How do you start your own bank?

What if you wanted to start your own bank? Do you just rent some space, put out a sign and started taking deposits? Not exactly. Let's look at the steps you have to go through in order to start your own bank. The rules and requirements vary from state to state, so in this article we'll use the requirements from the state of Florida.

The organizing group

Just as with any business, you'll first have to make some pre-planning decisions -- like who your partners (called the organizing group) will be. You'll also have to write a business plan. All of these things will be taken into consideration when you apply for a state or federal charter.

State vs. Federal Charters

Some of the benefits of a state-chartered bank include local access to decision-makers and, sometimes, faster responses to questions and concerns. Local decision makers also may be more familiar with the local economies and market conditions. Local regulatory assessment fees are often lower than federal fees, as well.

A charter is an agreement that governs the manner in which the bank is regulated and operates. It authorizes the organization of the bank by either the state or federal agency. The agency that charters the bank is primarily responsible for protecting the public from unsafe banking practices. It conducts on-site examinations to make sure the bank's financial condition is good and that the bank is complying with banking laws. State charters and federal charters typically do not differ too much in the way the bank conducts business. They do, however, differ in other areas. For example, in Florida, a state bank is not required to be a member of the Federal Reserve System, while federally chartered banks are. Also, state-chartered banks are regulated by state agencies, while federally chartered banks are regulated by federal agencies.

The organizing group has to identify directors, a chief executive officer (who usually has to have past experience running a bank) and other executives. The integrity, past business histories and credit histories of these people will greatly affect the acceptance or denial of the bank's charter. The important thing is to carefully select these partners and make sure they are team players, have the experience and know-how to help you make the bank work, and can withstand (both professionally and personally) the close scrutiny of the regulatory investigation.

Holding Company

A bank holding company is a company that has control over a bank. It holds 25 percent of the stock and has the ability to control the election of a majority of the directors of the bank. The Federal Reserve may also determine that a company either directly or indirectly has controlling influence over certain management and policy decisions for the bank. The organizing group has the option of establishing a holding company for the bank when it applies for the charter.

The number of directors you must have varies from state to state. In Florida, you must have at least five, and there is no maximum number. These partners have to put up money as an initial offering that shows their level of commitment and helps get the bank going. The required amount in Florida is 25 percent. In other states it may be as low as 10 percent to 15 percent of the total capital needed to start the bank. This group then becomes shareholders in the bank. In most cases, there is a limit of 24.9 percent to how much stock an individual or company may have, unless the company is a holding company.

The bank's market and location

The location of your bank is also a very important decision. You have to do some market research to determine how well a new bank will do in a particular area, or where the best spot in a large geographic region might be. This information is also required for your application for a charter. You may be competing against others who are also trying to charter a bank in that area! Even though competition is healthy for business and consumers, there is still the need to make sure a stable and safe financial environment is maintained. The economy will also be taken into consideration in locations where there are lots of competing banks.

The specific physical location of your bank is chosen by the organizing group and is just as important as finding the right market. You want the bank's location to be convenient for customers and in a heavily trafficked area. You also need to decide whether to buy or lease a building.

Raising money to start your bank

The capital requirements to start a bank often vary greatly from state to state. In Florida, the suggested capital requirement is $6 million for a bank in a metropolitan area and $4 million for a bank in a rural area. In other states, such as New York, that amount might be $10 million or more for metropolitan areas. Those capital requirements are usually determined by your strategic plan and pro forma financial statements for the market you've selected.

As mentioned above, the organizing group may be responsible for 10 percent to 15 percent of that amount. The remainder is sold to shareholders. Organizing groups may shoot for 400 to 750 or more shareholders in order to raise the money needed to start the bank. Usually, the more shareholders a bank has, the better its chance of succeeding.

The charter application and other details

There are still some details that have to be determined before you can submit your charter application. For instance, what are you going to call your bank? You have to come up with a name that is different enough from other bank names to avoid confusion. You also need to think about whether you want the word "bank" in the name, and whether you want the geographic region in the name. Regardless of the name you choose, you have to verify that the name is not being used by any other corporations -- which leads us to the fact that you have to become incorporated.

Before you actually file your application, it is recommended that you set up a pre-filing meeting with the state's department of finance and banking. This will help make sure that you have all of the information you need to file. Usually, the biggest delays come from incomplete background and/or financial information.

Once you have all of the details ironed out, you fill out the charter application and submit it (along with a lot of other information) to the state's board of finance and banking -- or, if you're applying for a federal charter, you'll send it to the Office of the Comptroller of the Currency. Here is the list of items you have to include in Florida:

1. The names and addresses of all of the organizers and the holding company (if there is one)

2. The names of the proposed directors, the CEO, the senior loan officer and the cashier

3. The name and address of the bank

4. The number of shares, par value, and share prices for each share that will be sold

5. The total amount of common stock, as well as surplus and reserves for operating expenses

6. The number of shares of bank stock that each organizer plans to purchase

7. Where the money for purchasing those shares is coming from

8. Names and addresses of proposed investors who will own more than 10 percent of the bank's total stock

9. A completed charter application (form DBF-C-10 in Florida) for each organizer, proposed director and principal stockholder, CEO, senior loan officer, cashier, and all other executive officers

10. Pro forma financial statements

11. An addendum to those financial statements that explains assumptions and strategies to achieve the projected market share for each type of product or service

12. Assumptions used to calculate earnings

13. Everyone involved in the purchase or lease of the proposed bank building

14. Any business or personal affiliations between the bank property seller or lessor and any of the organizers, other bank officers, and shareholders who will own 10 percent or more of the bank stock

15. Copies of location feasibility studies and local zoning laws

16. Copies of results of any environmental tests conducted at the bank's location

17. Projected organization costs (this includes filing and regulatory fees, professional and consulting fees, payroll and payroll taxes, rent, capital-raising costs, printing, postage, telephone and office supplies)

18. Proposed salaries and benefits for bank officers

19. Copies of any employment contracts that may be given to officers

20. Copies of proposed bank policies

21. And finally, your detailed business plan!

As you can see, there is a lot of information that has to be gathered and submitted with your charter application. Leaving out any of this information, or having some of it incomplete, will slow down the review process considerably. There will also be a filing fee, which in Florida is $15,000. Most other states require a similar amount.

If your application is deemed complete, then a decision will be given within 180 days. If your charter is granted, you will usually have up to one year to open your bank. In all states, you are required to apply for deposit insurance with the FDIC before you can accept deposits from the public.

Types of Banks

There are several types of banking institutions, and initially they were quite distinct. Commercial banks were originally set up to provide services for businesses. Now, most commercial banks offer accounts to everyone.

Savings banks, savings and loans, cooperative banks and credit unions are actually classified as thrift institutions. Each originally concentrated on meeting specific needs of people who were not covered by commercial banks. Savings banks were originally founded in order to provide a place for lower-income workers to save their money. Savings and loan associations and cooperative banks were established during the 1800s to make it possible for factory workers and other lower-income workers to buy homes. Credit unions were usually started by people who shared a common bond, like working at the same company (usually a factory) or living in the same community. The credit union's main function was to provide emergency loans for people who couldn't get loans from traditional lenders. These loans might be for things like medical costs or home repairs.

Now, even though there is still a differentiation between banks and thrifts, they offer many of the same services. Commercial banks can offer car loans, thrift institutions can make commercial loans, and credit unions offer mortgages!

Date: 2015-12-18; view: 724