Basic concepts and strategies represent the heart of developing and implementing a great bank. The Strategic Plan will reflect these strategic advantages as influenced by both market data and the skill sets of the Organizers. Within each category there are subcategories and details, some of which will be left to senior bank management while others will be discussed during the organizational process. Although there are many subcategories and details, they funnel up to these key concepts and strategies.
These concepts and strategies are unique to a smaller community bank. Larger institutions, by their nature, create additional growth pressures and regulatory trigger points that change their strategies and necessitate a larger market. However, for a de novo bank these are the keys to success.
A correctly organized de novo bank inherently contains several generic strategic advantages.
- The Bank will open with sufficient capital and will be in a position to deploy that capital in a safe and sound manner.
- The Bank will open without any problem loans on its books.
- The Bank will be entering the lending market where collateral values on real estate have been adjusted to current market values and therefore a reasonable loan to value ratio can be prudently applied to underwriting those potential loan opportunities.
- The Bank’s local Board of Directors, Advisory Board and senior management will be able to more readily identify underserved areas in the community.
- The Bank will be able to attract quality and highly skilled employees.
- The Bank will be able to leverage the Board of Directors and Advisory Board strengths, community contacts and industry experience in serving its market.
Detailed Strategic Advantages
Organizers and the Board of Directors
A diversified, informed, and independent Board is essential to the success of the Bank. (In De Novo Bank’s situation the Organizers or Founders will become the acting Board of Directors of De Novo Bank.) Diversification, in this case, means each director representing different centers of influence, different knowledge of the market area, and different business expertise. This will allow the de novo bank to diversify and micro-manage its loan portfolio better than larger regional and national banks.
An informed Director knows his role as a director, is knowledgeable about banking, and is knowledgeable about what is happening in the bank’s market area. Typically, only a few directors will have previous banking experience. Consequently, during the organizational period, the Directors will be able to take advantage of the Directors’ Development Program and attend various seminars. It is only natural to assume the lack of banking experience is a problem and insurmountable. However, during the organizational period you will learn about banking and become knowledgeable about your role as a director. Many directors find this extremely helpful in augmenting their business and professional expertise. Furthermore, lack of banking experience provides a different perspective and new insights into banking strategies and the needs of the community. This is one of the strengths of a community bank.
Independent directors are essential to the de novo bank’s success. Some banks are organized around the president with the president selecting the directors. Our de novo bank clients are organized around the directors, who then will develop a strategic plan and finally hire a president that can implement the plan. This strategy places the power in the hands of twelve qualified directors instead of one person with a “yes” board. The success of a bank dramatically improves when decisions are made with multiple views and inputs.
Retaining a President Capable of Implementing the Strategic Plan
Retaining the correct president is a process. Once the strategic plan and the educational process are completed, you will have a better understanding of the type of president the bank needs. In addition, each Director will have an understanding of the questions to ask and understand the answers. Then the Board will begin the interview process and have time to evaluate and interview numerous candidates. This process creates the greatest opportunity for the Bank to retain the best president possible.
A Marketing Aware Board
Our de novo bank client’s marketing strategies will center on directors, stockholders, advisory board members, and senior bank management for the first three years. Funneling prospects to the president and senior loan officers is the key to marketing. As leaders in your community and industry each director will naturally be in contact with other individuals discussing their latest bank problems or needs for funding. All the directors have to do is introduce these individuals to the president of the bank. The president will identify how the de novo bank can assist the individual. If we have twelve directors, each introduces the president to three new prospects a month then thirty-six new clients are directed to the Bank.
Stockholders represent another group of potential customers of the Bank. Developing good stockholder relations will not only deliver customers but also increase the flow of information about your market area to the Bank. Some stockholders realize they can conduct their banking business and increase the value of their bank investment at the same time.
Creating an advisory board allows a community bank to increase its reach into different markets and industries. A bank board level committee is created to establish and coordinate advisory board activities.
Senior loan officers will also have contacts and marketing abilities to bring customers with them or attract current clients during the first three years.
By consistently combining and implementing these four marketing methods, combined with the size of the market and future market expectations, the Bank should reach its growth goals.
