MAKING MONEY THE DE NOVO WAY

Wendell Howie’s deal is typical of what’s been happening with new banks in the last few years. Howie rounded up eight investors-including the usual doctor, lawyer, business executive and real estate developer. Each then invited friends to sweeten the pot, and in the end, 70 different stockholders raised $860,000.

The group borrowed $2.3 million from a bigger bank and raised another $120,000 to cover startup costs. On April 8, Howie and company opened the doors of Addison National Bank, on the corner of Belt Line and Commercial roads.

As president, Howie expects to guide the bank through about two rough years, building up business as well as losing money. If the market is right, the bank will turn a profit then, and build up assets. A big bank may come along and like what it sees. Then the 70 investors stand a chance to sell out and double their investment.

That’s the optimistic scenario, one that has prompted Metroplex investor groups such as Howie’s to start up around 60 de novo (new) community banks since 1983. In that year, when new banks hit an all-time high, Texas accounted for more than half of the de novos in the country-150 out of 269 start-ups approved by the U.S. Comptroller of the Currency, who oversees such things.

But now the bloom is off the rose. The investment climate has changed dramatically. The shifting sands of the Texas economy have wrung out the easy profit.

The main problem is with the buyers. The big banks that used to acquire de novos are having problems with their real estate and oil and gas loans. Some, like Allied Bancshares and BancTexas, have actually been selling more banks than buying.

“I get a call a week from bankers trying to sell me their de novo banks,” says James Huffines, president of Dallas Bancshares, a community bank holding company that is still in a buying mode. “A lot of the de novos are under the illusion that a bigger bank will buy them out for a high price. But that is just not going to happen. Investors can get a lot better return by putting their money in certificates of deposit and paying ordinary income taxes on the interest. Given the problems of a de novo today, it’s just not worth it.”

Since there are more sellers than buyers, the prices of banks on the auction block are also depressed. Huffines believes the marketplace is so tough that “in the next 24 to 36 months, a significant number of de novos will be merged or sold.”

One of the key problems that de novos face is finding a seasoned banker to take the helm during the bank’s early months. “Right now there are too many banks and not enough bankers,” says Jack Roberson, an assistant vice president at Allied Bank-Lakewood. Roberson, a correspondent banker, reviews new charters to determine if Allied will loan the investor group the capital needed to start the bank.

Usually the new president comes from the lower ranks of other banks, with banking experience but no taste of the duties of a chief executive. Assembling a board of directors that is unanimously committed to one course for the bank is also crucial to its survival.



BUT OFTEN that’s not the case. A recent fight at an East Dallas de novo was particularly brutal. An experienced banker who had come up through the ranks of a major holding company had always dreamed of running his own bank. Joined by an investor group of attorneys and physicians, the banker, who asked that his name not be used, finally opened the bank.

Six months later, a fissure developed on the board, pitting the five doctors against the three attorneys. The attorneys chose to call a shareholders’ meeting to oust two of the MDs so they could control the majority of votes and be able to fire the president. At the meeting he discovered they had hired a police officer, who bodily ejected him after the new board had elected another president. They had even arranged to confiscate the bank’s car. He had to phone his wife to get a ride home. “It was humiliating,” he says.

From the beginning, the president had informed the attorneys that the U.S. Comptroller’s office forbids de novo bank boards from removing a director without approval until the end of the term. “They refused to listen. After all, I was still legally responsible,” he says.

The president blew the whistle, and called the Comptroller’s office. “The government told the directors they can’t put in a new president without its approval,” says the ousted president. He was back at the helm in 48 hours, trying to find loans to buy out the dissident shareholders. That deal is now being formally reviewed by the Comptroller’s office. “We lost $3 million in assets, which set us back three months in growth,” laments the banker.



DE NOVOS are now entering a highly competitive banking world, just unleashed from the protective cloak of regulation. Today, the costs of doing business are significantly higher than they were a few years ago. And the percentage of “free money,” or demand deposits that the bank doesn’t have to pay interest for, has declined significantly.

This gloomy news, however, is not sounding the death knell for new community banks. Roberson says that, judging by the applications flooding his office begging for funding, “the rush to charter new banks has not slowed.”

And de novos with specialized marketing strategies are thriving. Medallion National Bank, located at Northwest Highway between Skillman and Abrams, offers any creditworthy customer a 90-day loan at the prime rate if the customer maintains at least 30 percent of that sum in other accounts at the bank. That strategy has allowed Medallion to become profitable in just seven months, according to James Harrison, Medallion president.

Signature Place Bank, located at Preston and Spring Valley, took the opposite tack, deciding to eschew the retail customer in favor of the corporate account. The bank, “which broke even in the sixth month and has made money ever since,” according to bank president Ben Cunningham, doesn’t even have a motor bank. Signature Place frowns upon retail customers, “who require lots of teller time with a bunch of itty, bitty checks,” he says.

But generally, the days of a quick profit for de novos are over, and many investors may find themselves in the banking business far longer than expected.