Banking Law

On the heels of a post of a couple of weeks ago, which related the sorrowful tales of disappointed applicants for de novo bank charters who have been left at the alter by the FDIC, I received an e-mail from a bank organizer who was derailed by the FDIC when he was involved with a group that tried to start an industrial bank in Utah (and threw in excess of $650,000 in expenses down a rat hole). This poor soul is currently waiting in increasing frustration for the FDIC to act on an application for insurance of accounts in connection with a new state commercial bank charter, a charter that the primary regulatory approved months ago. It's hard not to feel this guy's pain.

It appears that many, many others continue to feel similar pain. In addition to the thwarted applicants we've previously discussed, the business press has been virtually awash in similar tales. The Atlanta Business Chronicle ran a story last Friday entitled "Golden Age of New banks Likely Over."

New bank charters charters have been all but frozen as equity capital has dried up. Some insiders say the government has put a quasi-moratorium on startups because regulators already have enough on their plates.

"Quasi-moratorium"? It's "quasi" in the sense of "Quasimodo" of Victor Hugo fame: damned ugly and deaf to all appeals to reason.

In Northern Virginia, disappointed organizers of a bank were told they will be turned down because of the local economy. Organizers were incredulous.

Federal Deposit Insurance Corp. staffers told the startup that the agency was recommending its application for deposit insurance be declined due to ?the economy in Northern Virginia,? said First Financial Chairman Charles Curtis.

?It?s unbelievable,? he said. ?It really is.?

It's unbelievable for a number of reasons. This is an organizational group that raised $18.1 million in capital and whose application for a new state charter was approved last December by the State of Virginia. The FDIC hasn't officially told them yet that they've been turned down, just that staff is going to recommend rejection of their application.

The FDIC has not officially turned the bank down yet ? staffers just told the bank they were recommending it be turned down, Curtis said.

After the bad news arrived in July, the bank pulled together regional economic data and presented a rebuttal. No dice.

?What they really threw in our face was that 50 high-rise office buildings, 28 on the Dulles Toll Road alone, are sitting vacant,? Curtis said. ?That has nothing to do with us or with community banks. Those are all financed by big insurance companies. But the FDIC just won?t listen.?

Ubiquitous sound-bite dispenser Bert Ely had the last word on the matter.

He argues that new banks actually pose less risk to the FDIC than banks that launched five to seven years ago and lent aggressively at the top of the market. Because lending standards are much more conservative now, new banks are less likely to make bad loans.

Logic will get you nowhere fast, Bert. "No new charters" is the line of the day, and the FDIC's sticking to it, facts be damned.

Smart organizers are looking for community banks to buy. Like a group in Houston, Texas, which changed horses in mid-stream, abandoned its de novo application, and bought a small bank, when the FDIC gave it a hint that buying an existing one would get it where it wanted to be sometime before The End of Days.

?It became clear to us after discussions with the Federal Deposit Insurance Corp. in April that this would be a better route for us,? [CEO Rick] Pritchett says. ?We had looked at a couple of other deals but narrowed it down based on the quality of what Northern Bancshares had to offer.?

Expect a similar plan to be followed by many others who would have preferred not put capital into the hands of a seller's shareholders (which is what paying a purchase premium does), but who understand that when there's only one way to skin the cat, you skin it that way.

R. Clark Locke, an investment banker with Hovde Financial Inc., says the strategy of buying a rural bank to jump-start the regulatory process is hardly new, but has been a popular choice in Texas now that regulators are much more stringent when considering applications from start-up, or de novo, banks.

?There?s an unwritten understanding with the regulators that if they can find a rural charter or recapitalize another existing bank, they should do it,? Locke says. ?Approvals for de novos have been that much more difficult to get.?

"Unwritten understanding." Well, it's finally being "understood" in writing, if only on a blog.