Probation Over, De Novo Class of '08 Ready to Fly

Banks formed at the height of the financial crisis are officially coming of age.

Community banks that opened their doors in 2008 have begun to pass a key regulatory threshold, even as new charters remain at their lowest level in decades.

Through Tuesday, 31 banks have shed their de novo status this year, with another 40 set to do so coming months, according to the Federal Deposit Insurance Corp. Prior to reaching their seventh anniversary, newer banks are subject to added scrutiny and higher capital standards.

The milestone signifies the end of an era for banks that went into business right before the credit markets froze. It also marks the emergence of a new class of battle-tested bank executives who had to take a more cautious approach to growth while gaining experience dealing with unexpected shifts in regulatory demands.

The crisis "was a time of trauma for the financial industry generally, but it wasn't necessarily the worst time to be starting a bank and building a portfolio of assets" said William Mayer, co-chair of the financial institutions group at Goodwin Procter. Though credit markets tightened as the 2008 de novos opened, Mayer said that "a more positive way to look at it is that banks were being much more conservative about extensions of credit."

"If you go back to 2008, you're going to see a wide variation in [de novo banks'] success," said David Baris, a partner at BuckleySandler and president of the American Association of Bank Directors. "The differentiator in banks in the same or similar markets has to be the management and the board."

A distinguishing feature of the 2008 de novo class is that they're shedding their new-bank status much later than they initially planned. The FDIC in 2009 extended the de novo period to seven years from three years for institutions under its supervision, reacting to the high failure rate of new banks during the financial crisis.

"Depository institutions insured less than seven years are over represented on the list of institutions that failed during 2008 and 2009, with many of those failures occurring [during] the fourth through seventh years of operation," the agency said in a letter to financial institutions at the time of its decision.

The FDIC's decision sparked a backlash of frustration throughout the industry, said Chris Cole, senior regulatory counsel at the Independent Community Bankers of America. "We heard from our de novo banks right away about it," Cole said.

De novo banks "were unhappy to say the least," Cole said, adding that seven years is "entirely too much regulation at the beginning."

Under current regulatory guidelines, new banks must maintain a Tier 1 leverage ratio of 8% for three years. De novo banks are also subject to a more-rigorous examination schedule and must seek approval to make changes to their business plans.

Reflecting on the altered requirements, bankers said they took longer-than-expected supervisory period in stride.

"With all of the things that were going on, it was just one more thing," said Dan Morrison, chairman, president and chief executive of the $318 million-asset Optima Bank & Trust in Portsmouth, N.H., which shed its de novo status in January. "Complying with new rules is just one of the things that bankers do."

The longer de novo period was "understandable," given the economic conditions at the time, said Mac Wilcox, president and chief executive of the $122 million-asset Savoy Bank in New York, which also hit its seventh anniversary in January.

Banks are also marking their transition out of "de novo" status by putting in place new growth plans. Of the banks set to lose their de novo status this year, only two — CapStar Bank in Nashville, Tenn., and Empire Bank in Springfield, Mo. — had more than $1 billion in assets at Dec. 31, according to FDIC data. That figure is sure to rise as management teams add branches and expand upon their current business lines.

Gold Coast Bank in Islandia, N.Y., which reached its seven-year mark last month, is planning to add a branch on Long Island, said Catherine Califano, the $323 million-asset bank's chief financial officer. Still, the bank plans to expand cautiously.

"Even though we're out of the de novo period, it doesn't mean that we can do whatever we want," Califano said.

Optima, which has five branches in eastern New Hampshire, is also looking to add an office, Morrison said.

The 2008 class is passing the seven-year milestone at a tough time for bank entrepreneurs. Only two banks — Primary Bank in Bedford, N.H., and Bank of Bird-in-Hand in Bird in Hand, Pa. — have received regulatory approval in the last four years.

As many de novos shed their long-held status and look to grow, their prospects of being acquired by a larger bank will likely diminish, industry observers said. (Premier Commercial Bank in Greensboro, N.C., was recently acquired by NewBridge Bancorp, also in Greensboro, just a few months shy of its seventh anniversary.)

Sales of de novos, along with their pricing, have fallen in recent years, Baris said. "Not that many years ago, the thinking was that you would form a de novo, and within five to 10 years … there'd be some other bank that would buy you," he said.