SNL recently published an article discussing the FDIC's new policy change on de novo banks. In "Extending Bank's Adolescence," author Christina M. Mitchell writes, the "change effectively extends adolescence for young banks, lengthening the period of increased regulatory supervision required for de novo institutions in a move that industry observers say will heighten the already considerable barriers to opening new banks." Over the past few years, the regulators have nearly shut down the flow of de novo bank openings with a drastic increase in regulatory scrutiny. As the regulatory approval timeline continues to increase, the capital requirements and start-up expenses of opening a bank have climbed significantly. These challenges are keeping many potential investors on the sidelines, and too few of them are looking for other opportunities to enter the banking industry, such as Buying a Bank.To read Ms. Mitchell's full article click on the link: Extending Bank's Adolescence.
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.
Acquiring a bank with an eye on making an impact in underserved customer groups
Bank investors and organizing groups know that to be successful in today’s environment, a different type of strategy is required. Acquiring a financial institution with an unhealthy balance sheet and anemic profit potential taps more than investors’ wallets; it can tap their creativity too. One challenge lies in developing a business strategy that can win, and keep, new customers.
Lena Robinson, of the Federal Reserve Bank of San Francisco, identifies four areas of untapped customer potential for the banking industry: the unbanked, underserved, emerging and immigrant markets. Unbanked consumers are those who have no existing banking relationship. Underserved consumers maintain only a checking account. Emerging consumers who use minimal banking products, but could be ready for more sophisticated debt or investment services. And immigrant consumers are generally migrant workers who have historically been unresponsive to traditional bank marketing initiatives. All of these segments represent opportunity for a newly acquired bank to create value. (http://www.frbsf.org/publications/community/investments/0311/article1.html)
Rewriting the rules
The FDIC’s survey on banks’ efforts to serve unbanked and underbanked consumers, published in February, indicates that addressing these segments efficiently has long been a problem for the banking industry. (http://www.fdic.gov/news/news/press/2009/pr09015.html) Unbanked consumers are hard to locate and not generally interested in traditional banking products and services. Underserved, emerging and immigrant consumers may be more open to the idea of banking, but they have often have little money and minimal interest in borrowing. Those two characteristics are problematic for the traditional banking business model, which emphasizes deposits and lending.
Because these untapped segments aren’t well addressed by traditional banking operations, efforts to court them must take a different approach. This approach should:
• Clearly identify the wants, needs and aspirations of customer being targeted
• Involve the creation of specialized products and services that match those customer needs, and distribution channels to match those customers’ lifestyles
• Incorporate innovative outreach programs to establish lines of communication with those target customers
• Find a way to develop trust among consumers who may be leery of financial institutions in general
• Consider the development of new ways to measure creditworthiness; consumers in untapped segments may not “pass” traditional credit tests
• Address the profit challenge associated with serving customers who aren’t likely to produce large deposits or request large borrowing facilities
In the introduction to Untapped: Creating value in underserved markets, (http://ca.csrwire.com/pdf/Untapped-excerpt.pdf) authors John Weiser, Michele Kahane, Steve Rochlin and Jessica Landis recommend businesses focus on creating win/win situations—where value is generated for the community and for the business. They also argue that it’s important for businesses to create strong partnerships with other organizations that can bring new insights and knowledge to the outreach effort.
As the banking industry continues to evolve through this period of change, new management teams and investors have the opportunity to create a new kind of value. To date, the banking industry has struggle to realize the potential in these segments—but if there ever was a time for change, it is now.
Next week, we’ll discuss specific geographies where these underserved groups are likely to exist, as well as how you can use that information to target your bank acquisition search.