July 2, 2018

New Banks: What Requirements Are Needed to Start and Be Successful?


The formation of new banks is picking up, although it’s still considerably below the levels that preceded the financial crisis of 2008-2009. Banks need to pay attention to their capital management, their deposit base, their management team, and their business plan.


The formation of new banks has been much slower in the wake of the 2008-2009 financial crisis than it was pre-crisis. Since 2010, 11 new banks have been established. Eighteen applications are pending, indicating a pick-up in activity. Still, compared to pre-crisis activity, de novo formation is slow. Prior to 2000, more than 100 new banks were formed every year.

The creation of de novo banks is picking up.

While some new banks are showing great success as the economy picks up, others are closing or merging. Their stories indicate the pitfalls and challenges banks face as well as issues and activities that concern regulators. Being aware of both increases the chance for a de novo to succeed.

As American Banker points out, regulators are being stringent because they don’t want new banks — or any banks — to fail. They will look to see that capital management is adequate, that the deposit base is solid, that the management team is experienced, and that the business plan is feasible.

Some De Novos Have Foundered

Costa Mesa, California-based Blue Gate Bank is being acquired by Santa Rosa, California-based Big Poppy Holdings, Poppy Bank’s parent. Both institutions have a majority ownership from a single family, the Gallahers. 

The chief executive officer of Big Poppy, Khalid Acheckzai, indicated that Blue Gate is being sold because of the regulatory environment. 

Blue Gate Bank has been in operation since January 2017, and had $130 million in assets. Blue Gate was felt to have a solid business plan, strong capital-raising ability, and a good management team.

Some found that deposits didn't keep pace with loans.

Blue Gate's difficulties have stemmed from the business plan. It began a Small Business Administration (SBA) lending operation, but was not able to get enough core deposits to fund growth in loans.

The bank then asked to change its deposit funding strategies to follow those long used by Poppy. Both the U.S. Federal Deposit Insurance Corporation (FDIC) and the California Department of Business Oversight refused to approve that plan.

Available materials did not name any specific strategies, according to American Banker. But experts believe that Blue Gate may have had noncore funding in mind, like brokered deposits, as a means of supporting loan growth. 

Regulators tend to frown on brokered deposits because they do not see them as reliable, stable sources of funding. In addition, brokered deposits were linked with riskier strategies for growth during the financial crisis.

The lesson for de novo banks? Regulators expect new banks to adhere to their business plans. Meaningful changes may not meet with approval, and going outside the plan sans regulator approval might mean sanctions from national or state authorities in the future.

Another California bank, Core Commercial Bank of Newport Beach, obtained regulatory approval but never opened. The reason? Failure to meet capital requirements. 

American Banker notes that there is evidence that regulators have boosted capital requirements for new banks from pre-financial crisis levels. More than $25 million is likely a minimum.

Georgia-based Pacific Metro bank, whose business plan was to market to Georgia’s Asian-American population, found regulators concerned about its management team. Regulators want experience and no blots upon the records of seasoned managers.

Pacific Metro withdrew its application.

But all is not bleak on the new bank front. Observers expect more to be formed, especially in areas where merger or acquisition activity has left few banks.

Let a Seasoned Loan Sale Advisor Help

In an era of increased regulatory scrutiny, new banks should remember that they also need an investment plan that will maximize returns. Experienced loan sale advisors like Garnet can help banks buy strong loan portfolios. Sign up for our newsletter for more information.