/dā ˈnōvō, di ˈnōvō/
Starting from the beginning; anew.
“De novo” is the industry term recognizing the formation of a new financial institution, typically a bank.
Between 2010 and end of 2015, only two new banks opened their doors in the US. Since that time, however, an increase in de novo activity has appeared; with two new openings and seven pending approvals.
There are no doubt several reasons for this shift. One reason could be that the failure rate of banks during the recession is fading into history, and the economy is gradually getting back on its feet. Also, the FDIC has lifted some of the regulatory burden on these institutions. For example, in 2009, a regulation (FIL-50-2009) was created that mandated heighted examination procedures to continue for seven years after a bank’s approval. In 2016, this rule was rescinded and the period has been reduced to three years.
This is not to say that there are no hurdles to overcome for a new bank. The average shareholder equity for a de novo application is $30 million. Regulators also require that a bank’s board of directors and executive staff have substantial banking experience. A start up also requires patience. There is a misconception that starting a new bank will only take a few months, but it can actually take a year or more.
Despite these obstacles, the upward trend is there. Here are three of the new institutions:
- This story from American Banker describes the success of Bank3. It’s a community bank that’s carved out a solid niche for itself in Tennessee.
- Another is the Bank of Bird-in-Hand (in Bird-in-Hand, Pennsylvania). It started in December of 2013, and less than three years later, it was selected by DepositAccounts.com, as one of its Top 200 Healthiest Banks in America. Today it stands at $170 million in assets, and, thanks to community support, it has exceeded its profit and growth projections.
- A third is the Bank of Austin (Texas), slated to open later this year, is described in this Austin Business Journal The bank will focus its services on small and mid-size businesses.
These banks have successfully negotiated a number of requirements for new institutions. A new bank must, for example, determine its target market and the products it will offer. It needs to study the location, demographics, and competition. The new bank needs a 3-5 year business plan showing growth and expected ROI. It will need to plan for and deploy a solid risk management infrastructure.
Finally, a bank needs a reliable, modern technology provider. Many de novos choose outsourced solutions. This gives the new bank the flexibility to grow and change without replacing or upgrading in-house hardware, reducing capital expenses and IT costs.
Welcome to the new world of new banks.
Looking for more information on starting a bank? Check out the new Jack Henry & Associates' De Novo Resource Center.