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Insights

Fall 2019

Build It or Buy It: How Best to Start a New Bank Today

By Neil E. Grayson, B.T. Atkinson, Randall L. Saunders

West Virginia Banker

Reprinted with permission from the West Virginia Banker

Build it or buy it? The decision is not just for home buyers – it also applies to those seeking to start a bank. Although these are two well-established ways to start a bank, at any given time over the past 40 years, it has usually been pretty clear which approach made more sense. During most of the 1990s there were few de novos because the regulatory hurdles were so high. Similarly, from 2008 until 2016, the FDIC had placed a virtual moratorium on de novo banks, so the only realistic path was to buy an existing small bank and make it your own, a de facto de novo. During this period, most “new” banks were recapitalizations of troubled banks forced to sell as a last resort. On the other hand, from the late 1990s until the start of the Great Recession, new banks were relatively easy and inexpensive to form, resulting in a wave of de novo charters averaging more than 100 per year during that period.

With the notable shift in regulatory attitudes over the last few years, obtaining a de novo charter is again an option. In some markets there are also small, healthy banks for sale – especially in rural markets with little growth potential and aging management teams. Based on current bank stock values, these banks can be cost-efficiently purchased and rebuilt to form a new de facto de novo. So which approach makes more sense today? The answer depends on a few key factors, including those discussed below.

Why Build It? – The De Novo Process

There are several benefits to a de novo charter approach, specifically:

  • A clean slate to start with, including the latest technology without potentially cumbersome or outdated legacy systems
  • An improved regulatory willingness to facilitate formation of new banks with a more definite time frame for approval
  • A shortened de novo restriction period of three years
  • No time spent looking for a bank that passes due diligence scrutiny and can be bought on terms acceptable to the new management team and investors

De novo groups without well-connected organizers and those in slower growth markets have found that pitching an investment in a de novo bank is more difficult than expected. In the current environment, investing in a de novo bank is not purely a financial decision. Investors searching solely for a return on a financial investment are not likely to invest in a de novo bank in this environment. Investors in de novo banks are also typically motivated by a sense of community service, entrepreneurial spirit, or both.