Academic journal article ABA Banking Journal

How Bank Startup Build Leaders: Beyond the Economic Implications of the De Novo Drought, the Lack of Bank Startups' Will Have Profound Effects on Future Banking Industry Leaders

Academic journal article ABA Banking Journal

How Bank Startup Build Leaders: Beyond the Economic Implications of the De Novo Drought, the Lack of Bank Startups' Will Have Profound Effects on Future Banking Industry Leaders

Article excerpt

The year is only half past, but 2016 is well on its way to joining 2011, 2012 and 2014 in a dubious distinction: a year that zero new U.S. banks were chartered.

As consolidation of existing banks continues, many have observed that the lack of new banks reflects burdensome regulatory compliance, an inhospitable interest rate environment, excessive capital requirements, an insufficiently robust economy--or some mixture of all of these.

In his classic 1946 book Economics in One Lesson, Henry Hazlitt writes that economics "is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run." And thus, while the drought of de novo banks will ripple through the American economy, it will have subtle, significant and virtually unexplored longrun effects on the next generation of bank leadership.

De novo bank founders are entrepreneurs, and the entrepreneurial mindset is different from the "stewardship" mindset that characterizes many bankers, says Trey Maust, co-president and CEO of Lewis and Clark Bank in Oregon City, Ore. While stewardship can yield growth--consider Jesus' parable of the talents, in which the steward who got the largest investment return for his master's money was most highly commended--it also implies an inward focus, a priority on preservation rather than risk.

While it's a good model for a mature industry like banking, every industry needs an entrepreneurial edge, a bit of ebb and flow that brings fresh perspectives, outside people and creative ideas. Since the recession, the banking industry has been all ebb and no flow.

And what will that ebb tide mean for the future of banking? Few bankers see the de novo drought ending soon. The Federal Deposit Insurance Corporation says it wants to ease the process for new bank investor groups, something that ABA Chairman Dan Blanton strongly encouraged in a recent meeting with FDIC Chairman Martin Gruenberg. But the higher compliance burdens, higher capital levels and low rates aren't expected to go away (see James Chessen's column on page 22). "It takes a unique situation to succeed today because of the scale of all of the governance matters that the regulators require of you," says Michael Ewing, vice chairman and CEO of Oak View National Bank in Warrenton, Va. "It's very difficult to find people to put up enough capital to allow you get to the scale to be profitable."

And thus, if we are to look into the effects the de novo drought "on the general interest in the long run," we will see banks struggling to attract creative outside talent, connect with small business customers and channel innovation inside the bank.

Magnets for fresh talent

Maust knew he wanted to start a community bank just six months after he took a job as CFO at a small Portland-area community bank. He had come into community banking at an angle, following several years working in mergers and acquisitions on Wall Street.

So he and a group of co-founders and investors raised $12 million in capital--a high level for the mid-2000s, calculated for growth--and launched Lewis and Clark Bank in Oregon City in 2006 as part of the last big wave of bank startups before the financial crisis.

Today, Maust notes, banks are usually expected to have $25 to $30 million in capital before being chartered--a high hurdle given the persistent low-rate environment. "Had there not been an opportunity to start one at the capital levels where I thought we could, I would have gone somewhere else to work--probably a different industry," he says.

He's not the only CEO who would have been lost to community banking. In 2007, Frank Sorrentino led the opening of what is now the $3.4 billion ConnectOne Bank in Englewood Cliffs, N.J., just across the Hudson River from Manhattan. Sorrentino had previously spent nearly three decades as a high-end custom home builder in New Jersey, and as a longtime bank customer as a businessman, he wanted to bring his skills to the banking industry. …

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