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De novos are back, get ready for more

De novo banking activity has picked up significantly and could rise even further after the long thaw that followed the credit crisis.

Few new banks opened their doors in the years after the Great Recession, but the tide is beginning to turn. Six of the 11 new banks formed since 2010 have opened their doors in the last 12 months and 18 more groups have applied for new banking charters, 17 of which have come in the last year.

Randy Dennis, president of DD&F Consulting Group, who has helped charter close to 100 banks in his career, said on the latest Street Talk podcast that interest in backing de novos is growing among bankers and former bank directors as well as people outside the industry who see value in community banks.

"Between the new people coming in and the displaced bankers out there, I think we're going to see considerably more activity," Dennis said in the episode.

A resurgence in de novo activity would be welcomed by many community bank advocates since just a few banks opened in the first five years after the credit crisis. That stands in stark contrast to the levels of activity seen before the downturn, when 150 banks opened every year, on average, between 1997 and 2007. Many of those banks were reliant on construction lending for income and financed the credits with more rate sensitive deposits like brokered CDs. When the housing bubble burst, a number of those institutions faced considerable pressures on credit quality and liquidity, and ultimately failed.

Regulators responded to the stress in August 2009 by changing the rules for new bank formation and requiring that de novos undergo a longer supervisory period and hold higher levels of capital.

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In April 2016, the FDIC shortened the heightened monitoring period for de novos to three years from seven years as part its efforts to encourage de novo formation. That change, as well as an improving economic and interest rate environment, caused investor interest in new banks to grow.

Dennis said groups looking to operate in metro markets likely need $15 million to $20 million in capital, but he said raising money for de novos is no longer the challenge. Instead, the issue that most new banks face is figuring out how to fund their future growth. He said regulators no longer allow de novos to rely on noncore funding and instead require them to build core deposits.

"Banks have to think a whole lot more about business development on the deposit side," Dennis said in the episode. "Everybody is in the business of bringing in new deposits — lenders, deposit people, customer service, universal bankers — that has to be part of their compensation to bring in new deposits."

Given the challenge that organizers face when trying to build an institution from scratch, Dennis said some investor groups have sought to purchase an existing charter rather than apply with regulators to start a new bank. He said a "true startup" will take six months or more to receive regulatory approval, whereas an investor group can acquire an existing bank in close to 90 days.

Buying an existing charter could essentially give organizers a head start since they acquire earning assets and deposits in the deal. Dennis said there are many opportunities for investors to look to acquire small rural franchises, highlighting that there are close to 500 institutions across the country with less than $50 million in assets. A number of those institutions operate in slower-growth markets but offer any acquirer a sticky, low-cost deposit base.

"Depending on one's appetite, there is a lot to look at and choose from as opposed to de novo banking," Dennis said, but added, "I love de novo banks. There are very few things you can do that have so much excitement associated with it."