De novo banks established over the last 10 years are posting their first profits at a faster pace than de novos founded prior to the Great Recession.
It took an average of 8.6 quarters to turn a profit for the 1,046 de novos established from 2000 to 2009. For the 30 de novos launched since 2010, it has taken an average of 6.8 quarters. Industry consultants attributed the quicker profitability to technology adoption, consolidation and larger capital raises.
As consumers increasingly rely on mobile and digital banking, de novos have been able to operate with a lower headcount and less physical space for branches and offices.
"If you can be more reliant on cutting-edge technology and you don't have the sunken fixed costs of additional full-time employees, that probably would allow de novo banks to reach profitability more quickly," Steven Lanter, partner at Luse Gorman PC, said in an interview.
The transition away from branches, especially marquee headquarters locations, have allowed de novos to put more of their limited start-up capital to more profitable uses, according to James Stevens, a partner at Troutman Pepper Hamilton Sanders LLP.
"People are no longer building Taj Mahals. Pre-2010, people were building very large buildings," Stevens said.
The start-up capital required to open a de novo bank has increased since the Great Recession, due in part to the required technology investment. Still, having more capital available enables a rapid growth profile. "Because [capital demands] have gone up, they're pushing growth," Stevens said. "They have the capacity to grow faster."
M&A could also be helping de novos' profitability. If a de novo opens in a market with little or no local competition, it can become profitable more quickly, Lanter said.
"The consolidation that we've seen over the last decade has allowed new banks to flourish a little quicker," he said. "When you open up the bank, you're not competing with Bank of America right away. You're competing with other ... local banks. And if there's a void in that sector, then you might have an opportunity to fulfill the needs of local and small businesses."
While the low interest rate environment is weighing on net interest margins for all banks, well-run de novos can post profits without a favorable rate environment, both Lanter and Stevens said.
"Historically low interest rates are generally not going to help de novos — or any financial institutions — with their earnings," Lanter said. "But if you're still operating and executing your business plan and you are going out and attracting good customers and good loans, you're still going to make money."
Once interest rates return to historical norms, the pace at which de novos post their first profit could accelerate further, Stevens said.
"[Once] we have, at some point in the future, a rising net interest margin, that [profitability] trend will not only continue, but also perhaps they'll get profitable quicker," he said.
In the near-term, de novos will get a small revenue boost once Paycheck Protection Program loans are forgiven.
"If the de novos were already operating in a way such that they had the operational capacity to participate in the PPP, then I think like any financial institution, they would recognize the noninterest fee income for those loans and ... they'll be seeing a nice uptick in noninterest fee income," Lanter said.
