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De novo banks growing, some even turning profits during pandemic

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De novo banks growing, some even turning profits during pandemic

Several de novos, or newly chartered banks and thrifts, have accelerated their path to profitability, aided by fees generated from the Paycheck Protection Program, a government COVID-19 program that provided emergency funding to small businesses.

All six de novo banks that opened in 2018 posted a positive return on average assets over the last 12 months ended June 30. And a handful of de novos were exceptionally quick to turn a profit, with Gulf Capital Bank, launched in December 2019, booking net income in just its third quarter of operations, though it posted losses in subsequent quarters. Lexicon Bank, established in August 2019, reported a profit in its sixth quarter and has remained profitable for three straight quarters through the most recent quarter. For the more than 1,000 de novos established from 2000 to 2009, it took an average of 8.6 quarters to turn a profit.

De novo activity collapsed after the Great Recession but has recovered in recent years with 33 de novo banks established since 2017 that are still operating, 24 of which have been open for at least 12 months. Of those 24 banks, 10 posted a profit for the last 12 months ended June 30.

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For this analysis, S&P Global Market Intelligence looked at all de novo banks established from 2017 through Oct. 5, 2021. Newly formed holding companies were excluded, except when the company was formed to establish the bank. Shelf charter banks, nondepository trusts, and companies with a foreign banking organization charter were also excluded.

PPP loans have accelerated Las Vegas-based Lexicon Bank's growth. When the program opened, the bank nearly quintupled its assets in a single quarter, growing from $58.5 million total assets in the 2020 first quarter to $248.5 million in the next quarter. In August 2021, the bank reported that it had originated more than $280 million of PPP loans in total.

The asset growth might not last as banks process forgiveness applications, causing the PPP loans to roll off their books. In the second quarter, Lexicon bank's total assets dropped by 19%. But forgiveness can also boost income as banks recognize fees earned from originating the loans. Lexicon Bank's interest income, which includes fees, clocked in at $2.5 million in the second quarter, up 25% from the previous quarter and 180% higher than the prior-year period.

Similar to Lexicon Bank, San Diego-based Endeavor Bank, which opened Jan. 22, 2018, has booked a profit due, in part, to PPP loans. The bank reported a return on average assets of 0.84% for the last 12 months ended June 30, and the second quarter marked its fifth consecutive quarter of profitability.

"PPP fee income is not only driving bank profits but also providing a permanent increase in bank capital through retained earnings," said Steve Sefton, president of the bank, in an earnings release.

Meanwhile, Santa Ana, Calif.-based Infinity Bank, which opened Feb. 1, 2018, posted a 0.31% ROAA for the last 12 months to June 30, its third straight quarter of profitability.

Greensboro, N.C.-based Triad Business Bank, which opened in March 2020 just as COVID-19 triggered widespread shutdowns, posted a negative 1.17% ROAA over the last 12 months. But CEO Ramsey Hamadi noted in the bank's Aug. 10 earnings release that net interest income rose 30% on a linked-quarter basis to $1.9 million as core interest income, which excludes PPP interest income, increased 39%. The bank recently completed a common stock offering, which management said will fund its growth initiative targeting $800 million in assets by year-end 2024.

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