POST OF THE DAY
Community Banks, Like Dandelions
Board: Liquid Lounge

Related Links
Discussion Boards

By Tiddman
June 6, 2007

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

A few years ago (as far back as 2001 in fact) I posted questions here and on other boards asking about this phenomenon of local community banks popping up, growing like crazy for a few years, and then getting bought out at huge premiums.

Since then, I've watched bank after bank start out with $10-30M of seed capital, use that to quickly establish a deposit and loan base, then grow these at insane rates (often as high as 50-60% CAGR) for 5+ years, all the while generating ROE's in the 18-25% range, and then sell themselves to a larger bank for usually more than 3x book.

Around 2001-2003 the first few times I saw this happen, I thought it was an anomaly, perhaps explained by either the sharp yield curve, or some updraft in commercial banking caused by the dot com boom.

Well here we are 5 years later, and it is still happening. Banks are popping up like dandelions, and as soon as execs sell their amalgamation of 10 or so branches to a major, they turn around and do it again. Just in my geographical area (northern Virginia) there have been dozens of deals made and banks started. For instance:

http://www.prwebdirect.com/releases/2006/10/prweb453786.php

Just to pick a few in my area, there is ANCX, SONA, ABVA, and FDVA. There are more -- many more. These are just a few that seem to be following an incredible growth trajectory, with a smug business plan of selling out about 5 years after inception. There is a gold rush feel to the whole thing -- large numbers of people are making themselves millionaires by doing nothing more than starting local banks and selling them.

I'm really mystified by this phenomenon, partly because it seems like such easy money. Why not buy any of these banks at 1.3-1.6x book, wait a few years, and get bought out at 3x book? Return on investment should be 15% CAGR at a minimum, or perhaps much higher. ABVA for example is growing their deposit and loan base at 40-60% CAGR.

I would love to get some comments from the folks here to help explain how it is perpetually possible to start and grow these banks so quickly, and why the majors are constantly willing to pay > 3x book for little chains of branches that all seem to be offering the same products and services...

T

 


Become a Complete Fool
Join the best community on the web! Becoming a full member of the Fool Community is easy, takes just a minute, and is very inexpensive.