In thinking about small banks like those presented above, experience tells us several things.
1. Some of these banks are perfectly happy with the status quo—earnings are good and the reality of their size limitations has not yet set in.
2. Some of these banks are concerned about how to survive in the future, but have not focused on what to do or when to do it.
3. Some of these banks have run out of gas (and young bankers, owners, customers, etc.) and are truly desperate to get out of town before the bottom falls out.
In time, we believe that almost all small banks will have to consider their strategic options because of size and the increasing expense of compliance and security. Most observers think that survival requires at least $500 million to $1 billion in assets to have the scale to profitably cope with the upcoming changes in demographics and technology. In the meantime, though, figuring out which banks are in the second or third bucket and willing to consider a sale, can seem like a huge hurdle or challenge.
Since I was a hurdler in college, it’s safe to say that I like hurdles. So for the sake of this article, let’s just assume that we clear a major hurdle and identify a few small banks that are willing to sell – an outcome borne out many times in my professional experience. If one such bank can be found, why then should you consider this as a viable option?
We understand that an existing bank might not fit every potential de novo banker’s business model. However, there are a number of compelling reasons to at least consider it as a viable alternative.
1. Buying an existing small bank can be much faster than chartering a new bank – 60 to 90 days compared to six to nine months.
2. The price of a new bank, especially one in a rural area, is relatively modest, so you should not pay for a large amount of blue sky or create a lot of goodwill on your balance sheet. The premium paid would roughly equal the cost of organizing a new bank plus the operating losses for the first 18 months.
3. Existing banks are usually already profitable, so there is no 18 month start-up loss period.
4. An operating bank already has a “back office,” complete with a technology provider and an existing team of people who are operating the bank.
5. Location is not an issue. A bank that is located in a rural area of the state can be moved. As part of your acquisition, you can branch or relocate the headquarters to the market you want to serve. Of course, care must be taken to continue serving the bank’s existing market area.
6. Most rural banks have low loan to deposit ratios, so they have ready funds to lend, allowing you to execute your business plan more quickly. Since building deposits and liquidity is a major problem for new banks, existing banks usually have a viable market presence and a proven ability to generate deposits for you to lend in other markets in the future. In fact, the cost of funds in a rural market is usually significantly lower than the cost at a metropolitan bank.
Although my cat-loving mother-in-law hates it, most of us have heard and maybe even quoted the Mark Twain idiom “there is more than one way to skin a cat.” Of course, when it comes to cats, none of the outcomes are favored by the cat kingdom or my mother-in-law. However, in talking about banking, it makes a great point in that there is always more than one way to accomplish a desired result.
If your desired outcome is to open a new bank in your market, you should consider the option of short-cutting the de novo process by acquiring a small bank. In fact, since some of the de novo and acquisition steps are identical, pursuing both avenues at the same time (up to a certain point) can ensure that you will not be guilty of trying to leap across a chasm in two jumps. That, my friends, is one of the most dangerous, and expensive, places you can find yourself in.