Starting point
The bank is brand new — a de novo just coming to life with its initial capital infusion from investors and a modest amount of ownership deposits. These funds have been placed entirely in long-term fixed-rate securities. It’s a safe and simple beginning, but one that reflects the quiet caution of a bank not yet open for business.
With no loans and no customers yet, the bank’s total assets are $2,000, all invested in securities yielding 4.00%. On the funding side, you’ve got $1,000 in ownership, checking accounts at 0.00% and a small amount of overnight funding at a 3.00% interest rate. That gives you a low cost of funds at 0.13%, thanks to the heavy weighting of no-cost checking.
The result is a net interest margin of 3.93% which is decent on paper, but misleading in substance. There’s no fee income, no loan portfolio, and no real franchise value yet. Not surprisingly, net income is negative (-$44), driven by fixed operating expenses against a minimal revenue base. ROE stands at -4.61%, a reminder that capital is idle and under-earning.
From a risk standpoint, the bank is playing it safe:
Liquidity is high at 97.8%, with all assets in securities.
There is no credit risk, since there are no loans.
Rate risk is minimal (-1.1%) due to the simplicity of the balance sheet.
This is the blank slate — safe, clean, and small. Now comes the real challenge: How will management begin to build the bank?
