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Show Me The Money

The challenge of capitalizing a de novo bank is far more complex and difficult than it appears to be when the organizational efforts first begin.

To a varying degree each organizer believes that their entire roster of friends, relatives, business, professional and social contacts will all share their vision regarding the communities' need for a new bank. Therefore, based on that assumption it is difficult for most organizers to believe that selling stock will be anything but a "slam-dunk." So, operating on such blind faith, most groups begin the process of going about raising capital without a definitive strategy or a contingency plan to deal with changing circumstances or unforeseen difficulties.

Oh, that it would be so easy, even in the best of times! To complicate matters, during the past 18 months or so, every organizing group has had to cope with two distinct economic realities. First, a raging bull market that begged the question, why should anyone direct their investment dollars away from hot rising securities (dot-com or otherwise) to invest in a bank stock albeit solid if unspectacular? Second, the current 'soft' economy presents a different challenge to the investor as well. Therefore, those groups without a well-designed strategy, the support of industry experts or the ability to articulate the historical advantages of investing in bank stock in challenging times, are ill equipped to successfully complete their capital campaign, given the recent economic state of affairs.

We have observed that groups that "hit the wall" share many of the following common characteristics, behaviors and viewpoints.

  • The group, individually and collectively, grossly underestimates the time it takes for an organizer to become proficient at telling the bank's story and then actually closing the sale.

  • Generally speaking, groups of highly successful, independent individuals often have difficulty working in a team environment. Each person has their own perspective on what works and how it should be done.

  • Few of the organizers have ever sold or attempted to sell a security of any type. Therefore, they have difficulty addressing key questions posed by potential investors such as: "What's in it for me?" "What's the exit plan?" "Is there a market for the stock after I purchase it?" "Historically, how have bank stocks performed?"

  • Everyone in the group expects all the other members to equally pull their weight

  • A belief that the president they hired will do "all the heavy lifting." "Why not," they say, "after all he is on the payroll, we aren't."

  • Many times the proposed president is reluctant to ask for outside help. He doesn't want the organizers to perceive that his asking for outside support is a sign of weakness or lack of professionalism. To compound the issue it is likely the proposed president has little or no previous de novo bank experience. Therefore he is "learning" along with the rest of the group.

  • Many proposed bank presidents have limited sales experience; therefore they believe the local organizers should sell the stock themselves.

  • The group will just mail out the offering circular (prospectus) assuming, that act in and of itself, will prompt people to rush in with a check.

  • The group distributes several thousand offering circulars. They host 3-5 evening investment meetings with food and beverage included. Selected members of the community attend the events and they tell the organizers what a grand idea the new bank is. This makes all the organizers feel great. Everyone leaves on a high note. Then nothing much happens after that. The organizers do little or no follow up, get very little feedback, and receive no checks! A lot of money was spent for a feel-good evening that didn't produce much in the way of stock purchases.

  • Ill conceived and protracted capital campaigns generally consume enormous amounts of organizational funds. When that occurs, the funding needed to build the critical elements of the bank's infrastructure is compromised.

  • At some point the organizers come to the realization that the project has taken longer than anticipated and that the end is still not in sight. Confidence slacks, and expenses continue to mount up.

  • The organizers become stymied as to why they have not been able to wrap up this capital project and open the bank. How is that they, the pillars of the community, have not completed this task in record time? After all, everyone they spoke to said it was a great idea however, in the process they discover the fundamental difference between a depositor's mentality and investor's mentality.

Presently there are numerous groups in the US that are burdened with at least three or more of the elements listed above. Sadly, when and if an organizing group finally recognizes that they need professional assistance often it is very late in the game. Furthermore, never having been exposed to the capital markets, the organizers have great difficulty accepting the fact that the standard industry fee for professional management and facilitation of a successful capital campaign is 4%-6% of the total offering. Or that "outsiders," (read, industry consultants) can be the critical ingredient in the formula needed to successfully close a capital program.

Often, by not dealing with the facts as they are, rather than as they hoped to be, the group's capital program loses momentum and at some point the damage is irreparable. Consequently the outcome may be that the stock is not sold, the bank fails to open, the community is not well served and the organizers lose all of their up-front "seed" money. This is not a pleasant outcome to such a noble beginning.