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As de novo bank applications pick up, so do withdrawals

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As de novo bank applications pick up, so do withdrawals

The recent wave of de novo applications has also seen several potential banks withdrawing their applications as issues crop up during the process.

Six of the 22 banks that submitted applications in 2018 have withdrawn their applications, while none of the eight applications submitted in 2019 have been withdrawn as of May 9. Withdrawn status applies to de novo banks that have volunteered to remove their applications as well as applications that regulators reject.

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Most banks that withdraw are having trouble meeting their capital minimums, according to Nicholas Graham, a consultant with FinPro Inc. and an expert on de novo banks.

"They've just had trouble getting to the capital that they displayed in their original application," said Graham.

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Regulators have been open to new de novo applications and have encouraged new business plans, but banks feel they need to be a certain asset size to be profitable for shareholders, according to Graham.

"You need to be a certain size these days ... to get to profitability," he said. With pre-opening expenses, additional losses before reaching profitability and the need to maintain an 8% leverage ratio during the de novo period, banks need approximately $20 million to $25 million in capital to reach profitability, said Graham.

De novos established since the beginning of 2018 had an average of $91.4 million in total assets as of March 31.

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North Carolina, a hotbed of banking activity, has been the site of half of the withdrawn 2018 applications. A limited pool of local investors can make raising enough capital difficult if several banks try to form around the same time, Graham said. De novos are encouraged to raise the majority of their capital locally as a signal that they will have a strong customer base upon opening.

"The best customers that many de novos will have will be their shareholders," Graham said. If local capital is dry, de novos could try to raise capital outside their state or on a national level, but doing so could indicate lower support for the new bank in its home region.

But just because a bank has withdrawn its application with a federal regulator does not mean its doors will never open. Two of the three North Carolina de novo banks that have withdrawn applications have found other ways to enter the state, such as by opening under a charter from a different state or acquiring a bank in the state.

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