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Building Better Banks

As seen in Yahoo Finance, Western Banking, MortgageBanker.com

What is the first thing a new bank needs the day it opens? Customers. The customer will dictate when, how and where they will interact, if at all, with your bank. Remember the line from the movie Field of Dreams "build it and they will come?" That may be very good advice if you are building a ball field in the middle of Iowa. However, it just plain does not happen that way in today's financial service industry. The day of opening the doors of your bank and watching the flood of eager-to-be customers rushing in to establish accounts is gone forever (if that truly ever was the scenario).

"In the golden 1970's and 1980's the marketplace was much more forgiving. Many banks succeeded in spite of themselves, while other banks failed because they had no definitive marketing plan in place to counter the competition," said Bob Steiner, CEO of Steiner & Associates, a management consulting firm specializing in financial institutions. "Customers will not come in solely because of their disenchantment with their present financial service provider. They want an institution that provides the products and services they need, and banking alone won't cut it."

Today's bank needs to be entrepreneurial, with a management team and organizing board that is market driven, technologically adept and customer centric, factors that should play a role when choosing board members. A critically important task, board members should be chosen because they are independently successful in a wide range of fields, with a broad range of experiences that can help your financial institution respond to changes, gain profitability and avoid risks. To find a group like this many institutions seek help from professionals.

Bankmark, a California-based consulting firm specializing in the formation and facilitation of the de novo bank process, heads up a community bank development team of industry specialists (attorneys, economists, operational experts, IT specialists, and capital acquisition and marketing firms) that have successfully opened over 115 banks in the last 17 years. Bankmark believes that in order to be successful today's management team and board of directors need to accept disciplines that round out their banking skills, such as marketing and product distribution, and avoid focusing on one product or service. Well-rounded banking skills, coupled with a desire to serve rather than dictate to the customer, will ensure a new bank's success.

While a consulting firm can help put together the appropriate professionals to make a successful bank, they can also provide services to help you compile your application and business plan, which must be submitted to the appropriate regulators before a bank can open. A long and thorough process, this is an important step because it sets the tone for the flavor of the bank once it is open.

"You can't learn as you go when you're starting a new bank," said Bryan Hyzdu, president of Service 1st Bank in Stockton, California. "The expectation is that you are 100% ready to go when you submit your application. If the application doesn't reflect that the regulators will think you haven't done the research, and aren't ready for the challenge of opening and operating a bank."

Constructing your application and business plan are important steps toward opening a bank, but you should also consider factors such as where the bank will be located and whether or not to offer Internet banking. With all these tasks to keep in mind, it's easy to overlook the crucial details that will keep customers coming back. Tasks such as hiring and training employees and choosing an operating system are often put on a back burner during the organizational and capitalization phases, not to be considered again until the capital has been raised and the bank receives permission to open, which may be too late.

"Because banks typically exceed their pre-opening budget, they need to defer some of their expenditures until after the bank is open, which usually means that the appropriate people and systems are not brought in early enough," said Ruth Razook, president & CEO of RLR Management Consulting, Inc., which provides executive bank management consulting services to over 80% of California's new community banks. "A bank needs to be prepared to take depositors as soon as they open. A minimum of 120 days of lead time is needed to develop an operating system and train the staff, both of which should be fully functional 30 days prior to opening."

Although the time spent waiting to receive approval on your application and business plan seems endless, the satisfaction of having the regulatory board approve it is unparalleled.

"Submitting our application has been a long process," said Bill Baribault, chairman of Professional Business Bank (IO) in Pasadena, California. "Going through it has helped me appreciate the thoroughness of the banking authorities, and their approval further endorses the quality of the proposed bank's board and business plan."

Once the regulators have given you the green light to move forward, it is time to begin the complicated process known as the capitalization phase. In today's market, that means raising between seven million to ten million dollars. To ensure its de novo charters have the financial resources to operate during the capitalization phase, Bankmark developed a correspondent banking relationship with The Independent Bankers Bank (TIB), whose underwriting efforts can support two locations and capitalization funds in excess of ten million. TIB is one of the nation's largest bankers' banks, providing a competitive edge to more than 800 independent community banks by providing them with the most innovative correspondent banking products and services available.

"We are thrilled to establish a relationship with someone as active and accomplished in de novos as Bankmark," said TIB President and CEO Gayle M. Earls, who looks forward to a partnership that would serve a larger market.

While a strong correspondent banking relationship can help you move forward with plans to open a bank, investors will determine whether or not your bank will open for business. To capitalize a bank in the amount of ten million dollars, and have customers on opening day, most proposed financial institutions seek to generate as many shareholders as possible. Bankmark and its community bank development team have developed a guided, proven record that sets the foundation for generating shareholders.

"Bankmark's process, which facilitates interaction between the proposed new bank and the community, doesn't just sell stock. It develops awareness that can generate business leads, future clients and customers," said Jim Miller, founder of eBankStocks.com, a vertically integrated service package for community banks that provides market making, valuations and consulting advice.

Kerry Pendergast, proposed president of Premier Service Bank (In Organization) in Riverside, California, agrees.

"With Bankmark's proven strategy of bringing in shareholders, which we have witnessed first-hand since beginning our offering several weeks ago, we feel confident that we will be able to open this bank with a built-in customer base."

While it is possible to open a bank without assistance from professionals, many directors agree that the process of opening a bank is easy to underestimate, and having someone to guide you along the way brings positive results. Take 1st Pacific Bank of California in San Diego, and Mission Oaks National Bank in Temecula. Both opened for business on November 17, 2000, but 1st Pacific, with the help of Bankmark, generated $11.5 million from an estimated 460 shareholders, while Mission Oaks had an estimated 325 investors purchase $7.6 million shares (The Press-Enterprise).

Regardless of how you choose to raise your capital, once those funds have been acquired, which can take anywhere from two to six months, you are ready to do business. From start to finish the process of opening a new bank is one that requires hard work, commitment and patience. It is by no means an easy task, but with professionals who have done it before, and a clear understanding of what type of bank you want to be, it can be done. Are you up to the challenge?