Bank Purchase Basics: Top Ten Topics When Buying a Bank

From the broadest perspective, you could say buying a bank is like buying a car: you pick the one you want, kick the tires, and then make an offer. But because banking is a highly regulated industry and a bank purchase is never accomplished by one person alone, the sales process tends to get complicated and very time consuming.  Many factors, like the experience level of those spearheading the project, can create success or cause failure.

Here are ten hot topics to address when moving forward on a bank purchase project.

Organizers

Diversity is a key quality of an effective bank organization team. When selecting organizers, you should be mindful of compiling a broad cross-section of knowledge and networking power. Your organizers should come from different business backgrounds and various professions. Of course, the target size of your group limits the amount of diversity possible. But if you are building a group of ten organizers/directors, for example, you may want to maximize the knowledge base by selecting individuals from ten different backgrounds.

Capital

Your organizers have to be connected well enough to be able to raise an appropriate level of capital. The exact amount of money needed will vary based on a number of factors, including the bank size, the composition of the organizing team, preferences of management and, of course, the business plan. The regulatory environment is a factor as well, particularly in this post-financial-crisis era. An average range might be $14 to $18 million.

Management team

The executive management team consists of three individuals:

1.    President/Chief Executive Officer
2.    Chief Financial Officer/Cashier
3.    Chief Lending Officer/Chief Credit Officer

Make these choices carefully. Extensive banking and management experience is a prerequisite for all three positions.

Business plan and application

The application process for purchasing an existing bank is similar to that required when establishing a new bank. Essentially, regulators want to know every detail about your group’s plans for the bank once the acquisition is finalized. Communicating these details is no small task; a completed application may be 2,000 pages or more in length. A wrong word or unclear explanation can cause confusion among regulators, which creates delays in the approval process.

In our experience, the production of an acceptable bank application requires extensive collaboration between De Novo Strategy, the organizers, management team and legal counsel.

Board Training

Before the bank changes hands, the Board of Directors must undergo extensive training to learn their duties and responsibilities as directors.   

Time commitment

The organizers and Board members must be prepared to devote an appropriate amount of time and energy to direct the acquisition and, later, the bank. You can expect your team to put in five to twenty hours per month on the bank project.

Market research

No assumptions can be made about the market or competitive dynamics. Market research must be completed to ensure that the business plan is realistic and the bank’s goals are achievable, given the constraints of its resources.

Location

The organization team should address the bank’s location: Is it appropriate? Is the branch large enough to support the bank’s five-year growth plan? Can the community both support and benefit from the bank’s operations, as defined in the business plan?

Products and services

It’s likely that the product and service set offered by the existing bank isn’t optimal. A careful review of profit potential of each product offered will be necessary. As well, those products need to be analyzed in terms of the needs of the local market.

Pre-opening Expenses

Pre-opening expenses are funded out of pocket by the members of the organization group. A typical pre-opening price tag is approximately $75,000 per organizer or more. The group will need to decide how to collect these funds; this is often done in three or four equal payments, spread out over the first six months of the project.