Pub. 10 2019 Issue 3

www.wvbankers.org 16 West Virginia Banker new de facto de novo. So which approach makes more sense today? The answer depends on a few key factors, including those discussed below. Why Build It? – The De Novo Process There are several benefits to a de novo charter approach, specifically: • A clean slate to start with, including the latest technology without potentially cumbersome or outdated legacy systems • An improved regulatory willingness to facilitate formation of new banks with a more definite time frame for approval • A shortened de novo restriction period of three years • No time spent looking for a bank that passes due diligence scrutiny and can be bought on terms acceptable to the new management team and investors De novo groups without well-connected organizers and those in slower growth markets have found that pitching an investment in a de novo bank is more difficult than expected. In the current environment, investing in a de novo bank is not purely a financial decision. Investors searching solely for a return on a financial investment are not likely to invest in a de novo bank in this environment. Investors in de novo banks are also typically motivated by a sense of community service, entrepreneurial spirit, or both. Both state and federal regulators have demonstrated their desire to assist de novo banks and streamline the regulatory approval process, including committing to make a decision on the regulatory applications within 120 days. The FDIC’s shortened de novo period also means that a bank has the full flexibility of its charter following its first three years of oper- ations. A de novo bank starts with a clean slate – every bit of technology infrastructure as well as each loan and deposit are of its own choosing, with no inherited headaches from a prior management team. However, regulators are requiring de novo groups to raise significantly more capital than before the financial cri- sis – enough to take the bank to profitability within three years. At the same time, regulators have been reluctant to approve innovative or high growth business plans. This combination makes it difficult to build a business model that will be attractive to both regulators and investors. As a result, there have been a number of de novo groups in the past few years that received all necessary regulatory approvals but had to withdraw their applications because they could not raise their capital. There has not been a de novo bank headquartered in West Virginia to open since Premier Bank, Inc. in Shepherdstown in July 2005, but there has been a recent increase in activity in nearby Ohio and in the Washington, D.C. metro area. Earlier this year, Ohio State Bank opened in April in Bexley, Ohio followed in June by Trustar Bank opening in the Washington D.C. suburb of Great Falls, Virginia. The de novo pathway for organizing groups in the region has not been without its share of challenges. Vision Bank (Proposed) in McLean, Vir- ginia recently withdrew its proposed de novo application and its key executive officers joined Old Dominion National Bank. In addition, despite obtaining approval for FDIC deposit insurance in January 2019, MOXY Bank (Proposed) has thus far failed to raise its requisite capital to open in the nation’s capital and on August 7, 2019 parted ways with its proposed chief executive officer Casey Mauldin. Why Buy It? – The Existing Bank Model Benefits in buying an existing charter to operate a de facto de novo include: • Existing systems, which allow a bank to start at “second or third base” • (Hopefully) existing profitability of the established bank • Substantially more flexibility in developing the bank’s business plan, including a niche or specialty-focused plan, In the current environment, investing in a de novo bank is not purely a financial decision. Investors searching solely for a return on a financial investment are not likely to invest in a de novo bank in this environment. Investors in de novo banks are also typically motivated by a sense of community service, entrepreneurial spirit, or both. Continued from page 14