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2018 Bank M&A Statistics

2018 Bank M&A Statistics

January 7, 2019

Authored by: Robert Klingler

2018 was only the fourth most active year over the last five years in terms of the number of insured institutions that agreed to sell. However, perspective is also important, as 2018 was also the fourth most active year over the last ten years, and the most active if measured as a percentage of institutions available to sell. 2018’s 262 bank and thrift deals ended up slightly lower than 2017’s 267 transactions. Based on the 6,670 insured banks and thrifts outstanding as the beginning of the year, 4.6% exited through a business combination.

Until and unless we see significantly more de novo activities, it seems unlikely that we will return to 300 transactions in any given year, as we last saw in 2014.  However, on an annualized basis, the second quarter of 201 saw 336 transactions!  Similarly, looking at a four quarter rolling total, we had more than 280 deals announced both between Q3 ’17 and Q2 ’18 and between Q4 ’17 and Q3 ’18. Each institution’s decision to sell remains subject to a number of unique considerations, but, all else equal, we would expect the percentage of institutions selling in any given year would likely decline rather than increase going forward.

We are strong proponents of the proposition that “banks are sold, not bought.”  The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year.  Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations.  As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.

2018 reflected, consistent with recent trends – although perhaps not yet reflecting the year-end stock declines – a continued increase in the average price-to-book multiple paid in bank transactions.  While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 and 2018 has risen to 1.6x book, with 2018 slightly higher than 2017.  This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less). 

2018 marks the seventh straight year with over 240 transactions announced during the year, and the fifth straight year in which more than 4% of the institutions at the beginning of the year sold. Based on these trends, and without attempting to identify how the financial sector’s market decline will impact M&A activity, this would point to between 217 and 250 deals to be announced in 2018.

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OCC Provides a Path for FinTech Charters

On July 31, 2018, the OCC announced that it had finalized parameters for its new limited-purpose financial technology national bank charter and is ready to begin taking applications.  This release follows several years of formal deliberation on the topic and coincided with the release of a 222-page U.S. Treasury report on innovation.  Industry reactions have been wide-ranging – will this level the playing field or usher in a FinTech “apocalypse“?

Highlights of the OCC notice include:

  • Designation of the charter type as a national bank.  Like its other special-purpose charters, including the non-depository trust company or the credit card bank, the FinTech charter will be a “national association” in the National Bank Act sense of the term.  As the saying goes, membership will have its privileges (and burdens):  capital requirements, examinations, and federal preemption of certain state laws.
  • Eligibility for qualified applicants that plan to conduct activities “within the business of banking.”  Pursuant to existing OCC regulations, a limited-purpose national bank not engaging in fiduciary activities “must conduct at least one of the following three core banking functions:  receiving deposits; paying checks; or lending money.”  In its FinTech charter announcement, the OCC notes that it “views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways.  For example, facilitating payments electronically may be considered the modern equivalent of paying checks.”
  • A requirement for a commitment to “financial inclusion.”  We will see how this element is administered.  In theory it provides a non-depository parallel to the Community Reinvestment Act (“CRA”).
  • Publication and comment period.  Just as for other types of national banks, applications will feature newspaper publication requirements and will be generally subject to public review and comment.

The OCC stated that its decision to open the door for this new form of national bank “is consistent with bi-partisan government efforts at federal and state levels to promote economic opportunity and support innovation that can improve financial services to consumers, businesses, and communities.”  Comptroller Otting added:

Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.  It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.

Treasury’s report is consistent with these themes, noting, “A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models” and that the OCC should proceed with “thoughtful consideration” of FinTech charter applications.  Treasury also calls out specifically the need for updating regulations that relate to data aggregation, for addressing those which have become “outdated” in light of technological advances (e.g., in the mortgage lending and servicing space, according to Treasury), and for a regulatory approach that enables “responsible experimentation” in the financial sector.

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2017 Bank M&A Statistics

2017 Bank M&A Statistics

January 3, 2018

Authored by: Robert Klingler

It looks like we’ll end 2017 with a total of 263 bank and thrift transactions, representing a slight increase in the number of deals over 2016 (250), but well below 2014 and 2015 levels (307 and 294, respectively).  However, in light of the decline in total number of banks (and the dearth of de novo activity), 2017 basically equaled 2014 and 2015 transaction activity, with approximately 4.5% of institutions at the beginning of the year exiting through a business combination.  (2016’s 250 transactions represented approximately 4.0% of the outstanding banks at the beginning of 2016.)

Until and unless we see more de novo activities, it seems unlikely that we will return to 300 transactions in any given year.  However, on an annualized basis, the fourth quarter of 2017 saw 296 transactions!  Were 2018 to keep up that pace, over 5% of the remaining banks in the country would need to sell.  Each institution’s decision to sell remains subject to a number of unique considerations, but, if anything, it would seem the percentage of institutions selling in any given year would likely decline rather than increase going forward.

We are strong proponents of the proposition that “banks are sold, not bought.”  The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year.  Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations.  As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.

