Why private investors are scooping up small banks

August 22, 2023 10:45 PM

Market volatility and a tougher business environment for banks have established the conditions for private investors to scoop up small banks.

Sometime between Silicon Valley Bank's collapse in March and the private equity-backed purchase of PacWest Bancorp in late July, investors began moving on a number of community lenders that they may have seen as undervalued.

In Texas, separate investor groups are in the process of buying Eden Financial in San Angelo and Farmers State Bank in Shelby County.

In Cheyenne, Wyoming, a local acquirer is purchasing Wyoming Bank & Trust. And in Georgia, a group of unnamed investors from Jacksonville, Florida, is acquiring The Claxton Bank.

Six bank acquisitions that are backed by investors or private equity have been announced so far this year, according to data from S&P Global. That represents a small increase in the pace of such deals from last year and 2021.

So far this year, deals involving private investors make up more than 11% of all bank M&A transactions, which is the highest percentage since 2012, when they comprised more than 8% of all deals, according to S&P Global.

Smaller banks with less than $2 billion of assets, which typically do not have diversified business models, have emerged as the most likely targets of bank acquisitions this year, according to Frank Sorrentino, managing director of the financial institutions group at the investment bank Stephens.

"There's not a lot of levers for these banks to pull," Sorrentino said in an interview. "There's going to be an increasing amount of smaller banks seeking partners."

Here is a look at the six bank acquisitions by private investors that have already been announced this year. The financial terms of some transactions have not been made public.

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Holladay Bank and Trust

The first of these six deals made history.

In late February, a group of investors reached an agreement to purchase Holladay Bank and Trust in Salt Lake City, Utah, in what could be the first time in U.S. history that an existing commercial bank was acquired to be converted into a Black-owned minority depository institution.

The investors that financed the acquiring entity, Redemption Holding Company, include former White House Policy Advisor Ashley Bell; Bernice King (pictured above), the daughter of Dr. Martin Luther King Jr.; and Dhani Jones, a former NFL linebacker.

Holladay is a $68 million-asset bank that held $56 million in deposits at the end of last year. The investor group announced plans to expand the Utah bank's business to provide national lending opportunities.

"Redemption will serve as a lifeline to the next wave of Black and Brown first-time homebuyers and small business entrepreneurs across the country," Bell, Redemption's CEO, said in a press release announcing the deal.

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Southern Bankshares

A summer wave of acquisitions backed by investors or private equity began in June when a group of individual investors based in Jacksonville, Florida purchased Southern Bankshares and its Claxton Bank subsidiary.

The $162 million-asset bank is based roughly 50 miles west of Savannah, Georgia, in the small town of Claxton. Founded in 1941, it serves Claxton and nearby towns including Bellville and Richmond Hill.

"It is a community bank through and through," Southern Bankshares CEO Philip Williams said in a press release announcing the acquisition.

The acquiring investors have not been named, but the deal announcement said that the purchasers have a successful track record in leading and investing in banks.

The deal, which still needs regulatory approval, is expected to close by the end of the year.

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Eden Financial

In July, a group of investors based near Dallas announced a deal to buy into Eden Financial, the parent company of Texas Financial Bank in Big Lake and Del Rio, Texas-based Amistad Bank.

The investor group, Patron Holdings, said that it wanted to support the growth of community banking institutions.

Ned Fleming is serving as chairman of Patrons' board of directors. Fleming is a founding partner of the Dallas-based private equity firm SunTx Capital Partners.

Patrons CEO Conner Price previously held director positions at Security National Bank, Business First Bank and Veritex Community Bank.

"Patrons plans to invest in these organizations and maintain the distinct market flavor and autonomy that has contributed to the banks' historical success," Price said in the deal announcement.

The company's acquisition of Eden Financial is expected to close later this year, pending regulatory approval.

Farmers Bancshares

Later in July, a Texas-based corporation called FSBH Inc. announced a deal to buy Farmers Bancshares and its subsidiary Farmers State Bank in Center, Texas.

Farmers State Bank was founded as a community bank in 1904. The $379 million-asset bank operates five full-service locations and two loan production offices in the Shelby County area.

FSBH was formed for the purpose of acquiring and operating Farmers State, according to a press release announcing the deal.

"This partnership allows Farmers State Bank to remain local and continue to be run by people who are truly invested in our wonderful communities and cherished customers," Luke Motley, board chairman of Farmers State Bank, said in the statement.

The acquisition is expected to close by the end of the year.

Farmers State Bankshares

Earlier this month, Savile Capital Group reached a deal to acquire Farmers State Bankshares, the parent company of Wyoming Bank & Trust in Cheyenne. Savile, which is based in nearby Sheridan, Wyoming, operates wealth management and financial advisory businesses.

The local investors said they were seeking an established banking franchise to grow their business. Wyoming Bank & Trust, a $295 million-asset community lender founded in 1919, has $245 million in deposits and $122 million in loans.

Jeff Wallace, the longtime CEO of Wyoming Bank & Trust, will continue to manage the bank's daily operations, while David Wasitowski from Savile will take over chairman duties.

The deal is expected to close next year.

Eureka Homestead Bancorp

Eureka Homestead Bancorp in Metairie, Louisiana, is the latest community bank that a group of private investors is seeking to acquire.

Founded in 1884, Eureka Homestead is the oldest savings association based in Louisiana. The $103 million-asset bank has operated in the New Orleans metro area since its founding and currently manages a single full-service location.

The investors formed Eureka Investor Group to purchase the bank in a transaction valued at $13 million, according to a press release. The deal is contingent on the purchasers raising $43 million to fund the purchase price and invest in the bank.

The investor group is led by 50-year banking veteran Bob Goldstein and Lisa Narrell-Mead, the CEO of the financial services consultancy Everett Advisory Partners.

Shareholders in Eureka Homestead are expected to receive between $20 and $22 per share in cash consideration, according to the press release.

The sale is expected to close in the first half of next year, pending regulatory approval.