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Despite high growth, some states have zero postcrisis de novo banks

The number of de novo applications filed since the financial crisis is on the upswing, with 21 applications filed to date in 2019 alone.

But in some areas, the de novo drought continues — even in states with high population growth, usually a signal to bank organizers that a market could support more banks.

Colorado, Idaho, North Dakota, Oregon and Washington populations all are expected to grow 5.2% or more by 2025, at least double the U.S. state population growth median. But all five states have seen zero de novos since the crisis. Industry participants believe consolidation is a barrier for potential de novos in these states, though other states, such as North Carolina, have been defined by M&A activity and consolidation.

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Colorado's projected population growth from 2020 to 2025 is 6.4%, more than triple the U.S. state median of 2.1%, but the state has not seen a de novo since 2008.

Don Childears, CEO of the Colorado Bankers Association, said an influx of migration into the state is causing strong population growth, but digital banking is making it easier for newcomers to keep their existing banking relationships after they move.

"They can stay with the bank they've been doing business with. You couldn't do that 20 or 30 years ago," he said.

Childears also pointed to out-of-state banks "aggressively" acquiring in-state banks and branching into Colorado, making it challenging for a de novo to start in the state. Oregon Bankers Association CEO Linda Navarro said there have been significant investments in Oregon through acquisitions, particularly from regional banks, but limited de novo activity.

Idaho, Washington, Oregon and Colorado have seen high levels of bank M&A since 2009 relative to the number of banks headquartered in the states, which could be contributing to the dearth of de novo activity. However, other states with high numbers of bank deals relative to the number of banks in the state have seen de novo filings since 2009, including Florida, California, Arizona, North Carolina and Georgia.

According to S&P Global Market Intelligence data, since 2009, there have been 38 bank deals in Colorado where the target had less than $500 million in assets. Of those deals, 19 featured a buyer that was out of state or an investor group. Since 2009, Oregon has seen 11 bank deals with sub-$500 million targets, five of which had a buyer that was either from outside Oregon or was an investor group. Government-assisted deals were excluded from these figures.

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But regional banks moving into a state and gaining scale should not deter de novos because a new bank will not be competing for the same business as large banks right away, said Steven Lanter, partner at Luse Gorman PC.

"The more consolidation, the [less] small bank competition there is and the more available talent," Lanter said in an interview.

Lanter believes de novos have an advantage over banks with legacy technology platforms. "A new bank is able to avail itself of state-of-the-art technology and doesn't have to deal with any legacy technology issues," he said.

Childears also pointed to customers' increasing demand for digital banking. But modern mobile apps and digital services are expensive to launch.

"Filling customers' needs in that way may deter a de novo group or make them realize how difficult it could be to get started," he said.

Investing in state-of-the-art technology can be costly and creates a hindrance for a de novo, said Robert Carothers Jr., partner at Jones Walker LLP.

"To make that investment for a de novo increases the initial fixed cost to get up and running," he said in an interview. Raising capital is the biggest hurdle for a de novo bank because the startup costs are much higher than they were before the crisis, partly due to technology costs, he said.

To encourage more activity, the FDIC has taken steps to improve the application process, including allowing a de novo bank to submit a draft of its application to receive feedback.

With stronger economic conditions, regulatory relief and a rising-interest-rate environment, de novo activity could increase to an extent, Carothers said.

"We will never see the numbers we saw pre-crisis," Carothers said. "It's hard to envision that ever being the case again."

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