The decision to acquire a bank in an underserved community is ultimately based on the investment value of the target bank. But determining that investment value is a tricky proposition; a low-income neighborhood may not offer much appeal currently, but infuse that low-income neighborhood with capital, and the situation might look quite different.
Residents of underbanked communities typically have their financial needs fulfilled by payday loan stores, check cashing establishments, and even unlicensed predatory lenders. The expense associated with these services creates inefficiencies in the cycling of cash within the community. In other words, predatory lenders can drain more money out of the community—through high finance and service charges—than they put into it.
A banking institution, however, can have the opposite effect. When a bank reaches out to underbanked consumers and educates them on the advantages of keeping a deposit account, that bank is also compiling assets that will be returned to the community in the form of loans. Those lend-able funds are the building blocks of home ownership and local business development.
Financial education creates financial efficiencies Studies have repeatedly shown that financial education is a huge component of attracting and retaining underbanked consumers. A bank that operates effectively in a previously underserved community isn’t limited to showing consumers how to reduce their finance charges, however. The bank can also initiate programs to help consumers develop more efficient budgeting, spending, savings and even tax planning habits. Over time, those cumulative household savings can also be directed back into the community, through discretionary spending.
With a creative vision and effective outreach and education programs, then, a newly acquired bank can anchor a turnaround within an underserved community.
Overcoming the failures of previous banks The challenges in initiating such a turnaround are large, but not insurmountable. If the target bank is already located within the underserved community, the bank organizers need to understand why that institution wasn’t previously effective. The product and service set, the brand image and the marketing programs (to name a few) need to be overhauled to address the needs and wants of local consumers.
If the target bank is to be relocated to the underserved area, the bank organizers must try to gain some insight from the history of banking in that community. Did previous banks or branches fail? If so, why?
Underserved communities and unbanked consumers obviously aren’t the low-hanging fruit of the banking industry. However, initiating real and positive change within a community is an endeavor that can be both rewarding and profitable. And, because there are many underserved locales in the U.S., the group of bank organizers that defines a workable model for one community has ample opportunity to roll out variations of that model to other areas.
Next week, we’ll discuss marketing strategies for attracting and retaining underbanked consumers.
An early decision bank organizers must address is whether to buy an existing bank or create a de novo bank. The right choice among these two options is always dictated by the particular set of circumstances faced by the group. At times, as circumstances and opportunities develop, bank organizers may even switch strategies in the middle of the process.
If the decision is made among the organizers to buy a bank, certain steps must be completed in order to get the transaction finalized. While each bank acquisition is unique, the steps generally fall into four major phases.
Phase One: corporation formation Once the decision is made among the organizers to buy a bank, the group members create a stand-alone corporate entity. The newly formed corporation has two purposes: to purchase a bank and manage the organization’s funds. Other steps that are completed during this phase include:
• Identification of the target bank
• Negotiation of the purchase agreement
• Sourcing and hiring of executive officers
• Selection of a new bank location, as dictated by the business plan and/or assess the condition of the existing bank location
Phase Two: application After the target is identified and the stock purchase agreement is in place, the group begins on the change of control application. The business plan within the application includes 10 separate sections; these sections are broken down and worked on until each is at least 80 percent or more complete.
Typically, each organizer must also complete an Interagency Biographical Financial Report (IBFR). This can be one of the most difficult sections; it must include each organizer’s personal and financial records for the previous two years and the current year, as well as projected records for the next year. The organizers should be compiling this information while the other sections of the application are being completed.
Phase Three: pre-file and comment letter Once the business plan is 80 to 90 percent complete, the organizers schedule a meeting with the regulating agency. At this meeting, the organizers must explain and defend their business plan to the regulators.
After the pre-file meeting, the group fine tunes and completes the business plan and sends it off to the regulating agency. The agency then has 30 days to make comments and request additional information. Once that request is made, the organizers have 30 days to compile the requested data.
Phase Four: Sell stock/capital and open doors Often, when a bank is being purchased, a substantial amount (greater than 75 percent) of the capital must be raised by the time the application is filed with the regulators. In the current economic environment, regulators only want to approve “sure deals.” They are so busy with all the banking issues, that capital uncertainty is one issue they do not want to worry about in a purchase transaction.
For this reason, the organizing group is typically left with a private placement offering as the simplest way to raise the capital. Often this is done amongst the organizing group plus a few outsiders. The amount of capital required is dependent on the business plan approved. Typically, the regulators will require additional capital above the purchase price of the target bank to ensure that the new business plan has enough capital to succeed.
Once the capital has been transferred to the sellers of the bank, the doors may open “under new ownership.”
This is just a broad overview of the bank purchase process; each deal has unique circumstances that must be addressed. These circumstances could be legal in nature and involve counsel. Others are small details that can be easily overlooked by organizers. De Novo Strategy, Inc. has the experience and dedication to make the bank purchase project a reality and to help with every step.
Sanderson
State Bank, Sanderson, Texas, was closed today by the Texas Department of
Banking, and the Federal Deposit Insurance Corporation (FDIC) was named
receiver. To protect the depositors, the FDIC entered into a purchase and assumption
agreement with The Pecos County State Bank, Fort Stockton, Texas, to assume all
of Sanderson State Bank's deposits, including those that exceeded the deposit
insurance limit.
Sanderson
State Bank's sole office will reopen on Monday as a branch of The Pecos County
State Bank. All depositors of the failed bank will automatically become
depositors of The Pecos County State Bank. Deposits will continue to be insured
by the FDIC, so there is no need for customers to change their existing banking
relationship to retain their deposit insurance coverage. Customers of the
failed bank should continue to use the same banking location until they receive
further information from The Pecos County State Bank.
Over the
weekend, depositors of Sanderson State Bank will have access to all of their
money by writing checks or using ATMs or debit cards. Checks drawn on the bank
will continue to be processed. Loan customers should continue to make their
payments as usual.
As of
December 3, 2008, Sanderson State Bank had total assets of $37 million and
total deposits of $27.9 million. The Pecos County State Bank agreed to assume
all of the deposits for a .55 percent premium. In addition to assuming all of
the failed bank's deposits, The Pecos County State Bank will purchase approximately
$3.8 million of assets, and have the option to purchase owned premises and
equipment. The FDIC will retain the remaining assets for later disposition.
Customers who
have questions about today's transaction can call the FDIC toll-free at
1-866-782-1766. This phone number will be operational this evening until 9:00
p.m., CST; on Saturday from 9:00 a.m. to 6:00 p.m., CST; on Sunday from noon
until 6:00 p.m., CST; and thereafter from 8 a.m. to 8 p.m., Central. Interested
parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/sanderson.html.
The FDIC
estimates that the cost to the Deposit Insurance Fund will be $12.5 million.
The Pecos County State Bank's acquisition of all the deposits was the least
costly resolution for the FDIC's Deposit Insurance Fund compared to
alternatives. Sanderson State Bank is the 25th bank to fail in the nation this
year, and the second in Texas. The last bank to be closed in the state was
Franklin Bank, SSB, Houston, TX, on November 7, 2008.