There's a group of community banks flush with capital, unburdened by delinquent loans and busily expanding assets — at the expense of troubled kin.
The de novo class of '07 and '08 fortuitously opened its doors just before regulators said Do Not Enter, but late enough in the game to realize strict loan standards were necessary to navigate the real estate recession. Now they're coming for troubled banks' lunch money.
"We're taking in $1 million in deposits this month. And we have the potential for $3 million," said Edward Lette, chairman and chief executive of Business Bank of Texas in Austin, which opened in 2007.
De novo bankers said their luck in timing, coupled with conservative underwriting and capital deleveraging, has contributed to their sound health. Consequently, they are picking up customers from struggling banks.
"There are loan relationships and deposit relationships that you can capture out there" from weaker banks being forced to trim their balance sheets, said Jack Greeley, a banking attorney at Smith MacKinnon PA in Orlando. "For many banks, it's painful for them to get rid of them."
The de novos' higher capital ratios have enabled many of them to spend while other banks must hoard capital in order to meet heightened regulatory standards. Some de novos have been permitted by regulators to buy branches but not yet to buy whole banks.
These banks opened just before the de novo window slammed shut. By 2009, bank startups slowed to a trickle as bank regulators began scrutinizing applications with a seeming bent to reject them.
The '07 and '08 de novos' timing was almost perfect. The median total risk-based capital ratio of the 141 banks founded in 2007 was 16.51% and for the 72 banks that opened in 2008 was 21.68% as of March 31, according to data from SNL Financial LC. (This does not include banks formed by existing bank holding companies.) Many of these banks have a total risk-based capital ratio double the minimum 10% that regulators consider well capitalized.
Meanwhile, only two of the banks opened in 2007 and none of those started in 2008 had an adjusted Texas ratio exceeding 100% as of March 31, according to SNL. (Banks exceeding that percentage are considered to be in danger of failing; the ratio is adjusted to exclude government-guaranteed loans.)
Greeley said he is now working with one de novo that is closing on a branch purchase from an older bank and two other de novo clients are in talks to do the same.
"With regard to branches, we will actively look at opportunities that may come up from that," said Bruce Page, president and CEO of Intracoastal Bank in Palm Coast, Fla., which opened in 2008. "We're constantly getting new customers and business than we had originally envisioned because of some of the discontentment in the industry."
The $96 million-asset Intracoastal Bank became profitable in the first quarter of its second year in business, two quarters ahead of schedule.
Though they are pleased with such performances, de novo bankers from the class of '07 and '08 said they must be selective in how they use their capital while managing growth.
"We've identified a niche and we stick to it," said Michael Kowalski, president and CEO of First Associations Bank in Dallas.
The $257.8 million-asset First Associations, which opened in May 2007, is the third de novo that Kowalski has started. It solely banks with homeowners associations, and garners a majority of its deposits through lockbox processing facilities, allowing the bank to operate with just nine employees. It had the third-highest return on average assets (1.58%) and the third-highest return on average equity (13.25%) as of March 31 among the 213 banks established in 2007-8, according to SNL data.
Kowalski and others in his class acknowledge that timing was everything. "The 2004 to 2005 class were helping create the bubble," Kowalski said. "Frankly, we have not had a loan go 10 days past due … any loans that I do make to associations, my eyes are wide open."
For the 141 banks founded in 2007, the median percent of nonperforming assets was 0.88% of total assets. It was 0% for the class of 2008.
Also, these bankers entered the lending cycle when the values of collateral had already started falling, so they did not have to take a 60% cut in the price of their collateral as some of the older banks have done, Greeley said.
Greeley said many of the bankers who he helped start de novos in 2007-'08 could not have done so earlier because they had signed noncompete agreements with their former banks. Greeley said he often now reminds these bankers about a Garth Brooks song that includes the lyrics "Thank God for unanswered prayers."
While these younger banks haven't had to cope with problem loans, they've faced other challenges. Given the tough regulatory and economic climate, many are accumulating capital, meaning they are not using it as quickly as the de novos that preceded them.
"The returns have been fairly weak because they haven't really fully deployed or leveraged that capital," said Aaron James Deer, an analyst at Sandler O'Neill & Partners LP.
The median return on average assets for the 2007 banks was negative 0.67% and a negative 1.48% for the 2008 banks, as of March 31. Deer said most of these bankers are using their capital to invest in relatively safe securities rather than in new loans. That has been true for the $58 million-asset Business Bank of Texas. Lette said he has been unwilling to match loans made by other lenders that he considers too risky.
Lette, now with his fourth de novo, said his primarily online bank focuses on commercial and industrial business. It had the highest total risk-based capital ratio, at 73.26% on March 31, among all of the de novos in 2007-8.
Many bankers "are used to being a lender, and in this environment, it's kicked us in the head," Lette said. "That is why you see more banks focusing on the investment side."