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With applications in limbo amid pandemic, would-be de novos weigh next steps

With economic uncertainty surrounding the COVID-19 pandemic, several proposed banks have withdrawn applications. Each de novo bank is handling the situation differently, with some simply withdrawing and others planning to reapply in the future.

So far in 2020, five banks have withdrawn their applications, two banks have had their applications returned by the federal regulator, and one approved applicant decided not to open the bank. Six of these banks had initially submitted applications in 2019. Several banks withdrew applications in July alone. Among those is the company-sponsored application for Midvale, Utah-based Rakuten Bank America, which is applying for an industrial loan charter.

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At least one withdrawn de novo has expressed interest in reapplying after the pandemic ends. Farmers Branch, Texas-based TYME Bank withdrew its application, and its application with the Texas Department of Banking was rejected. However, management is still interested in starting the bank. According to an order from the Texas Department of Banking, the bank's organizers "have not demonstrated that the convenience of the public will be promoted by the establishment of the bank." The regulator did not believe the bank had a "reasonable probability of success and profitability" and wrote that the officers and directors did not display "sufficient banking experience, ability, standing, competence, trustworthiness and integrity" to make the bank successful.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Although the pandemic and resulting environment do play a role in a de novo's business plan, state regulators said TYME's application would have been rejected even without COVID-19. "It doesn't appear to us that the application indicated that this particular bank could serve the needs of the public properly," Texas Banking Commissioner Charles Cooper said in an interview. Cooper said that despite TYME's rejection, the state is still open to de novo applications.

"Declining this particular application does not mean that we're going to decline all applications," he said. "We are talking to others about de novo applications." There is at least one other bank in organization in Texas: Houston-based Agility Bank NA.

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"We're not saying, 'don't file a de novo application in the state of Texas, because they're not going to be approved.' We are certainly not saying that," Cooper said.

TYME plans to resubmit its application after the pandemic ends, organizer Joe Hansen said. Even with the rejection, the banks' organizers think its application can be improved enough for it to open. "We are working on our application; we feel that we have strengthened it," Hansen said. "We've had our capital lined up even prior to withdrawing."

TYME plans to move forward within the next three to six months, Hansen said. "We feel that a new bank is needed," he added. "We feel the market feels the same way as we do."

But not every withdrawn de novo was so optimistic.

Columbia, Md.-based NXG Bank withdrew its application on July 1. Proposed President and CEO Bill Knott said in an interview that the withdrawal was pandemic-related and based on bank valuations. The bank had issues with raising capital since the pandemic began in February, with Knott noting that it raised about $16 million but was not able to bring in the remainder required. With banks trading below tangible book value, it can be difficult to raise enough capital by getting investors to buy into a de novo at 100% of tangible book, Knott said. With no foreseeable end to the pandemic, organizers decided to withdraw the application.

"I don't see this getting resolved in the near term, don't see us resubmitting," Knott said.

Resubmitting would require starting the process over again. Uncertainty surrounding banks' credit positions also makes it difficult to start a new bank. "You can build scenarios on either side of it," he said, adding that banks are not sure of borrowers' credit health because of deferrals and other factors, making it unclear on how much banks need to set aside in reserves. With no credit history, de novos are at a disadvantage.

Working with regulators was easy despite the pandemic, Knott said, and he expressed disappointment that the bank was not able to open.

"A couple months' difference makes all the difference in the world as to whether it opens or whether it doesn't," he said. "I've got a lot more respect for those people who start small businesses now and have been successful in getting de novos off the ground. You don't realize how fine a line it is."

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