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New Bank Waits… And Waits

Four letters stand between San Diego and the establishment of the region’s first new commercial bank in nearly a decade: FDIC.

The proposed Endeavor Bank, which received state approval from the California Department of Business Oversight in March and approval for its stock offering circular in July, is waiting for the Federal Deposit Insurance Commission’s OK to open its doors.

The FDIC’s role in the process of de novo bank formation is to consider the risk a new institution could pose to its Deposit Insurance Fund, which covers losses incurred by failed financial institutions.

Endeavor, whose management team declined to comment for this article, said this summer when it announced who had been tapped to lead the bank – longtime San Diego banking executives Dan Yates and Steven Sefton as CEO and president, respectively – that it was aiming to open by year’s end.

The FDIC, which said this month that the application from Endeavor remains pending, has said that applications are typically approved or denied within four to six months after completion.

That hasn’t been the case with Endeavor, which filed its application for deposit insurance in more than a year ago, in August of 2016. However, that timeline starts when the proposal is “substantially complete,” to use

the FDIC’s terminology, and Endeavor may have seen an extension of that runway as a result of the addition of its top executives – both of which were previously running other banks – months after the initial filing.

Critical of Timing

But while the FDIC has been on a road tour of sorts in recent months, prodding those interested in starting new banks to do so, the head of another federal agency has been calling out the regulatory body for its slow pace when it comes to approving applications for deposit insurance.

In a letter to the American Bankers Association, the Office of the Comptroller of the Currency’s Keith Noreika, acting comptroller of the currency, said requiring approval from a state or federal chartering agency and from the FDIC to establish a bank wastes “time and money.” (The OCC is tasked with oversight of national banks; state banking agencies oversee their state-chartered counterparts.)

Streamlining the process would reduce the bureaucracy through which entrepreneurs interested in starting a new bank today must wade through, he said.

“De novo activity appears to be thawing slowly as the economy warms, but getting FDIC de novo insurance is still an exceedingly rare event,” Noreika said. “Making the process more efficient can help accelerate the recent positive trend and create more economic opportunity for consumers, businesses and communities across the nation.”

That being said, banking regulation is necessary to ensure economic stability, Noreika said in a conference on fintech regulation this month in New York.

History Dictates Caution

Khoi D. Dang, a Los Angeles-based partner with Duane Morris LLP whose areas of practice includes banking, says the FDIC has taken steps to streamline the process in the past couple of years compared to how it handles requests during the recession.

However, “the thing we need to remember about the FDIC is that it is both a federal banking regulator and an insurer of deposits,” he said. “Applications for deposit insurance must still be scrutinized and must be consistent with federal law and jurisdictional perspectives which are not always congruent with the more localized interests of state-chartering agencies.”

It was the more-rapid rate at which newer banks were failing compared to more-established institutions as the economy reeled during the financial crisis that spurred the FDIC to shift toward more oversight over de novo institutions. That resulted in a reduction of such applications to nearly none.

Fewer than 10 new banks have opened since 2009. But the pipeline has recently begun to show nascent signs of life. Southern California has been a hotbed of this activity, relatively speaking, with Endeavor waiting in the wings San Diego and two Orange County-based banks, Infinity and Blue Gate, were approved and opened this year, respectively.

A decade ago, applicants faced fewer barriers to entry when it came to the level of capital, regulatory scrutiny and competition from fintech firms, Dang said.

But consolidation, which continues to be a force in the industry, has brought forth new business opportunities, such as the one San Diego’s Endeavor says it has spotted.

“This opens up opportunities for smaller community banks who generally are more nimble in their particular markets,” Dang said. “I think we will see a wave of de novo bank formations, but unlike in past cycles, this cycle will be much more measured and calculated given how relatively recent the recession was.”

At least in California, that appears to be the case, as no de novo applications have been submitted so far this year. As to whether Endeavor will open its doors this year? Only the FDIC knows.

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