Before the financial system imploded in 2008, it seemed like a bank was opening in California every week.
But over the past several years, many of those new banks were gobbled up by bank roll-up operations such as Grandpoint Bank, Opus Bank and Banc of California Inc. Meanwhile, the flow of new – or de novo, in industry parlance – banks has run dry.
There hasn’t been a new bank in Los Angeles County since 2009, and nationwide just one has opened since 2010.
Part of that is regulatory: the Federal Deposit Insurance Corp. made the approval process more difficult for new banks and the 2010 Dodd-Frank Act has increased the compliance burden for smaller lenders. But a bigger part is financial: As long as there are existing banks out there that can be bought for a good price, would-be bank founders are more likely to simply be buyers.
“There’s still a surplus of small banks,” said Banc of California Chief Executive Steve Sugarman. “For new capital looking to build or develop a bank, it’s probably healthier to recapitalize.”
But that could soon change. With bank prices steadily increasing, it’s getting harder for investors to buy institutions on the cheap, which means it might not be long before starting a bank becomes more attractive than buying one.
Bank drought
According to a 2014 Federal Reserve paper, more than 100 banks a year on average were chartered between 1990 and 2008. But since 2010, there’s been just one: Bank of Bird-in-Hand in Bird-in-Hand, Pa., which serves the state’s Amish community.
Southern California in particular was hit with a wave of new banks in the late 1990s and early 2000s. Between 2000 and 2004, 12 banks were chartered in Los Angeles County. Other areas were even crazier.
Tim Coffey, a San Francisco analyst who covers community banks for Atlanta brokerage FIG Partners, said 16 banks were founded during that time in the San Diego area alone.
“There was a big period of de novos around the 2000 to 2004 period,” Coffey said. “The two biggest regions were the West and the Southeast.”
While many of these smaller banks folded or were absorbed after the crisis, many others remain. And that’s one reason why people who want to get into the banking game are in no rush to start their own: They can speed up the process by buying an existing institution.
“It takes de novo banks five years to turn a profit,” Coffey said. “If you look at the life cycle of a bank, it’s not like a tech company. It takes a while to get going.”
Opus Chief Executive Stephen Gordon thinks there are still too many banks in California, calling the state entirely overbanked. He wonders what purpose many of these smaller, newer banks actually serve.
“They don’t have enough capital, and they don’t have a big enough vision to actually make a difference and truly impact the economy,” he said.
Tim Chrisman, chief executive of downtown L.A. executive search firm Chrisman & Co., which specializes in banks, has similar concerns. He said he’s had many discussions with regulators about the large backlog of stagnant banks, with the implication being that these regulators are less excited about approving new banks while there are still recently hatched institutions with mediocre balance sheets and limited growth prospects.
“We still have a problem with these de novo banks started in California,” he said. “Today there’s no franchise there, nothing there to buy.”
Ed Carpenter, chief executive of Irvine bank consulting and investment firm Carpenter & Co., said regulators also played a major role in stopping the flow of new banks by funneling postcrash opportunistic investors toward existing, broken banks rather than new ventures.
“When investor capital wants to go into banking, the regulatory agencies tend to turn them toward troubled banks as opposed to inviting them to start new banks,” he said.
But as banks heal and regulators move further away from triage mode, those incentives have faded. Most recent bank deals in Los Angeles did not involve troubled institutions and the escalating prices have reflected that.
Not that the Amish are usually trendsetters, but that’s one reason Bird-in-Hand is likely to presage more new banks in the near future. Primary Bank in Bedford, N.H., recently got approval from state regulators there and is next in the pipeline – it would be the first general-purpose business bank to emerge since the crash. And Carpenter & Co. recently asked regulators to approve a new bank of its own, Core Commercial Bank in Newport Beach.
As bank prices keep going up, the de novo math is going to start to pencil out at some point. They might take some time to get off the ground, but as merger and acquisition multiples increase, waiting becomes more appealing than overpaying.
