Recent media accounts have cited a bank in formation – Aris Bank – as taking advantage of a “loophole” in the Dodd-Frank Act signed into law last week. Contrary to these reports, the transaction is part of a familiar theme in which a private equity firm proposes to make a noncontrolling investment in a bank as part of a capital raise with other passive investors who invest side-by-side. What is new under Dodd-Frank is a modestly enhanced ability of both national and state-chartered banks alike to branch “de novo” into new states notwithstanding state laws to the contrary. Like many other banks, Aris Bank would reportedly take advantage of this enhanced ability to cross state lines via de novo branching.
Over the past year, there have been numerous capital raises, led by one or more noncontrolling investors, by both existing banks and start-up banks – particularly “shelf charter” banks set up to participate in FDIC auctions. The new financial reform legislation does not materially impair or expand the ability of investors to make these types of investments in banks. In fact, as regulatory capital demands increase as a result of Dodd-Frank and existing industry trends, many more are likely to follow.
Under the Dodd-Frank Act, a bank may now establish a branch in a new state to the same extent as banks chartered by that state. Despite the fact that a number of states, such as New York, permitted de novo branching by out-of-state banks prior to the new Act and federal savings banks have long had the ability to branch de novo into all 50 states, for many banks de novo branching has not been a preferred method for entry into new states. These banks have instead preferred to enter new markets via acquisition in order to reach critical mass more quickly. Banks wishing to expand into new geography in other states will still need to make the fundamental business calculation about whether it is more cost effective to do so by acquisition or de novo branching.