De novos: Refiguring the cost of entry

The economy has a lot of influence on the de novo market, which might be picking up, albeit tepidly. James LaPierre, FDIC Kansas City Regional Director, shared at a seminar hosted by the Eide Bailly accounting firm on Nov. 1, that the FDIC has approved nine applications for FDIC insurance so far this year and the agency currently is considering 12 pending applications. This represents quite a spate of activity relative to the inactive years following the financial crisis and subsequent recession.

One of the reasons de novo activity has been so sparse is the substantial amount of money it takes to gain authorization for a bank charter. In the last few years, it seems whenever bankers would ask how much money it takes to start a bank, experts quoted figures of $20 million to $25 million, which prices out most investor groups. A banker put the question to LaPierre at the event in Mankato, Minn., and he offered a surprisingly manageable number — $10.5 million.

The key, LaPierre said, is the FDIC is going to require 8 percent Tier 1 capital at the end of the proposed bank’s third year, plus money to cover start-up costs and operating losses. For a typical $100 million community bank proposal, regulators would be looking for the investor group to have $8 million in capital, perhaps $2 million to cover net operating losses over three years, and $500,000 to cover the start-up costs.

Many of the recent start-up banks are located in large cities where organizers are planning to have far more than $100 million in assets after three years, thus necessitating the higher investment estimates so often mentioned by experts across the country.