Is Wisconsin's first new bank in over a decade on the horizon?
The September 2017 edition of the Wisconsin Banker featured an article titled "Where Have All the De Novos Gone?" and 18 months later, we're still asking that question. With a handful of de novo banks opening in the Midwest since 2017—but none in Wisconsin—are we seeing the start of a trend, or just a blip on the radar?
It depends where you look. De novo activity is strongly tied to local market conditions in addition to real and perceived barriers to entry. Watching for de novos in Wisconsin has been a bit like off-season whale watching for the past decade, but that could be about to change.
Finding Fertile Ground
One of the strongest indicators that an area is ripe for de novo activity is the local market. "It starts with the local market conditions," said Ken Thompson, president/CEO of Capitol Bank, Madison. "It has to be a growth market, a net attracter of jobs and people. Banks run parallel to their local economies." The strong relationship between a bank and its community is why most de novos are found in more densely populated areas. "A city or town that's attractive for de novos is attractive for other businesses, too," explained Pete Wilder, attorney at Godfrey & Kahn, s.c. "That's why many of the de novos you see are in higher-concentration areas." Areas that have seen consolidation of their local community banks can also present an opportunity. "Stable local markets with good economic growth but with a number of consolidations are ideal markets for new community banks," said Kirsten Spira, attorney at Boardman and Clark, LLP. "These markets are often hungry for the personal connections and attentiveness that community banks can provide."
But, a booming local economy isn't tempting enough on its own for potential de novos. There also needs to be the opportunity for a niche business plan—something that's becoming more important for any successful financial institution, no matter its age. "There could be an opportunity somewhere for a 'boutique bank'," explained David Schuelke, president/CEO of Spring Bank, Brookfield. "If you have a focused strategy in a vibrant market, there could be room for you to be successful. It's hard to be everything to everybody." Spira agreed, recommending the next wave of de novos "focus on niche markets and building strong brands."
Finally, in order for a potential de novo to thrive, the target market must have a population of experienced bankers who have the desire to run their own institution. Thompson recalled the flurry of activity in the Madison area from the late 1980s to 2000, calling it the "post-consolidation era" (Capitol Bank was a de novo in 1995). Just prior to that time, a period of rapid consolidation saw several community banks acquired by larger regionals. That left some experienced bankers without leadership roles. "Some of those experienced bankers were interested in getting involved in more of the strategic decision-making on a day-to-day basis," Thompson explained. Those bankers would start the de novo as an investment, typically having 20-30 years left in their careers to grow and sell the bank. However, that demographic today suffers from what Wilder called a "psychological hangover from the recession," causing them to be more risk-averse than their predecessors. "The generation of bankers who would be in a position historically to start their own bank have seen what can happen, which has perhaps subdued a bit of the entrepreneurial spirit that has driven de novo formation in the past," he explained.
Real and Perceived Challenges
After selecting a geography ripe for de novo activity, potential investors need to overcome several real and perceived barriers to entry. First, and perhaps most obvious, is regulatory compliance. "I strongly believe that the Dodd-Frank Act and over-regulation put a damper on [de novo activity], because it increased the costs of running a bank," said Schuelke. "It's a cost that doesn't enhance the customer experience." He served on an ABA Task Force that created a report sent to the regulatory bodies with recommendations for how to encourage de novo activity. Among other ideas, the report recommends regulatory bodies employ staff dedicated to de novos and allow decision-making further down the chain of command to facilitate quick and clear answers to questions throughout the process. "If you had a specific team within the agency, that would be very helpful," Schuelke explained.
Another regulatory factor inhibiting de novo creation is the perceived capital requirements. "There continues to be a misconception about the amount of capital you need to raise," said Wilder. "If you talk to the regulators, it all depends on the business plan, the market you'll be in, et cetera." Unfortunately, the impact on de novo activity is the same, regardless of whether the capital barrier is real. "The expectation is that you'll need more capital, so whether that's real or not, it has an impact," Schuelke explained.
A bank is not an easy business to start, especially with today's prolonged low interest rate environment, heavy compliance burden, tight margins, and intense competition for deposits. This environment presents a different kind of challenge: demonstrating profitability. Creating a pro forma that's lucrative on paper is more difficult today than it was before the recession. "It really is about how much harder it is today than it was 10 years ago to run a profitable bank," said Schuelke. "There are higher fixed costs." In addition, there easier, less risky investments potential shareholders can make with their funds. "With the stock market doing as well as it is, it can be a tough sell," said Thompson. "Post-recession investors are more cautious."
Ironically, the health of Wisconsin's banking industry also presents a challenge. "There are still a lot of banks in the Midwest," Wilder explained. "If you look at where the new round of de novos are popping up, it tends to be in high-population areas on the Eastern Seaboard or the Southwest. The Midwest still has so many bank charters compared to other regions of the country."
Ultimately, the return of de novos to Wisconsin will be the result of a combination of all of these factors, and will come with time. "De novo bank charters are cyclical, and we are in the downturn of the cycle," Spira explained. "Since the Great Recession, regulatory restrictions and increased capital requirements, and more regulatory scrutiny in the application process have made starting a de novo difficult." Despite that, the first Wisconsin de novo in over a decade could be on the horizon. "There are definitely markets in Wisconsin for the right bank with the right business plan to come in with a fresh opportunity to build their technology and branches from the ground up and be a new type of bank that is nimble, efficient, and the bank of the future," said Wilder. "I would also want to be the first new bank to the market, because the press and attention you would get would be a huge boon."
Boardman and Clark, LLP is a WBA Gold Associate Member.
Godfrey & Kahn, s.c. is a WBA Bronze Associate Member.