Unencumbered Initial Capital
Initial capital is dependent upon the bank’s strategic plan and its inherent risk profile. A de novo bank, by definition, has zero assets or liabilities the day it opens. Thus all the initial capital is available to support the strategic growth of the bank. In general, a $15 to $18 million in initial capital creates an opportunity for a bank to significantly growth assets and impact its community.
Diversified and Quality Loan Growth
Diversified quality loan growth is essential to a de novo bank’s success. So how will a de novo bank accomplish this? And, what responsibilities do the directors have?
Directors assist in the oversight of the loan portfolio. The primary reason rapid loan growth creates negative income is loan quality. Diversified, independent, informed directors create quality loan portfolios. A diversified board brings different business lending opportunities to the bank. President driven loan growth tends to center in businesses he has experience with and commercial real estate. De novo banks cannot primarily rely upon commercial real estate for loan growth in the future. A board member with manufacturing experience will understand the business plan of the manufacturing client and know if it is feasible. A dentist will know if the proposed projections for a new dental office are reasonable or not. In addition, informed directors know how someone is doing in the community through their contacts. They use their business experience to evaluate the request and determine if it is reasonable. This improved quality control is what will make a de novo bank a success.
De Novo Banks focus on managing their net interest margins, overhead and organizational costs. The net interest margin is basically the difference between interest earned and interest expensed divided by earning assets. A de novo bank will manage the net interest margin by strategically pricing its loans and establishing a deposit acquisition committee. A de novo bank will not be the lowest or highest priced loans in the market. The Board believes business owners, executives and professionals want experienced knowledgeable bankers to assist them. They also want quick and honest information and responses to service requests. This separates a de novo bank from other large institutions that have branch managers, twenty something loan officers, and changing personnel. It is expected that our clients will be willing to pay for such services. In addition, the de novo banks form deposit acquisition committees to monitor and establish guidelines for acquiring low cost deposits. This will also improve the net interest margin.
Overhead will be controlled through the involved knowledgeable Board. The site will be leased, not owned by the Bank. Furthermore, every effort will be made to keep lease costs both in the organizational stages and after the Bank opens, at the lowest rates possible. Secondly, the bank staff will be minimal. Everyone, including the president, will have to understand we are all in this together. Everyone must do their fair share of lifting.
Organizational costs are controlled through consulting costs that are fixed, delaying both the president’s salary and rent expenses, being able to negotiate with a pool of presidential candidates and equipment and data vendors for the lowest possible expense.
Opening the Bank with a Clean Balance Sheet
Many of the existing institutions continue to struggle with problem loans. These include loans with overvalued collateral and poorly underwritten loans. These institutions are forced to focus on restructuring or collecting these loans and not on growing the portfolio with quality new borrowers. Regulators will classify these loans thus increasing each banks future non-performing assets. Furthermore, quality borrowers will leave a troubled institution for better service and attention. The Bank will have the opportunity to grow without the hindrance of legacy problem loans.
In addition to problem loans, many existing institutions have created interest rate risk in their existing balance sheet. An extended period of low interest rates in the United States has caused many institutions to extend asset maturities to attract a slightly higher yield. If interest rates increase, then these institutions could experience profitability issues.
Local Knowledge of the Market
Understanding the local market and economy is essential to quality loan growth. A local diversified board creates this advantage.
The national economy experienced significant problems since 2008, including declining consumer confidence, increasing unemployment, collapsing real estate values, declining interest rates to historically low levels, and shrinking business revenues. However, there are economists who believe the economy is at bottom or near bottom of this business cycle. By the time the Bank opens the business cycle could be on the upswing and creating a tremendous opportunity for the Bank.
Larger Institutions and Increasing Cost
The financial crises of 2008 created numerous laws and regulations directed at large banks and Wall Street financial institutions. Dodd-Frank bill of 2011 created over 450 pages of rules and regulations. However most of the regulations apply to banks with over $1 billion in assets. These regulations include, but not limited to, the Consumer Protection Agency, increased compliance and stricter capital requirements. All these regulations are increasing both the costs and time required to administer these regulations. Although some parts of the rules and regulations will filter down to the smaller banks, larger portion of the costs and oversight will be directed to larger banks. These factors all provide an opportunity for the Bank to enter the market at a lower cost structure and become profitable.