De novo survivors on why they made the cut

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Columbus First Bancorp opened in Worthington, Ohio, in August 2007, just weeks before the economy took a turn for the worse.

Debuting at the front end of the financial crisis had its share of tradeoffs. While it initially proved challenging to grow, Columbus First also had a relatively clean balance sheet compared to banks that had been around for a while.

“We didn't have any baggage ... when things started souring in this market and across the U.S.," recalled Rhett Huddle, the company's chairman and CEO.

Columbus First, one of the last banks to open before the crisis began, managed to build itself up to $333 million in assets before agreeing last year to sell itself to LCNB Corp. Huddle, who will join LCNB’s board, said higher funding costs, low lending limits and shareholder liquidity spurred the decision to sell.

Challenges now await a new class of hopefuls. After a long drought, eight de novos have opened since early last year. More than a dozen groups have pending applications to form banks, and more are finalizing their plans. Many are targeting large markets impacted by industry consolidation.

Studying the class of de novos that opened between 2006 and 2008 can provide insight for those looking to open banks today.

More than half of the roughly 400 banks that opened over that period still have less than $1 billion in assets, based on data compiled by FIG Partners. About a third have merged into another bank, while 7% failed.

Recent developments are making a greater case for optimism, industry observers said.

Tax reform is slowly motivating more businesses to expand, while regulatory reform will also help. Asset quality remains stellar and rising interest rates could help banks that are adept at increasing loan pricing at a pace that keeps up with higher funding costs.

Many pre-crisis de novos "are just now beginning to hit their strides,” said Greyson Tuck, an investment banking adviser at Gerrish Smith Tuck.

A key for many de novos that survived the crisis involved having the right personnel and directors. Perseverance and patience were also important.

That was the case at Aquesta Financial Services, a bank that opened in Cornelius, N.C., in 2006. Though business started out slow during the recession, the $425 million-asset bank became profitable after about two years. The pace of growth started to pick up as the economy recovered.

The crisis “was a stressful time,” said Jim Engel, Aquesta's CEO. “I had my life savings tied up in the bank. Some of what was going on was way beyond our control.”

The size of Aquesta's loan book has increased by 20% annually since 2012, Engel said. The bank has added to its SBA lending team and entered larger markets such as Charlotte, N.C., and Greenville, S.C. Engel wants to build a $1 billion-asset bank, though doing so will require recruiting the right talent.

Having the right amount of capital is also critical. Most de novos being planned now are looking to raise at least $20 million in initial capital. If the economy takes off, many of those banks might have to go back to investors to seek funds to keep growing.

Old Dominion National Bank, which opened in 2007 and moved its headquarters to Tysons Corner, Va., about 18 months ago, recently raised nearly $39 million to support lending, investment activities and growth in new and existing markets. It also raised $30 million in late 2016.

Total loans at Old Dominion have tripled in the last two years, reaching $117 million.

The $200 million-asset Old Dominion spent much of last year building out its management team and board, said Mark Merrill, the bank’s president and CEO. Early this year, executives began to focus on the capital raise, which included 320 individual investors.

Each investment was a “big enough number that these people have skin in the game ... and want to build with us,” Merrill said, adding that he expects 40% of the bank’s growth to come from doing business with the new investors.

“We're not just relying on one or two people, or just one or two ways, to get growth,” Merrill said. “We expect the growth you’ve seen over the last 12 months to ramp up much [more] over the next 12 to 24 months.”

Merrill, who joined Old Dominion in 2015 and became CEO about a year later when it had $55 million in assets, said his team spends a lot of its time building relationships with bankers in Pennsylvania and Washington. The bank has also hired lenders from community banks that have sold to larger financial institutions.

“At the end of the year, we had five producers," Merrill said. "Now we're ramping that up to seven or eight who have an average of 25 years of community banking experience in our markets. Because of that, they bring longstanding relationships with them.”

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