Where Have All the De Novos Gone?

By Tom Unger, ABC, APR, Fellow PRSA

The formation of new banks (also known as de novos) in Oregon used to take place on a regular basis before the
Great Recession of 2008. But if folk singer Pete Seeger were still alive, he might be tempted to write a new song titled Where Have All the de Novos Gone?
 
New banks are now harder to find in Oregon – and nationally – than Seeger’s proverbial flowers.
 
“Nationwide, we’ve seen a very low level of new bank formations since the recession 14 years ago. Unfortunately, in Oregon, the number has been zero,” said Linda Navarro, president and CEO of Oregon Bankers Association.
 
Interviews with regional and national experts revealed six causes of the large drop and how that might change in the future:

1. Low Interest Rates – The incredibly low interest rates have compressed margins, reducing what a bank can earn between what it pays its depositors and what it charges its loan customers.  
A de novo often starts with purchased money (such as offering higher interest CDs), rather than core deposits, said Thomas Brown, CEO of Second Curve Capital, an investment firm in Radnor, Pennsylvania.
 
“So, if you’re in a low interest rate environment and have a high cost of funds, that makes making money even harder,” Brown said.
 
“When interest rates are flat and the margins are shrinking, unfortunately the commercial banking industry isn’t as attractive,” added Chris Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America in Washington, D.C.
 
This issue will not change soon, predicted Mark Vitner of Charlotte, North Carolina, a senior economist at Wells Fargo.
 
“I don’t see a whole lot of relief there,” Vitner said. “I’m afraid we’re going to be in a low interest rate environment for quite some time,” perhaps as long as the middle of this decade. “When the next recession comes around, we’re likely to still have interest rates below 3%.”

2. High Capital Requirements – The increased oversight of de novos has included a rise in the amount of capital new banks have raised from investors before opening their doors.  
A new bank was once able to start after raising $5 million. That has jumped to as high as $40 million in some cases, said Brown.
 
“That’s a lot of money to raise and for people to put down on an entity when interest rates are so low and margins are so thin,” said Cole.
 
A de novo is required to gather three years of capital up front. “That’s a hurdle that could be mitigated if we had some way of phasing it in,” Cole said.
 
“When you start a bank, you don’t have any loans or any income. It takes longer to break even,” said Craig Wanichek, president and CEO of Summit Bank in Eugene. “The requirement for additional capital is a barrier for entry for new banks.”
 
But Navarro cautions that the level of capital required by regulators is not set in stone. “It depends on a banks business plan and where it plans to open its doors. Those interested in starting a bank should not assume regulators will require them to raise $40 million in start-up capital just because a de novo bank in
L.A. required that amount.” Navarro added, “There are examples of more reasonable levels being approved that wouldn’t force a bank to take outsized risk to become profitable.”

3. More Competition – New sources of capital for customers have appeared in the past decade, making it harder for new banks to start, said many experts.
 
Advances in technology have also led to the rise of fintechs and “neobanks” (a tech company that provides online banking services through a partnership with an established bank). According to one recent report from banking tech company Zeta, one in 10 bank customers already consider a neobank as their primary bank, despite the potential pitfals of banking outside of the insured and regulated banking industry.
 
Furthermore, “People are starting loan funds themselves, even starting broker dealers,” said Vitner. “They’re conducting the lending side of the banking business without getting a charter and having to put up all that capital and deal with all the compliance a commercial bank would have to deal with.”
 
Making the problem worse, credit unions retain the advantage of being tax-exempt but continue to grow their business lending. Their government-subsidized business model create an unfair advantage, said OBA Chair Jeff Sumpter, president and CEO of Lewis & Clark Bank in Oregon City.

4. Talent Gap – It’s also difficult to find quality bankers these days, said many of the experts.  

“Right now, the biggest obstacle is finding quality bankers,” said Wanichek.
 
The good news is that students and young professionals are starting to take a closer look at banking as a career choice, said Navarro. “The challenge is that banks have to compete with every other industry also seeing wage inflation and a shortage of prospective employees,” she added.
 
The OBA Education Foundation has been instrumental in establishing new courses and experiential learning opportunities at University of Oregon and Oregon State University. This is attracting more graduates to the banking profession. Such efforts have been bolstered by bank participation. Noted Wanichek, Summit Bank has partnered with University of Oregon’s banking classes and hired about six students, as well as former business operators, and trained them in commercial lending.
 
When the FDIC reviews the application of a de novo, it wants to see experienced bankers among the key staff, said Tim Keehan, vice president and senior counsel at the American Bankers Association.
 
“You can’t just go off the street and find one,” he said.
 
It’s also difficult to hire the necessary tech expertise to manage the back-office processing of loans and keeping the books, Cole added.

5. Pandemic – COVID-19 has put a damper on new bank formation. Before the pandemic started, T.K. Keen, administrator of the Oregon Division of Financial Regulation, said the state bank regulators were contacted about once a year by people who were thinking high level about starting a bank. Since the start of the pandemic in March 2020, he has not received one such call.  

“I think the pandemic has halted those sorts of inquiries. People are waiting to see the direction the economy and interest rates are going to go,” he said.

6. Consolidation – With the difficulties in starting a bank, it could be that would-be founders might look at purchasing an existing bank as an easier way to get into the industry, said Keen. An existing bank already has the technology, staff and vendor relationships, for instance, that a new bank would have to create.  

“It’s easier to assume another bank than it is to create a new one,” said FDIC spokesperson Brian Sullivan of Washington, D.C. When the banking system was stressed in 2008, “we experienced a lot of bank mergers and a continuing trend toward consolidation.”
 
The Future
We will see more de novos appearing like flowers in the spring sometime in the future, the experts said.
 
Whenever a larger bank faces a problem, it’s an opportunity for small banks to win over new customers, said economist Bill Conerly, Ph.D., of Lake Oswego.
 
“So, there is always an opportunity for small banks. We will have more de novo banks form, though it may be a while,” Conerly said.
 
“We’re encouraged the FDIC itself would also like to see more de novo banks,” said Keehan. “It’s critical you have an agency on board. The agency has been aware of it for awhile and have sought to improve the prospects of getting new banks up and running.”
 
Keehan also pointed to some recent proposed national legislation, which has won bipartisan support, aiming is to make it easier to start a de novo.
 
Want to Start a Bank?“
Oregon families and businesses still have many banking options, but a vibrant economy and well-served communities require a

broad spectrum of banks,” said Navarro. “Oregon would benefit from more new banks forming in our markets. I definitely believe there is room for a bank with the right market, people and business plan.”
 
“If the right talent with experienced banking industry leadership were to start a bank in Oregon, particularly in a growing community, I think there would be regulators, investors and community members in the bank’s corner,” she added.
 
Any plan to open a new bank should include a specific purpose, a target market and goals, Keen suggested, adding he’s available to give advice.
 
“Please come talk to us. We’re happy to have a conversation and give our thoughts to anyone who’s thinking about starting a bank. We’d love to hear about the concept,” said Keen.
 
He can be reached at (503) 586-8143 or [email protected].