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Fawad Butt is a banking consultant and the owner of www.ownabank.com
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  • 6 Easy Steps to Buying a Small Bank 0 comments
    Oct 14, 2010 1:02 PM

    Have you ever wondered what it takes to buy a small community bank? Thousands of investors across America have found community banks to be a valid investment vehicle and have acquired interest in community banks. Most bank investors acquire ownership by subscribing to Private Placements that are circulated to accredited investors by the selling bank.

    Private Placement investments in banks are typically not listed on any exchange and are generally considered illiquid. The investors are rewarded only if the banks perform as expected allowing appreciation of the bank stock and/or via irregular dividend payments. These factors limit the overall appetite for bank investments to those few qualified investors that are comfortable with the associated risks and have a longer-term investment horizon.

    The financial meltdown of 2008/2009 negatively impacted many community banks resulting in the failure of hundreds of such institutions. In the face of mounting bank failures, the FDIC decided to limit its exposure and effectively stopped the issuance of deposit insurance to new bank charters, also known as De Novo banks.

    It is estimated that between 2008 and 2009 over100 investor groups in various phases of De Novo application were either asked to withdraw new bank applications or were rejected outright. Leaving many with hundreds of thousands in sunk cost that was incurred during the De Novo process. Although, there was no clear policy statement on this matter by bank regulators, in some cases the investor groups were given soft suggestions to seek existing banks for acquisitions.

    For many De Novo groups, the path to bank acquisition was a major change in direction, and some abandoned the efforts all together. The reason was simple, for decades, filing a de novo application had been the preferred path to seeking new bank charters and most knew the process or could find affordable resources with experience in the process. Bank M&A had typically been the domain of larger banks who could afford to retain seasoned investment bankers to help close the deal.

    As of this writing in October 2010, it is fair to say that de novo is dead. There may be some lucky investors that can convince the regulatory bodies to allow them new bank charters, but that is the exception to the rule.

    The number of banks in the U.S has been declining since the 1980s when there were over 14000 banks in existence. Today the number stands at roughly 8000 banks and thrifts. It is conceivable that the total number can decline to 6000 banks in the coming years; much of the reduction will result from M&A activity in the space.

    Simple economics of supply and demand have not kicked in yet, but they will. As a result of the financial collapse, most small banks trade below book value today. This is an artificial dip in valuations. The reduced supply should start to impact bank valuations in the coming years, and those that are fortunate enough to survive the downturn will be more valuable than ever before.

    Buying a bank is not as simple as buying other companies. The bank regulations are much stricter today and in order to complete the acquisition process companies need to retain experienced legal, accounting and strategic advisory services. The following steps outline the acquisition process

    1. Identify an institution
    2. Negotiate a price
    3. Conduct due-diligence
    4. Negotiate a definitive agreement
    5. Fund the acquisition
    6. Seek approval from regulatory agencies.

    For individuals ready to embark on the acquisition process it is important to understand the importance and value of skilled help, the process can take 3-6 months from start to finish.

    Learn more about the process at ownabank.com

    Disclosure: I am a community banking consultant
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