De novo banks, or state registered community banks that have been in existence for five years or less, are maturing and becoming a vital part of the banking community. Yet, there are still neighborhoods across the nation waiting for banks to open, especially among smaller and less wealthy neighborhoods that cannot service the profit motive of regional or national banks.
"Executive at some de novo banks say that there is room for more players, particularly in the business banking area and in growth markets, such as California, Georgia, and Florida," stated Community Banker staff Debra Cope, in her article titled Starting from Scratch.
"Approximately 1,000 banks have been launched since the beginning of 1999 and they now make [up] 11 percent of [all] U.S. banking institutions. Between January 1 and November 10, 2005, 148 community banks opened for business, the largest number of startups since 2000."
Many smaller-sized communities are lobbying for their own banks that serve only its population, know the ins-and-outs of the community, and can establish a closer customer service relationship with the customer than large banks can.
Is Smaller Better?
"You can go down [to the community bank] and talk to the president and get your loan decision," said Rich Buckner, senior vice president of Milestone Advisors LLC. "Banks can consolidate all day long, but customers still want to deal face-to-face with decision makers at the bank."
"Customers prefer working with locally managed and owned institutions, and investors recognize that. That is exactly why de novos form," said William A. Doniou, Chairman and CEO of Pulaski Bank of St. Louis, Missouri.
At de novo banks, documentation requirements are often held to the minimum and even lesser educated consumers can easily understand the bank's guidelines and restrictions.
"The attraction is that we are not bogged down in tremendous bureaucracies and processes that make it difficult to get the transactions done," said Michael Sutton, President and Chief Executive Officer of The Bank of Evansville in Indiana.
Last year, The Community Banker studied 120 banks from De Novo Banking Class of 2001. "These 120 startup banks, which mark their fifth anniversary in 2006, are a microcosm of the de novo phenomenon," said Cope.
Lessons Learned from a Startup Bank
The Frederick County Bank of Maryland is a de novo bank that began operations in October of 2001. It was ranked twenty-third on the De Novo Banking Class of 2001 list, having increased its assets from $28 million in 2001 to $190 million in 2005.
Martin Lapera, the President of Frederick County Bank, believes that it isn't difficult to start a smaller sized bank.
"There is a lot of liquidity available and with a good business plan it is not difficult to access the $8 to $15 million startup equity through private or public stock offerings," he said.
Nevertheless, many new banks fail during the first three years of operation due to stringent regulatory control. "It takes about two years to break even and around three years to become a very profitable and growing company," said Lapera.
"With the economy strong and interest rates low, anyone can make money. With challenging economic conditions, we'll find out who the good operators are," said Lapera.
Frederick County Bank faced many hurdles before it opened in October of 2001, shortly after the September 11 tragedy.
"We experienced disruptions in the stock market the week of 9-11, as well as a negative impact on potential stockholders," said Lapera. The bank had already raised $8 million in the stock market—the minimum equity amount required for a new bank—before September 11. The offering date of the stock was extended to October 1, allowing the bank to raise another $1.5 million.
Lapera was fortunate enough to prepare the bank opening with around 35 people, most of which came from Frederick County National Bank (FCNB). FCNB Bank had been acquired by Branch Banking & Trust Company, a North Carolina bank the prior year.
"We already were experienced bankers, which made it easier to handle the challenges of a start-up bank," said Lapera.
A start-up faces the challenge of establishing an office from scratch—including staffing, finding the best branch locations, and securing a data processing vendor. The most challenging processes are complying with regulations and establishing banking policies and procedures.
"Fortunately, all people that had worked at FCNB were experienced in lending, branch and bank office operations, finance, marketing, human resource, management and compliance," said Lapera. "These people ensured that otherwise challenging issues fell in place without problems."
Today, Frederick County Bank is proud of its achievements and would not have done anything differently. The bank's employees have created a business and working environment quite different from the vast bureaucracies at larger banks. Customers are satisfied that there is rarely a complaint that cannot be solved promptly.
"We have gained the respect of everyone in our community in a short period of time," said Lapera. "Ultimately, our success has been measured in our impressive asset growth and strong earnings. We have consistently performed well within the top 25 percentile of the class of 2001… But, the greatest reward for our bank is the positive impact we have on our local community and its people."
Service as a Competitive Advantage
Lapera—who previously worked for a large bank—agreed that smaller banks cannot meet some of the product offerings of a larger bank.
"To counter this disadvantage, smaller banks often partner with larger bank and non-bank companies to offer many products and services they otherwise may not be able to offer and make good return on the investment," said Lapera.
Instead, smaller banks depend on exceptional customer service to create loyalty. "We can usually be more responsive, flexible and creative in the services we offer."
In the coming months, Frederick County Bank plans to open two more branches and another branch in 2007. Plans are to put more emphasis on the local residential real estate mortgage market and perhaps partner with other companies in the investment and insurance market.
"The bottom line for us is that we want to grow only to the extent that we can continue to offer the best customer service in the Frederick Community, and our emphasis will be more on profit growth than on asset growth."
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