De Novo Territory

De Novo Territory Still A Wasteland

*The collateral damage caused by a non-existent condition that actually exists–the oft-denied FDIC mortorium on de novo bank approvals–includes bank M&A activity. According to the American Banker’s Robert Barba and industry participants that he interviewed, a vital portion of the bank “M&A food chain” has been eliminated.

“It was normal for your bank to get bought and, two or three years later, sit around a kitchen table, decide to start a bank, plot to get local shareholders,” said Timothy Chrisman, principal of executive the search firm Chrisman & Co. in Los Angeles.

“It was a feeder source,” Chrisman added. “It was the process of community banking and that has changed dramatically.”

The consequences of this change might be unintended, but are important.

A smaller banking industry facilitated by acquisitions and few new entrants has various ripple effects. In the short term, a lack of second-act opportunities could stymie activity as bankers hold on to what they have. In the long run, it will lead to a consolidated industry with less innovation and a deteriorating customer experience, some advisers say.

Less innovation in an industry not known as “cutting edge” to begin with is not a good thing.

Other observers cite the longer period of strict FDIC scrutiny after formation and higher capital requirements for de novos, and the fact that the costs of regulatory compliance in the post-Franken-Dodd world, as also discouraging potential de novo applicants from proceeding. Spending hundreds of thousands of dollars on an application that stands a slim chance of being approved would call into question the business savvy of a de novo’s sponsors. Needing so much capital and asset “heft” to not only secure regulatory approval but to afford the ongoing regulatory burden throws additional wet blankets on the idea of traveling the de novo highway.

“The belief that exists now is that it would be hard to prosper as a de novo,” said Wesley A. Brown, a managing director at KPMG Corporate Finance. “Bankers starting a new bank 10 years ago would have done it with enthusiasm. The idea that they can thrive has been shaken.”

A FDIC spokesperson quoted by Barba denies the existence of a formal or informal FDIC moratorium,which is consistent with the FDIC’s forked-tongue consistent position on the issue. Instead, the FDIC contends that there are so many “weak bank” charters available that starting a de novo is less attractive. That this position serves the FDIC’s interests in steering would-be de novo applicants to purchase a marginal existing shop rather than start a new one, thereby rescuing a potential failure from the jaws of a future assisted sale, is purely coincidental.

Because the old paradigm of sell and start afresh appears dead, senior management’s impetus to support a sale is often lacking. On the other hand, where the shareholders force a sale, there’s also less likelihood of the seller’s management jumping ship and starting a competitor. These factors work to lessen M&A activity on the one hand and encourage some M&A activity on the other hand.

While some of the industry participants think we could see a pick-up in de novo activity in two or three years, I heard the same think two or three years ago. Predicting the future is always hazardous business, and I could be surprised that de novo activity eventually resumes. My honest few is that I simply don’t see it happening, unless the FDIC and other federal banking regulators have a change of heart, in reality and not merely as a matter of bureau-speak for public consumption. I think that the number of banks will continue to shrink, and that survivors will grow larger and larger in order to not only prosper, but to survive.

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