However, the rush of de novo banks came to an abrupt halt shortly thereafter. A number of factors contributed to the end of the new bank charter feeding frenzy. With the Great Recession came a large number of bank failures. Included in those failures were a disproportionate number of the banks chartered during the rush of 2000 to 2008. Enough failures, in fact, that the rules governing new charter supervision were materially changed, extending the de novo bank enhanced supervision from three years to seven years.
A closer look at the failures suggests that geographically, the failing new charters were more concentrated in the hard hit southeast and in other regions where the commercial real estate markets experienced a boom and then were hit the hardest in 2008 and 2009. Geography was not the only problem, though. The ever popular de novo bank business plan of limited branching, rapid growth in CRE lending, and funding by non-core deposits led the death march.
Much has improved since 2008 when over 526 banks failed across the country. America is recovering, bank failures have all but stopped and the financial sector has returned to profitability. This time, however, the recovery differed from previous ones with regards to de novo activity. Unlike previous cycles, as troubled banks failed or merged with healthier banks and the economy began to recover and expand, new bank charters were not replacing them and the total number of banks in America dropped to its current record low of under 6,000 financial institutions.
Common theories were that the laws enacted after the Great Recession created too many barriers to entry for de novo banks. Increased capital requirements, increased compliance costs, low interest rates with declining net interest margins are all frequently cited as reasons for the dearth of new banks, not to mention, the effect of the changing banking habits of millennials and the growing fintech revolution. (Of course regulatory resistance to new banks was another factor that resulted in limited interest in new charters, with its long and costly approval process.)
History has a way of repeating itself, though, and de novo banking is no exception. With the Great Recession in our rear view mirror and healthy bank M&A back in full swing again, it seems that the opportunity for new banks is presenting itself again. Regulatory resistance began to change radically in 2016 as the Conference of State Bank Supervisors and the FDIC realized that the lack of banking alternatives and the increasing availability of capital and management talent had created a need for new banks. New charter rules and the enhanced supervision criteria were changed from seven years back to three and the FDIC updated its processes and procedures and began a road show across the country on how to charter banks in the world of post Dodd-Frank banking.
With the Great Recession in our rear view mirror and healthy bank M&A back in full swing again, it seems that the opportunity for new banks is presenting itself again.
Since I began consulting in late 1977, predictions have abounded that branching would end, and the community bank as we know it would completely disappear. America would become the new Canada with only a few big banks left to serve our banking needs. That has not happened…yet. And why not? Perhaps it is the entrepreneurial spirit of Americans or maybe because of the old adage – people bank with people, not banks – continues to hold true. Regardless of what the future holds, today, community banking is still alive and well, and remains absolutely vital to the American economy.
With the sale of Lucasfilm to Disney, we are assured that the Jedi Knights will not pass into oblivion—there will be Return of the Jedi! With the recovering economy, a reasonable Congress, de novo bank supportive regulators, readily available senior management and as always, capital, new banks may again be seen in our neighborhoods. Given the persistence and creativity of our entrepreneurial bankers and investors—the Return of the De Novo may well become a reality!
Based on the knowledge we gained and the lessons we learned in the de novo bank rush of 2000 through 2008, subsequent articles will delve deeper into the specifics that organizers will need to consider when chartering a new bank, and the why’s and how’s of making new banks successful, including capital and organization requirements, the business plan, technology considerations, branding, and policies and procedures.
