Capital, Digital Initiatives Set De Novos Up for Success

In 2018, Matt Pollock and a group of business leaders and experienced bankers organized a new bank to fill a gap they saw in the Oklahoma City market. And he believes their tech-forward approach sets them apart from competing financial institutions.

“A lot of [banks] fall into the same traps in how they approach client services and products and relationships, and they just don’t do a very good job,” says Pollock, the CEO of $110 million Watermark Bank, which opened its doors in January 2019. “So, we really focused on [building] the right team, with the right model that really drives the business community.”

Few de novo banks have formed since the 2008-09 financial crisis. Of the 1,042 community banks chartered in the eight years preceding that crisis, 13% failed and another 20% were acquired or liquidated, according to a 2016 Federal Deposit Insurance Corp. study. Overall, de novo banks accounted for 27% of all failures from 2008 to 2015, and exited at double the rate of small, established banks.

De novo institutions are particularly fragile: They don’t tend to be profitable in their early years as they invest in building their business and reputation in their markets. In today’s environment, low rates pressure net interest margins, exacerbating these challenges.

With that in mind, Bank Director used FDIC data to analyze the 24 de novo banks formed from January 2017 through December 2019 to understand how they’re performing today and how they might weather the current economic downturn. We examined efficiency, through the overhead and efficiency ratios, and profitability, through return on assets and return on equity, as of Dec. 31, 2019. We also included equity capital to assets and net interest margin in the analysis. Watermark came in fifth in our ranking.  

Today’s batch of de novo banks features higher capital levels, a requirement that has dampened new bank formation. (The FDIC doesn’t set a minimum capital threshold for de novo banks; expectations vary based on the bank’s market, size, complexity, activities and business model.)

If the recession deepens, those high capital levels could come in handy as banks find it trickier to raise more capital, says Nicholas Graham, senior managing director at FinPro. “Many of the de novos that formed over the past several years, in a very general statement, have not fully leveraged their capital to date,” he says. “Therefore, they have more capital right now, all else being equal, to potentially weather this storm.”

Stringent capital requirements led some bank organizers to acquire rather than start a bank from scratch. Not so for Watermark Bank. Acquiring a charter was too expensive due to high bank valuations toward the end of the cycle, says Pollock, and an acquisition would have bogged the founders down with legacy cultural and technological issues.

So, they decided to start fresh. “Let’s build our systems and our workflows exactly how we want to do it; we’ll have to roll up our sleeves, it will take a little bit longer, probably a little bit more work but in the end, it would be a benefit,” says Pollock. “We ran a very lean operation, opened with 12 people, got up and running, and we quickly got to a break-even faster than many others.”

Prioritizing technology sets Watermark and many of its de novo peers apart from those chartered before the 2008-09 crisis. And it allowed Watermark to rise to the occasion in issuing Paycheck Protection Program loans, despite high demand and a spare staff.

“We did as many PPP loans in 10 days as we did loan transactions in our first year of operation,” says Pollock. “There was some stress, but at the end of the day we walked away and said, ‘We have good processes and procedures, we have extremely talented people, and we’re capable of leveraging our platform and our operational capabilities that we have today to a much higher level,’” he says.

Flexibility and nimbleness give de novo banks an advantage. “They’re more quickly able to adapt and add new products and services that may be more beneficial in this time of uncertainty,” says Graham.

Savvy de novos are investing in the digital infrastructure needed for modern banking, says Rick Childs, a partner at Crowe LLP. But there’s one more attribute he believes strengthens a de novo: extensive banking experience on the board and management team.

“You can skin the cat a lot of different ways in banking, but if you don’t have a lot of capital to help you weather the lean years, and if you don’t have strong management and [directors] to make sure you’re not taking unnecessary risk,” it will be hard to survive, he says. “[If] you know how to react when a difficult time comes around, then the rest will follow.”

Top Performing De Novo Banks

Rank Bank Name Asset Size (000s) NIM (3/31/2020) Overall Score
#1 The Bank of Austin $202,738 3.36% 5.8
#2 CommerceOneBank $258,590 3.34% 6.2
#3 Winter Park National Bank $418,816 2.89% 7.0
#4 Tennessee Bank & Trust $272,173 3.25% 7.7
#5 Watermark Bank $110,423 3.40% 8.0
#6 Infinity Bank $110,145 4.41% 8.6
#7 Ohio State Bank $130,519 2.22% 9.5
#8 Gulfside Bank $97,154 3.14% 10.6
#9 The Millyard Bank $23,524 1.41% 11.2
#10 Beacon Community Bank $161,029 3.05% 12.1

Source: Federal Deposit Insurance Corp.
Each bank was ranked based on profitability, efficiency, NIM and capital as of Dec. 31, 2019. The overall score reflects the average of these ranks.

