Where are the de novos?

The number of chartered banks in the US is dropping like a stone. Since 2004, the number of FDIC-insured institutions has fallen to just 4,517, a decline of 50% in just twenty years. The industry remains very profitable with an industry average return on assets of 1.12% and an average return on equity of 11.43%. So why are more new institutions not entering into this profitable market?

The answer is easy, starting a new bank comes with a myriad of intricate steps and problems, each with its difficulties. I should know. I was the primary organizer for the newly chartered Nova Bank in Huntsville, Alabama. From conception to opening, the process lasted just over four years. Nova Bank opened for business on January 26, 2024.

There are four primary hurdles to starting a new bank. First, you must have sufficient seed capital to cover organizational costs. Launching a bank is not cheap. You can expect to spend at least $2 million during the organizational phase. At a minimum, you should raise $4 million from a small group of like-minded organizers, the fewer in number the better. Ideally, your organizers live in the same community in which you expect to operate.

Second, you need a strong management team that has a demonstrated ability to generate new business, manage personnel, and administer the operations of the bank. You will need at least one or more senior-level local bankers to be the public face of the institution; however, a management team can be assembled after the seed money is committed.

Third, you will need regulatory approval, a lengthy and tedious process. Ever since the Great Recession, regulatory agencies are in no rush to approve new charter applications. Prior to 2008, more than a hundred new banks were formed every year. From 2009 forward, some years had no new banks entering the market with only four created in 2024. The regulators do not appear to have much appetite for anything but a traditional bank model serving a defined local market footprint.

Finally, the fourth hurdle is raising funds to capitalize the bank sufficiently to sustain growth and start-up losses until the bank reaches profitability within three years. Regulatory agencies do not specify a minimum amount of capital, but the industry consensus is that $20 million or more, including your seed capital, is needed to gain approval.

Each hurdle has its own set of challenges, but they are not insurmountable. A good business plan, a traditional conservative growth strategy, and small team of highly dedicated founders willing to work hard can launch a new institution despite the current market challenges. So instead of asking where are the de novos, a better question, is where are the banking entrepreneurs willing to give it a go?

This piece was published previously about de novo organizing. Minish Risk Advisors is an independent advisory practice. It is not Nova Bank and does not offer deposit services.