Question: We know that getting off to a good start is critical to a de novo bank’s success. Are there any factors that you would like to emphasize?
Answer: Sure. Getting off to a good start is key and one of the important decisions in achieving a good start is selecting that initial location. We have seen minority institutions cut corners in this regard by taking the least expensive route, sometimes settling on a branch location that another bank is willing to sell or donate to the bank in formation. This can be false economy as there may be issues with that location that make it less than desirable. A marginal branch for a large institution can be absorbed by its overall expense structure, but can spell disaster when it is the only location for a newly formed bank.
Question: What are the primary considerations in selecting the initial location?
Answer: As with anything having to do with real estate, the old adage of “Location – Location - Location” is your primary consideration. A good location for a bank is one that is in the proximity of and readily accessible by the customers it is trying to attract. So the first step is to clearly identify the type of customer the bank is targeting and ensure the location has the appropriate demographics and is easily accessed by the public.
Accessibility is often overlooked in subtle ways. We had a de novo bank in the third district that opened in a nicely appointed office in a large building located in an area with favorable demographics. What they had not anticipated was that local zoning dramatically restricted the size of signage on the exterior of the building, which made the bank difficult to see from the road. Our bank examiners had difficulty finding the bank, so you can imagine the impact it had on attracting new customers. That particular de novo bank grew more slowly than others in similar markets. Another important thing to consider are traffic patterns. We have seen situations where banks were located in very visible areas, but due to traffic patterns, could not be conveniently accessed. Things like on/off ramps and divided highways can make a big difference. Other logistical factors such as availability of public transportation and safety can also be important considerations. De novo banks must grow organically by building customer relationships; if the banks location is an impediment, management will be tempted to grow the institution in more risky ways. Location, convenience, and service levels are paramount in building a banking franchise.
Question: Most banks have multiple locations or branches. Isn’t that a viable way to spread the risk?
Answer: In theory, you could make that argument, but in reality, we have found that each additional branch is a critical decision in a de novo bank’s early years. A poorly located branch is a drag on earnings that is difficult to overcome and regulators are reluctant to allow additional expansion without a track record of meeting projections. This is why a de novo’s initial operating projections should anticipate branch expansion and appropriately budget for it.