De novo Digest: Investors enticed by IRA options Read More

Courtesy of SNL Financial
By Bree Fortney

More and more people are investing in de novos using self-directed IRAs. This is a growing trend that industry experts say is allowing community banks to attract a different demographic of shareholders and build larger customer bases.

Using IRA funds to invest in a de novo is not a new concept; for many years potential investors have put their retirement funds toward bank stocks rather than using more liquid assets. Bankmark, a consulting firm that assists organizers in starting new banks, has used IRAs to help fund de novos for 27 years.

Dan Hudson, president and CEO of Bankmark, told SNL Financial that while the use of IRA funds has been around for awhile, there has definitely been a growing popularity in this strategy. As banks are required to raise more startup capital, they will need to find different sources of funds, Hudson explained. As such, the number of banks offering this investment option will progress partly out of necessity, and partly out of awareness.

James Wagner, president and CEO of Trust Administration Services, told SNL that the need for capital will push more banks in organization to offer IRA investment options. "This is a welcome, additional way to earn capital," Wagner said, adding that as the idea becomes more apparent, the trend will likely increase.

Trust Administration Services assists de novos in raising capital, and is currently collecting approximately 20% to 30% of subscriptions through IRA funds. Within the last six months, Golden Valley Bank, Sutter Community Bank, Carson River Community Bank, Promerica Bank and Gold Coast Bank have all received investments from self-directed IRAs, through the assistance of Trust Administration Services.

Trust Administration also recently worked with Capital Bank of New Jersey, which said earlier in March that it increased the amount of startup capital it plans to raise due to greater-than-expected investor interest.

The use of self-directed IRA funds is not limited to bank stocks, but also is open to real estate, limited partnerships and many other types of assets, said Hugh Bromma, CEO of Entrust Group, a provider of account administration services for self-directed retirement plans.

Where a traditional IRA limits an individual to invest in a select group of assets, like stocks, bonds, or mutual funds, self-directed IRAs give the account owner control to make investment decisions and permit investments in nontraditional items. According to some, a self-directed IRA also provides more flexibility than a traditional IRA, allowing account owners to respond to changes in the financial markets and diversify their funds.

Bromma told SNL that the use of self-directed IRAs is definitely growing. "Our business is more than five times what it was in 2003, so there is huge growth," Bromma said, explaining that customer awareness is pretty low in regard to using self-directed IRAs to invest in bank stock, so there is only room for an increase.

While it is possible to use self-directed IRAs to invest in private stock, many banks choose to go public, therefore allowing investors to put their money toward public stock.

Not all institutions are ready to face those regulatory challenges, but some are more than confident that this path is the key to success. Oshkosh, Wis.-based Choice Bank raised $21.6 million in startup capital and opened for business in July 2006. When determining an investment strategy, CEO Keith Pollnow told SNL that the bank had two options ? it could use the "country club model" and get "a whole bunch of buddies together to write very large checks," or it could engage the community.

Choice Bank opted for option two because it wanted to have a large group of shareholders. Allowing investors to use their IRA funds helped enable the bank to attract 1,200 shareholders.

"The IRA investment is, of course, a long-term mechanism for savings. And the investment into a community bank stock certainly is looked at, and certainly is, a long-term investment. So it really fits together rather well," Pollnow said.

The executive said that other de novo bank groups in Wisconsin that are beginning the startup process have talked to Choice Bank about IRAs because "they feel it's a key to their success also."

Vincent Fazio, CFO of Canajoharie, N.Y.-based Patriot Federal Bank, also praised the results of allowing investors to use retirement funds. The executive told SNL that the bank raised about $8 million in capital, with more than $1 million coming from IRA funds.

Banks and shareholders alike benefit from the self-directed IRA strategy. Pollnow said that from a risk standpoint, de novo banks across the nation have had an extremely high success ratio, "so that would give the investor with the IRA money a sense of confidence versus some of the other marketable securities that they want to invest in with their retirement dollars."

Using IRA funds may become more popular, but Bankmark's Hudson said that this investment tool will not change the total number of de novos out there. "It's not going to change the number because the regulators control the number. The access of funds doesn't control the number. The benchmarks to get your charter are raising the bar everyday, so if the group can get as far as permission to organize, then this just becomes another vehicle for them to get there sooner rather than later."

What the rise in IRA funds will do for de novos is likely attract different types of investors who previously did not have the ability to invest, like professionals or small business owners who have not acquired great wealth yet, Hudson said.

Pollnow also commented on the various investors interested in Choice Bank. "People come to your investment sales meetings that you hold, and once you mention that there are IRA opportunities, you open it up to the whole audience. Immediately, everybody has a chance."

In the case of Frankfort, Ill.-based Town Center Bank, investment opportunities were opened to the younger generation. The company raised more than $21 million in capital stock from 925 investors, opening in September 2006.

CEO Andy Bernhardt told SNL that the bank had a desire to have a lot of shareholders and set its minimum investment with attracting "younger" shareholders in mind. Knowing that the majority of younger investors had their money in retirement funds, the bank wanted to find a way to make its stock attainable.

Phoenix-based Sonoran Bank NA used IRA funds as well and attracted a mixture of investors. CEO James Vigars told SNL that out of the total number of investors, approximately two-thirds of the people were "older," and one-third "younger." As for the total dollar amount, Vigars said that about 22% of its capital was raised through retirement account money.

While existing de novos have been successful with their capital raises and use of IRA funds, new banks are hopeful for similar results. Mark Martinez, regional president and senior lending officer of the proposed Lakewood, Colo.-based Solera National Bank, told SNL that the de novo recently began its capital raise with the goal of raising between $20 million and $24 million.

Making the decision to allow investors to subscribe with IRA funds and go public was not one made lightly. Martinez acknowledged that there are disadvantages, such as dealing with Sarbanes Oxley, all of the reporting requirements and the additional expenses. "But there is method to the madness," the executive said.

"There is clearly an upside because the way that we structure the offering ? [will] make the offering very affordable in terms of minimum subscription. And the reason being is that the objective is to have as many public shareholders as possible, versus as few. Raising $20 million, we estimate that we will end up in the neighborhood of 400 to 700 public shareholders. ? If all we do as a financial institution out of the gates is successfully penetrate that shareholder base as depositors, we've hit a homerun."

If everything stays on track, Martinez said that the bank is expected to open in June.