Red Rover, Red Rover, Let My Bank Come Over-What the Dodd-Frank Act Means for Interstate De Novo Branching

One provision of the 2,300-plus-page financial reform legislation approved this week by the U.S. Senate may radically change the face and pace of merger and acquisition activity in the banking industry. What is certain is that some banks will emerge as winners-stronger and bigger than ever-while others inevitably will come out losers. Section 613 of the new legislation (the "Act") does away with the compromise reached all the way back in 1994 with the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act that required states to "opt-in" if they wanted to permit interstate branching through de novo branches. Most states, including Iowa, did not opt in. That meant an out-of-state bank had to first acquire an existing in-state bank in order to operate in Iowa. And like Iowa, many states excluded banks less than five years old from being eligible for acquisition. Thrifts have been able to branch nationwide for years, and with the passage of the Act, state and national commercial banks will have the same opportunity. More specifically, de novo interstate branching will be allowed if "the law of the State in which the branch is located, or is to be located, would permit establishment of the branch, if the bank were a State bank chartered by such State." Those few simple words completely change decades of banking expansionary practices and limitations. More than 20 states that prohibit de novo branching or branching only by a state bank that has reciprocity will no longer be able to keep other out-of-state banks from entering their borders, provided those banks can prove to their own state or federal regulator that the new branch should be allowed. From a practical standpoint, Iowa banks bordering neighboring states may have attractive opportunities to expand into neighboring territory without having to pay a premium for an existing bank or branch. By the same token, banks in neighboring states (or any other, for that matter) can just as easily walk across the street and do the same thing in an Iowa bank's front yard, much less its back yard. With the fences being taken down that prevented interstate de novo branching, the coming years may see some reduction in the number of community banks, as bigger banks move into new markets more easily. Or we may see the very opposite, as strong community banks, too, expand their horizons beyond their immediate market area more easily and increase their operating efficiencies and profits. What is likely, however, is that banks that otherwise might have been attractive to a buyer because of the buyer's desire to enter a state will have a tougher time filling up their dance card with suitors-and the prettier ones are going to go to the best catches on the other side of the ballroom. For more information, contact Allyn Dixon at 515-246-4520 or

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