De novo activity has gone silent. What happened?

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De novo activity seems poised for a lengthy dry spell.

No new applications have been filed with the Federal Deposit Insurance Corp. since the end of December, the longest lull in more than two years. Five groups, on average, had applied with the FDIC each quarter in 2018 and 2019.

A challenging operating environment, exacerbated by current fears over the coronavirus, is making it harder for organizers to line up the initial capital and make their financial calculations work, industry experts said. And those hurdles are unlikely to go away anytime soon.

“I believe this reality has given pause to investors who were considering starting a new bank,” said Bob Newman, a bank consultant at Chatham Financial.

The nine de novos approved by the FDIC last year were required to raise an average of $24.4 million in initial capital, based on the agency's conditional approvals.

Even before recent market gyrations and the Federal Reserve's emergency rate cut, low loan yields and intense competition were pressuring bank profits, forcing organizing groups to rework their math for a new bank, Newman said.

Dan Hudson, CEO of NuBank, which helps groups form banks, said organizers have likely taken note of other groups' struggles opening banks.

Five proposed de novos approved by the FDIC in 2018 and 2019 did not open, and a number of others withdrew their applications. Many of those groups had a hard time raising capital.

At the same time, Hudson estimated that it could take a new bank more than four years to break even.

“I do not see this trend changing,” Hudson said in reference to this year's lack of applications. “We recommend that our clients buy a bank for the power of its charter to enter the business at less cost, quicker [return on investment], no prohibitions and many other advantages.”

To be sure, it is likely that some groups will take the plunge and apply with the FDIC this year.

Some investor groups are just waiting on the results of the 2020 presidential election, said Danny Payne, a bank consultant and former commissioner of the Texas Department of Savings and Mortgage Lending.

The FDIC and state regulators such as the Georgia Department of Banking are supportive of de novo activity, said Lee Bradley, senior managing director at Community Capital Advisors. He said he knows of at least one group in the state that is the early stages of forming and preparing an application.

“We're not going to see the number of de novo formations that we saw in" recent years, "but there will be more in certain markets," Bradley said. “I'm still a believer that community banks play a vital role nurturing and growing capitalism.”

Still, Bradley conceded that the slump will continue until a handful of groups successfully navigate the process this year.

“For this to work, the formation has to begin with entrepreneurs who understand launching a business,” Bradley said.

At least one group has been successful in recent weeks.

Gulf Capital Bank in Houston just finished raising more than $93 million in capital. It was the biggest de novo capital raise in the history of Texas banking.

The bank will focus on commercial lending with some dealings in commercial real estate. The goal is to fill a void left when several locally owned banks were acquired.

While organizers could have acquired a small bank, Jonathan Homeyer, Gulf Capital’s president, said it was important to have full control over the initial balance sheet and staffing from the beginning.

"We chose to start with a clean slate," Homeyer said. “We know there aren’t any skeletons in the closet because there aren’t any closets yet.”

While he was hesitant to discuss how the current environment might impact de novo activity, Homeyer acknowledged that the timing was important for his bank's efforts.

"We're happy to have closed our capital raise before the markets reacted the way they did over the past week," he said.

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