A New Dawn for De Novo Banks

By Monica C. Meinert

When Bank of Bird-in-Hand opened its doors in December 2013, it officially became the first de novo bank to receive a charter since the Dodd-Frank Act was passed. Headquartered in the heart of Amish country just outside of Lancaster, Pa., the bank has made a name for itself serving a client base that includes the local Amish and Plain communities.

The idea to start Bank of Bird-in-Hand came at a time when the climate for de novo bank formation was inhospitable at best. Rightfully concerned by the staggering number of new banks that failed during the crisis years, regulators in 2009 raised the de novo period from three years to seven and were requiring more capital than ever from banks seeking charter approval.

A common sight at Bank of Bird-in-Hand, which serves the Lancaster, Pa., area’s Amish and Plain Communities.

“It was a challenge, because we knew we were going to be the first bank, and we knew that the scrutiny was probably going to be strongest on us,” says Lori Maley, who came on board as CFO during the bank’s formation phase and today serves as CEO.

But the organizing team saw a concrete opportunity in a market hungry for personalized service and localized decision-making. “The community of Lancaster in general is different than other parts of rural America,” Maley explains. “These people value relationships . . . and they have a different approach to paying a bank back. If someone’s delinquent, the Plain community often steps in and helps them.”

Bolstered by the stability of the local market, the bank initially raised $17 million of capital, exceeding the FDIC’s minimum requirement of $16 million. They also put together a seven-year business plan. Maley, who had previously been involved with two other de novo operations—Berks County Bank in the late 1980s and Berkshire Bank in 2003—recalls that planning ahead for the extended de novo period was a challenge.

“I had been through the de novo process, but it was so much different this around,” Maley says. “It’s hard to do a business plan for one year, let alone seven.”

Learn more about new FDIC Chairman Jelena McWilliams’ efforts to encourage more de novos here.
When the bank opened, the community response was instant. “We had such loan volume that we almost had to turn some people away,” Maley recalls. “But if you turn people away, you can pretty much count on the never coming back to you.” Faced with staggering demand and knowing the reputational implications these lending decisions would have for the bank, the team at Bird-in-Hand developed a strategy of booking the loans and participating them out to other banks. “We were as high as $30 million of participations” in those early years, Maley says. Today, it’s closer to $25 million.

There’s been no slowdown since—Bird-in-Hand continued to see strong loan growth and deposits, particularly as a result of nearby mergers and acquisitions of other community banks within their market. In 2016, the bank welcomed the FDIC’s decision to reduce the de novo period from seven years back to three. And from a balance sheet perspective, the bank went from $35 million in assets on opening day to $308 million as of June 2018—a signal that in the right market at the right time, a new bank can thrive.

A rough road for de novos

For the financial industry, the opening of Bird-in-Hand was the first sign of life from a de novo banking sector that had all but flatlined in the post-crisis years.

“After the crisis, everything became so restrictive, and for about 10 years now, we’ve had almost zero new charters,” says former ABA Chairman Ken Burgess. “We have a lot of small markets around the country that don’t have their own bank anymore.”

Burgess is a de novo founder himself—he founded FirstCapital Bank of Midland in Midland, Texas back in 1998 with a group of investors and $6.5 million in capital. But he acknowledges that doing the same thing today would be nearly impossible, given the high capital requirements and significant regulatory costs. “When you’re in startup mode and your cost threshold is so high, it makes you pause when you’re thinking about starting a bank.”

Former ABA Chairman Ken Burgess, who founded a de novo two decades ago, led ABA’s efforts to urge regulators to reduce unnecessary regulatory burdens.

An until-recently stagnant economy also contributed to the de novo slowdown, notes Dan Yates, CEO of Endeavor Bank, a San Diego de novo that received its charter approval in January 2018. “Low interest rates and compressed margins make it more difficult to take the traditional spread model for community banks. When the spread shrinks so much, the economics that make that model work are very difficult to prove out if you can’t get to scale.”