2017 reflected, consistent with recent trends, a continued increase in the average price-to-book multiple paid in bank transactions.  While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 rose to almost 1.6x book.  This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less).  Looking at a more granular, quarterly, level, it would appear that the 2017 increase is likely tied to the “Trump bump” in bank stock prices.  The average price-to-book multiple rose to 1.4x in the fourth quarter of 2016 (which included pre-and post- Trump bump prices), and then jumped up 1.5x to 1.6x for each quarter in 2017.

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OCC Moves Forward on Fintech Bank Charters

Amid criticism from virtually every possible constituency, on March 15, 2017, the Office of the Comptroller of the Currency (OCC) released a draft supplement  to its chartering licensing manual related to special purpose national banks leveraging financial technology, or fintech banks. As we indicated in our fintech webinar discussing the proposal last December, the OCC is proposing to apply many conventional requirements for new banks to the fintech charter. While the OCC’s approach is familiar to those of us well versed on the formation of new banks, there are a few interesting items of note to take away from the draft supplement.

  • More bank than technology firm. Potential applicants for a fintech charter should approach the project with the mindset that they are applying to become a bank using technology as a delivery channel, as opposed to becoming a technology company with banking powers. While the difference might seem like semantics, the outcome should lead potential applicants to have a risk management focus and to include directors, executives, and advisors who have experience in banking and other highly regulated industries. In order to best position a proposal for approval, both the application and the leadership team will need to speak the OCC’s language.
  • Threading the needle will not be easy. Either explicitly or implicitly in the draft supplement, the OCC requires that applicants for fintech bank charters have a satisfactory financial inclusion plan, avoid products that have “predatory, unfair, or deceptive features,” have adequate profitability, and, of course, be safe and sound. Each bank in the country strives to meet those goals, yet many of them find themselves under pressure from various constituencies to improve their performance in one or more of those areas. For potential fintech banks, can you fulfill a mission of financial inclusion while offering risk-based pricing that is consistent with safety and soundness principles without having consumer groups deem your practices as unfair? On the other hand, can you offer financial inclusion in a manner that consumer groups appreciate while achieving appropriate profitability and risk management? We think the answer to both questions can be yes, but a careful approach will be required to convince the OCC that it should be comfortable accepting the proposed bank’s approach.
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Starting a New Bank

Starting a New Bank

December 5, 2016

Authored by: Jonathan Hightower

piggybankOn November 29, 2016, the FDIC, as part of its Community Banking Initiative, held an outreach meeting in Atlanta.  While the FDIC has indicated that it will publish a handbook regarding applications for deposit insurance in the coming weeks (which we’ll also summarize), we thought it made sense to provide a few highlights from that meeting:

Mechanics.  The mechanics of the chartering process are the same as before.

Business Plans.  As expected, there will be greater scrutiny on business plans, making sure that banks stick to their business plans post-opening, and (not expressly stated but as translated by me) ensuring that the results of the bank’s business plan do not deviate greatly from the original projections (i.e., providing for limited ability to take advantage of natural growth in the new bank’s markets or lines of business during the first three years of operations if not reflected in projections).  Approvals to deviate from one’s business plan will not be granted under most circumstances.

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12 Questions You Need to Answer Before Starting a New Bank

With paths recently being cleared from a regulatory perspective and the consolidation in the market, we’re hoping to see a pickup in de novo applications (and one that is far greater than the five applications the FDIC has indicated it has received for all of 2015). Because of the recent history of difficulty starting new banks and the extremely limited number of applications this year, we imagine many of the qualified candidates are hesitant to take the first steps. We’d like to make the process easier for you.

In his article, “Thinking of Starting a New Bank? Answer These Questions First,” which was published in The Banking Law Journal today, my partner, Jonathan Hightower (@hightowerbanks), covers twelve questions that organizing groups and individuals should answer as they begin a venture toward a de novo bank.

Please call any member of our Financial Institutions team if you’d like to start talking about the prospect of organizing a new bank, or if your further down the road and would like our guidance with your application – we’re happy to help.

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Is The Time Right for De Novo Banks?

Ten years ago, business was booming for community banks—profitability driven by a hot real estate market, a wave of de novo banks receiving charters, and significant premiums paid to sellers in merger transactions. Once the community bank crisis took root in 2008, however, the same construction loans that once drove earnings caused significant losses, merger activity slowed to a trickle, and only one new bank charter has been granted since 2008. But as market conditions improve and with Federal Deposit Insurance Corporation’s (FDIC) release of a new FAQ that clarifies its guidance on charter applications, there are some indications that an increase in de novo bank activity may not be far away.

To understand the absence of new bank charters in the last six years, one must look to the wave of bank failures that took place between 2009 and 2011, which involved many de novo banks. Many of these banks grew rapidly, riding the wave of construction and commercial real estate loans, absorbing risk to find a foothold in markets saturated with smaller banks. This rapid growth also stretched thin capital and tested management teams that often lacked significant credit or loan work-out experience. When the economy turned, these banks were not prepared for a historic decline in real estate values, leading to a wave of FDIC enforcement actions and bank failures.

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