COVID-19 has thrown a wrench in some hopeful de novo banks' plans.
Proposed banks that were in the organization process before the novel coronavirus began spreading throughout the U.S. are experiencing various impacts from the pandemic. The Federal Deposit Insurance Corp. returned one bank's application in order to get an update on its projections, and another bank is waiting to refile its application until regulators are less busy with COVID-19 response. One proposed bank that received its conditional approvals will not open after the pandemic stifled its capital-raising efforts.
"The regulatory process [for de novos] is pretty complicated," Steven Lanter, partner at Luse Gorman PC, said in an interview. "There's a lot of potential pitfalls and hurdles."
One of the biggest changes for de novo banks' business plans has been the drastically lower interest rate environment, James Stevens, a partner with Troutman Pepper, said in an interview.
"If you are putting together a business plan today for a de novo bank, you have to show a different rate environment than you would've shown if you prepared the business plan in February," he said. "Your business plan should be adjusted accordingly."
Organizers of OUR Community Bank originally filed their application with the FDIC in October 2019, but once the novel coronavirus came to the U.S., regulators returned the application and asked organizers to update their projections.
"The regulators asked us to make some adjustments in our projections," proposed Executive Chairman Emilio Santandreu said in an interview. "They asked us to review how we think our projections were affected by COVID-19." Santandreu pointed specifically to the drastically different interest rate environment from when they originally filed.
OUR Community Bank refiled its application on June 23. The bank plans to serve underbanked low- and moderate-income Hispanic and Latino communities in the Miami metro area.
The FDIC had questions for another proposed bank hoping to serve underbanked populations. Verdigris Bank withdrew its application in February after the FDIC had questions about its digital bank business plan, according to proposed CEO Michael Coghlan.
"The fundamental piece they were unable to evaluate was the digital proposition so they directed us specifically to the [Federal Reserve Board] to do that," Coghlan said in an interview. "The FRB is the regulatory agency able to assess digital and technology-led banking propositions more fully. That is the specific direction we were given."
The FDIC and the Federal Reserve will work together to approve Verdigris' applications once they are refiled, Coghlan said. The Fed will complete a technology review and the FDIC will be the regulatory authority, he said.
Even though Verdigris withdrew its application before the novel coronavirus began spreading throughout the U.S., the pandemic is impacting the timeline for when the proposed bank will refile its application.
"COVID hit and of course, all of the regulators are very much focused on stabilizing the whole banking environment," Coghlan said. "We wanted to hold off until they could work through this and there is a more clear path that won't be complicated by work the Fed has to do currently for COVID response."
For now, Verdigris has partnered with a sponsor bank to offer its transactional banking-as-a-service platform, BrightFi services, to client banks, Coghlan said. The company has set up a waitlist for retail clients. "That gives us the time, space and opportunity to focus on getting our products and services out and to take our time in completing the rest of the regulatory approval cycle," he said.
Coghlan said he has kept in touch with the FDIC and Federal Reserve Board, but expects to formally reengage with them in August or September.
Coastal Community Bank NA received preliminary approval from the FDIC on March 12, but will not open after its capital raising efforts stalled due to COVID-19 and the bank's proposed board suspended operations and withdrew their approvals, Joe Dorsey, who would have been the bank's CEO, told American Banker.