How To Start a Community Bank

 Following are 13 points that we feel accurately (albeit in condensed form) portrays the critical elements to be considered by any group that is considering forming a de novo bank.
A: Identify the Organizing Group

Form the organizing group VERY CAREFULLY. Select “doers,” not “talkers.” The organizers must be successful in their own right, and have demonstrated their ability to work in a group setting. Collectively, the group must agree to purchase approximately 15% of the total initial offering (the regulators want to see this level of commitment as it creates and maintains an atmosphere of dedication during and after raising the initial capital). Personally and professionally each proposed organizer/director must withstand the close scrutiny of the regulatory investigative process. Any current or past business or personal impropriety or undisclosed credit problem will be discovered and most likely will disqualify the candidate(s). Every director must appreciate the fact that this is a highly regulated industry. And while a proposed organizing director may have been or is currently successfully operating his or her business in a wide-open, high-risk fashion, the regulators are not comfortable with “maverick” organizing directors.
B: Identify the CEO

Although the directors “produce” the show, the CEO will be the “featured player.” It is the CEO upon whose shoulders rests the responsibility for carrying out the board’s policies and the one with the high community profile. The community will judge the viability of the bank based on their view of the CEO and how he services their needs. The regulators demand that the CEO must have previous community bank experience and preferable at the level to which that person is being proposed. They will not approve any CEO who has been associated with a failed institution, one that has been declared weak, in jeopardy or compromised while under the candidate’s direction. Further, if the bank expects to effectively compete in today environment, it must have a CEO, who is market-oriented. Today’s successful banks are lead by builders not by caretakers.
C: Engage Professional Help

Preparing the application and keeping up with regulatory directives and compliance issues is a complex process. While a “do-it-yourself” strategy is possible, the mission is to secure the charter as quickly as possible in order to reduce the organizational cost. Engaging bank consultants (for accepted regulatory form and substance) and attorneys (for legal/contract issues) who do this work on a continuous basis greatly compresses the approval time line and increases the prospect of timely, regulatory approval. This approach, can of course, equate to cost savings in the long term. Also, thoroughly check the credentials and references of any and all prospective consultants. Speak directly to the clients who have recently engaged them. Beware those promising, quick fix, no-work-on-your-part, and miracle solutions to any banking problem.
D: Identify the Market

Independently or with professional help conduct an objective overview of the market the bank intends to serve. Healthy markets support healthy banks. View the market from a business point of view and resist being swayed by the fact that it is your “hometown” and therefore by default you “know” it will support a new bank.
E: Analyze the Market

Here is where dealing with professionals is very helpful. Current market data and demographics must be researched. A detailed review of the competition and its market share and growth trends is critical. Service gaps need to be discovered and potential products and services identified. The long-term viability of the local market is the key to success. So the market must support the bank’s projected growth in order to justify regulatory approval.
F: Prepare the First Draft of Projections

A preliminary compilation of the estimated deposits, income and the associated expenses needs to be “penciled out” and reviewed in order to validate the assumption(s) that you have a viable business concept. A latter version of these projections will be included as an integral component of the charter application.
G: Build Regulatory Relationships

Make no mistake; the regulators have the final say as to whether or not they issue a permit to organize. They must be kept in the loop. Ask their advice and keep them advised of the progress of the project. They do not like surprises and abhor being kept in the dark. While there are established chartering guidelines for all regulatory agencies, it is still a matter of how they interpret the proposal and the confidence they have in the organizers and senior officers that influence the approval process. While you may not want to seek them out as friends, you certainly do not want them as enemies.
H: Think Marketing

The success of any business does not just “happen,” the leaders must “make it happen.” It is imperative that the business plans have as its base a well-crafted marketing component. Today the financial service industry is based upon selling in a cost-effective fashion, what the customer demands, at a price that they will pay, in a configuration that they will accept. Banks will not be successful (profitable) if the organization is placed on autopilot, with the hope that the customer will beat a path to its door. Passive marketing is no longer a viable option.
I: Think Technology

The industry’s service and product deliver channels are changing and the only way to keep pace with those changes is to incorporate technology as a cornerstone of the bank’s strategic operating plan. The technology that supports community banks today is both highly efficient and affordable. Every emerging community bank can now compete with their larger brethren on the technology delivery front and thereby are no longer at an operational disadvantage.
J: Think Human Resource

For every company that states, “people are our most valuable asset” and has demonstrated that fact, there are dozens of companies unfortunately who make the statement and do little to support it. Make no mistake; in the banking business people make the bank successful. The customers deal with, and form their opinions of, the bank based upon the personal experiences they have with the officers and staff. Yes, personnel expense is the second largest line item after interest paid on deposits however; organizations that cut corners on qualified staff run the risk of cutting the heart out of the organization.
K: Prepare the Application

The quality of the charter application is a reflection of the time, thought, preparation and dedication the group is willing to commit to the project. The regulators view the application as a “window” into the soul of the organizing group. The logic and presentation of all elements of the application, but particularly the business plan, speak to the understanding the forming group has of the financial service business and as such depicts the manner in which they will administer the bank. If there is any doubt that the group is capable of preparing and submitting the application in the best possible light, they should consider seeking professional help.
L: Raise the Capital

If there is one aspect of the entire de novo process that ends up as an underestimation of the scope of a task, it is capital acquisition. It takes a great deal of dedication, tenacity, focus and hard work to raise the required capital in a reasonable period of time. The operative word here is “reasonable.” The total organizational costs are to a large measure a function of time. Therefore, if it takes a long period of time to sell the stock, the total costs will be greater than if it was raised over a shorter period. This is just simple math. What sounded so easy, after all doesn’t every one the organizers contact encouraged them to go forward and agree “you can count me in?” Well, for some strange reason it just does not work out quite that easily. The capital component needs to be carefully considered then a determination made whether professional help is a sound investment. A final word on capital. The importance of a large, stable, and active shareholder base cannot be overstressed. Attracting 450-700 shareholders, a portion of whom can be the cadre of a fine-tuned business development task force is a tremendous marketing tool. A bank with only a limited number of shareholders has only a limited opportunity to really grow.
M: Enhance Shareholder Value

A project of this nature is not an ego-gratification exercise. The prime mission is to increase shareholder value while operating a business in a safe and sound manner. Remember it is not “our bank” unless the organizers plan to subscribe to 100% of the offering, which is not likely at today’s required capital levels. So don’t build a monument to yourselves. Always keep in mind that there are others (hopefully totaling into the hundreds) who have invested in the project based in their faith in the group and they deserve your best effort, and intentions.

Story © 2002 Steiner & Associates. All rights reserved