Where have all the de novos gone?

Between the year 2000 and 2008, the FDIC approved 1,042 new bank charters, leading those in the industry to dub that near-decade the “go go” years. Observers of the industry would just as soon forget what happened then. 

One consequence of the Great Recession is the rapid net decline in total banks, exacerbated by anemic de novo activity. In 2008, the FDIC approved, on average, one new bank charter per week. A decade later, you can tally new banks with your fingers.

In outlining the risk these trends pose during a community bankers symposium last year, Federal Reserve Gov. Michelle Bowman noted: “When banking services are limited, it is much more difficult for people to fully participate in the economy, or to manage their finances when times are tough. … A shrinking community bank sector may lead to a weaker banking system and weaker economy.” 

Tim Viere (left), CEO, Melissa Johnston,
CCO/CMO, and Todd Hovland, President
EntreBank, Bloomington, Minn.

Thus far in 2022, three de novos have opened: Scottsdale Community Bank, Scottsdale, Ariz.; Locality Bank, Fort Lauderdale, Fla., and EntreBank, Bloomington, Minn.

EntreBank says it wants to be the place for entrepreneurs. First Women’s Bank of Chicago, which opened in 2021, focuses similarly, though with a nod to businesses owned or run by women. 

There’s an adage that goes: Niche is rich. It’s generally accepted that all eyes are on these two new institutions as they work their business plans.

Opportunities, challenges abound for community bank de novos

The post Great Recession decline in de novo activity can be attributed to several factors, including that it can be easier for investors to get a foothold in banking by buying an existing bank charter. Adding height to the hurdle are startup capital investments (regulators require at least $10 million but can require as much as $30 million or more in capital), the challenges of finding qualified staff in an era of record low unemployment, increased compliance burden, and the cost of in-demand technology. Buying an existing bank and operating it as a de novo lowers startup costs by utilizing existing systems while taking advantage of existing profitability. Regulators also want experienced leadership, and it can be tough to convince seasoned bank executives to leave a secure position to take the chance on a new venture.

Dwight Larsen, president and CEO of United Bankers’ Bank, Bloomington, Minn., said the competitive loan environment, which is already suppressing interest rates for well-established banks, raises serious questions on whether a de novo can secure enough loan growth quickly enough to succeed.

Karen Grandstrand

Despite those headwinds, there are also positive signs that the pace of traditional de novos is picking up. The UBB team recently worked with two startup groups and an established de novo in Ohio, two more in Michigan currently in formation, and the recently-established Minnesota startup EntreBank. Karen Grandstrand, head of the Bank Finance Group at Minneapolis-based Fredrikson & Byron, said she expects the pace of de novos to increase as the number of existing charters for sale runs low. 

Consultants say there are benefits to forming a de novo rather than buying an existing charter. Founders can begin with a clean slate and save the often-burdensome time and money consumed by due diligence when acquiring another bank. 

 The best chance any de novo has for success is to have a solid business plan in a market with excellent growth opportunities.