What Keeps Alternative Investment Professionals Up at Night?


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The profile of alternative investments like hedge funds, private equity funds and real estate funds has risen dramatically in just the past five years, with a growing number of investors dipping their toes into this particular category. And this interest has pushed this once obscure class to become the fastest growing category of investments, with $18 trillion projected to flow into it by 2020.

This elevated importance has raised the stakes and pressure for key industry stakeholders, with the most obvious being the private fund managers that run the aforementioned alternative investments. However, our perspective is that the stakeholder most strongly feeling this pressure is the fund administrator that services both the private fund manager and the investor.

We find that fund administrators are under-appreciated and under-estimated for the critically important role that they play in the alternative investment industry. They are often the primary source of information and operations for the fund manager, and they are typically the conduit for the investor to be able to see and receive key information about the fund.

As these pressures continue to mount, fund administrators in particular are faced with the daunting task of keeping up with the rapidly changing landscape of the alternative investment industry, and then figuring out what they can do to succeed.

Let’s break this dynamic down into two areas:

Key Challenge
Regulatory and operational concerns have skyrocketed from being nearly non-existent just a few years ago to becoming the primary concern and challenge for both fund administrators and private fund managers. It is literally keeping these stakeholders up at night.

Multiple industry reports point to this, but here is a chart that comes from Linedata’s 2016 Global Asset Management & Administration Survey, which shows just how serious these concerns are:

linedatafirmchallenges

 

Just to reaffirm the impact of regulatory and operational concerns, notice that regulation and operations were considered more important than other seemingly critical concerns like fund performance and investor/client relations!

What can fund administrators do to succeed?

  1. Attack Regulatory and Operational Concerns: Fund administrators should look to technology to help them tackle the regulatory and operational concerns that are keeping them up at night. Begin by attacking regulatory and operational concerns. Technology can help a fund administrator better adapt and more quickly comply with new regulatory and compliance requirements. Progressive software solutions can help a fund administrator “project-ize” regulatory compliance by providing intuitive and transparent workflows that help them better collaborate with clients and investors, assigning a particular task to a particular person, and tracking the completion of each step in a way that is visible to all participants. Email notifications at appropriate moments along the way prompt the assigned person to know that an action needs to be taken. This type of digital collaboration greatly reduces operational efficiencies, including the back-and-forth communication that currently happens via email, electronic file folder systems and phone calls.
  2. Differentiate Themselves Through Client Service: Technology can also help a fund administrator dramatically improve its service to both its fund manager clients, as well as to the investors of its clients. Intuitive portals for both clients and investors that provide useful performance dashboards, as well as easy-to-use digital document storage and sharing, go a long way towards improving the fund administrator’s quality of service.

What’s keeping fund administrators up at night? It’s the fear of the unknown with the ever-increasing regulatory and operational pressures, as well as the fear of losing their clients and investors as a result of poor service.

Using modern technology can be the answer to a good night’s sleep for fund administrators. There’s a quote from the Linedata report that put it best: “Now is the time to embrace digitization to gain competitive advantage in this dynamic market.”

A Remedy For Commercial Client Headaches


Banks can solve a major headache for commercial clients by offering business services to help manage accounts payable, accounts receivable, tax collection and other payments. In this video, Matthew Hawkins of Mineral Tree explains how this approach can strengthen the client relationship while generating additional fee income for the bank.

  • How the Bank Gains by Offering Business Services
  • Benefits for the Client
  • How Technology Providers Can Help

Love Them or Lose Them: Why Becoming a “Top Provider” Is an All or Nothing Game With Your Top Clients


PwC’s John Garvey discusses how organizations must gain a larger share of their institutional clients’ wallets and will do so by employing client-centric business models. Voice of the customer (VOC) analyses are increasingly used as a tool to determine the business changes needed to better attain “top provider” status.

Download Related PwC Publication:
Love Them or Lose Them: Why Becoming a “Top Provider” is an All or Nothing Game With Your Top Clients