The de novo niche: Discovering hidden markets


Ten years ago, the banking industry endured one of its gravest disruptions: the 2007-2008 financial crisis. Perhaps no other data point illustrates the lasting impact more than the drop in total banks, from 7,381 (pre-crisis) to a much more consolidated 4,805 today.

In fact, one of the biggest industry trends in the early part of the last decade was the steady increase in de novo banks—a newly chartered bank that is not acquired through purchase. But between 2009 and 2017, only a handful of new banks formed in the United States—coming off an industry high of 1,042 between 2000 and 2008. Slowly, de novos are making a comeback nationwide. While that’s likely welcome news to technology providers, bankers and strategists alike, these new institutions stand apart not just in their formation but also in the new business environment they inhabit, and that drives their creation and strategic approach.

From recovery to discovery

Through the financial crisis and even post-recovery, bankers found it much easier (and more profitable) to simply buy an existing bank rather than form a de novo. Because de novos typically require substantial capital up front to justify their existence in an era of rising regulatory and operational costs, bankers have instead moved towards mergers and acquisitions (M&As) as their preferred growth strategy.

One such group in the Southeast, for example, raised $13 million to recapitalize a bank. Though they’d fixed most of its asset quality issues that lingered from the recession, the holding company was upside down with a loan and trust preferred debt that far exceeded the bank’s value. The investment group paid off the holding company loans at a discount, injected much-needed capital into the bank and emerged with a profitable $150 million bank at the end of the day. This paved a much quicker avenue to profitability for the bank and investors than launching a de novo and working at least two to three years to reach that same level.

The simple truth today is that fewer deals exist for banks and investors; in fact, that’s been true for the past three to five years. With a stronger global economy, bank valuations have jumped significantly. This makes it more expensive to purchase an existing franchise and further incentivizes the creation of a new institution. The same individuals that drive today’s current M&A environment are revisiting their pre-recession strategies and forming new institutions with fellow bankers displaced by M&A.

Regulators have also played a key role in strengthening the de novo landscape, particularly within the most current administration in D.C. “There’s clearly been a change in the regulatory environment and the receptivity to new banks,” said James Stevens, partner at Troutman Sanders LLP. “The FDIC has made multiple statements in support of new applications, and even the OCC’s fintech special purpose charter indicates a greater receptivity for new banking institutions across all levels, whether state or federal.”

Stevens adds that the FDIC has indicated its desire to act on all de novo applications within 120 days. This represents a significant opportunity for de novo institutions. Many regional banks have centralized efforts within economic centers and metro areas—leaving potentially underserved suburban and rural communities lacking a true community bank.

Meeting needs in a niche

The United States is still three to five years behind the next worldwide generation of banking, particularly in folding new technology into legacy systems. As the industry struggles to change this culture and mindset, de novos could inject some much needed energy. Don Allen Price, CEO of Texas-based de novo International Financial Enterprise Bank (IFEB), has this to say:

“The next generation of banks, especially in retail banking, will look and act completely different. Two key themes you will see are first, relevance. Everything they do is designed to meet the needs of the digital consumer, whether in the products they offer, how they offer them, their price, or most importantly, how they are delivered. Secondly, banking will look to not only have a focus on their customers, but also to generate a profit. Banks today struggle with an either/or mindset, whereas future banks will capitalize on both efforts by treating customers exactly how they should while making a profit.”

Price not only underscores the technological emphasis of today’s de novo banks, but also how they focus on affinity groups or niche markets. For IFEB, that focus is on digital consumers who want to interact with their bank primarily through their mobile device. For others, though, it could be a specific demographic or ethnic group. Stevens references a potential Ethiopian bank in Washington, D.C., as well efforts to form a bank in Georgia that serves the Chinese-American community.

As for specific affinity groups, Studio Bank in Nashville dedicates itself to serving the city’s booming music industry as well as its local community. Other banks report similar business-centric concentrations with small business owners in particular.

Overcoming regulatory hurdles for approval and managing compliance maintenance costs pose significant barriers for de novo institutions. Moving forward, they must maintain a market presence that provides sufficient scale and supports economic returns that attract investors and appease regulators.

Thus as they identify, target and serve various market segments, de novo institutions will bond with their communities and compete in novel ways with their local and national counterparts. In this way, de novos will experience newness of a different and daring kind.