Yates—who also founded Regents Bank in La Jolla, Calif., in 2001—says that a study of pre-crisis bank charters applications may shed some light on why so many did not survive those turbulent years and ultimately led regulators to slam on the brakes. “The plans started sounding very cookie-cutter,” Yates observes. “Everyone seemed to be dusting off the same business plan, running it though the regulators, getting their charter, and there was not a lot of differences from one group to the next.”

The next generation of de novo banks, however, appears to be taking a different path—honing in on niche markets and building strong brands that appeal to consumers’ desire for business that are local and authentic.

Banking on local

For Aaron Dorn and Studio Bank—which opened its doors this past June—that niche was Nashville’s “creators.”

“We use the word ‘creators’ very intentionally,” Dorn says of his customer base. It’s meant to be inclusive of anyone and everyone who is creating things—from buildings to nonprofit organizations to new families. “It’s a philosophical point of view we bring to the table where we as bankers are in the business of empowering Nashville’s creators. We’re a companion in that creative process.”

In envisioning this new bank—the first to open in Nashville in 10 years—Dorn wanted something that would be both hospitality-inspired and membership-focused. The hospitality focus is borne out in the bank’s sleek, sophisticated design aesthetic. As for the “membership” aspect, Dorn and his team have taken “a social approach to banking,” providing a physical nexus for its diverse customer base to meet and connect through happy hours and other educational events.

Bringing this concept to life started with an extensive due diligence effort and an in-depth study of the Nashville market. Music City has seen explosive growth the last decades, and with 100 new people flocking to Nashville each day, economic activity is booming—the deposit market has essentially doubled in size in the last 10 years, Dorn notes.

At the same time, though, the number of banks serving the market was decreasing. When word came down that Pinnacle Financial Partners, a midsize bank in downtown Nashville, had acquired Avenue Bank—a small western Tennessee institution that Dorn had helped recapitalize and relocate to the Nashville area—Dorn knew that there would be a gap in the market that a new, local community bank could fill.

“It started with a hunch,” he says, “which started a long process of asking questions.” In doing so, he found significant interest within the local business community, and Studio Bank was born.

Dorn and his team worked with regulators as they finalized their business plan and determined how much capital they would need. As a first-time CEO—a rarity in the post-Dodd-Frank de novo world—Dorn himself also faced a significant regulatory scrutiny.

“It was certainly a hot topic throughout the application process,” he recalls. “But they gave us the opportunity to fully explain how and why I was prepared to be a successful bank CEO.” Through written responses, personal interviews and a three-week period working side by side with regulators on site, Dorn succeeded in making his case that he was the right man for the job. He also credits the strength of his management team, which includes several seasoned banking executives with experience in key risk management areas.

New and nimble

De novo banks can also find strength in being nimble, says Endeavor’s Dan Yates—unencumbered by legacy systems, they can build sleek, innovative solutions that customers want from the ground up, and quickly.

Getting a de novo bank application through to a charter is a complex process, and even once the bank opens, there are challenges.

“There’s a perception that ‘new’ may mean you don’t have the size and capacity to take care of a larger company’s needs,” says Endeavor’s Dan Yates. But de novo banks can also find strength in being nimble—unencumbered by legacy systems, they can build sleek, innovative solutions that customers want from the ground up, and quickly.

At Endeavor, for instance—which serves primarily commercial clients in the San Diego area—Yates recalls that “for the first six months, it seemed like every business call I went on, we’d have a client asking for a technology we did not anticipate there would be a need for.”

The bank was able to work with its core provider, Jack Henry, to integrate and customize an array of tech solutions that its commercial customers needed. “That’s what you find in your first year running the bank—you have to keep tweaking it if you want technology to be a competitive edge,” Yates reflects. Today, he’s confident that Endeavor has the technology platform it needs to compete with larger players in the market, and the business is rolling in steadily.

“People are patient with new banks,” he says. “They want to make sure you’re going to be around for a little while before they unplug from an institution they’ve been with for a long time.” That’s why building a top-notch customer experience is essential for de novo success, he adds. “Somebody may not want to be the first client of a new bank, but after you’re six months old and more people are talking about their great experience, the next company is willing to take that chance and give you consideration.”


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