A custodian for individual retirement accounts has been making the rounds of investor meetings of would-be banks, and persuading many attendees to invest in the start-ups through their IRAs.
As a result, banks-in-organization such as Pacific Coast National Bank in San Clemente, Calif., are raising money far faster than they might have otherwise.
Trust Administration Services Corp., which administers and acts as a custodian of self-directed IRAs, has helped more than 40 southern California banks-in-organization raise millions in capital over the last three years, according to James Wagner, the firm's chief executive.
Investors can either open a new IRA with his company and include the start-up's stock in the account, or transfer existing IRAs that have other investments as well, to Trust Administration Services, a unit of the $1 billion-asset First Regional Bank in Los Angeles. (Trust Administration is in Carlsbad, Calif.)
Investors have been able to invest in a bank start-up through their IRAs for years, but the practice is becoming more common, Mr. Wagner says.
"The growth rate of start-up banks is really good - and a lot less risky than investing in, say, software companies," he said. "And all of the growth in the stocks of these banks is tax-deferred" since the investments are in an IRA.
About 25%-30% of the capital raised by the start-ups his firm has helped has come from investments in IRAs, Mr. Wagner said. For example, of the $22 million Pacific Coast has raised, $4.5 million has come from IRA investments by attendees of Pacific Coast's fund-raising seminars.
Colin M. Forkner, Pacific Coast's CEO, said Trust Administration Services has helped the organizers raise capital relatively quickly. Pending another examination by regulators, Pacific Coast can open in April, much earlier than it had expected.
"They really simplified the process for investors," Mr. Forkner said. "Without their help investors would have taken a much longer time doing this, and many would have never got it done at all."
First Vietnamese Bank, a bank-in-organization in Westminster, Calif., has raised "far above" the minimum $11 million approved by regulators. A good deal of that money came from IRAs through the help of Trust Administration Services, said Hieu Nguyen, the bank's president and CEO.
Mr. Nguyen invested in First Vietnamese through his IRA. He said he initially wanted to keep the account with Citigroup Inc.'s Smith Barney, liquidate the account's investments, and have Smith Barney reinvest the money into his bank's stock. Smith Barney was reluctant to do that, so Mr. Nguyen transferred his IRA to Trust Administration Services.
More and more banks in organization are actively promoting the use of IRAs, said Dan Hudson, the CEO of NuBank, a consulting firm in San Luis Obispo, Calif.
"This is a good alternative for those investors who say, 'I'd really like to invest, but I don't have the cash,' " he said. "Most people already have an IRA account somewhere, and so they can liquidate other investments in that IRA and invest in a bank stock instead if they want."
Mr. Hudson is one of several bank consultants who arrange to have Trust Administration Services attend investor seminars. He said the custodian will be at meetings in Dallas this month and in New York sometime this year for clients trying to open banks in those cities, Mr. Hudson said. Additionally, many bank organizers have contacted the custodian directly.
Pitching potential investors in start-ups has been good business for Trust Administration Services, which generates income for First Regional by charging investors administrative and custodial fees.
Revenues have increased about 30% each year since his firm started attending the investor seminars at banks-in-organization, because many investors have transferred IRAs with large balances from other custodians to Trust Administration Services and then invested in the new bank's stock.
Jack A. Sweeney, First Regional's CEO, said that on top of getting fee income from the custodian, First Regional gets a boost to its deposits; after investors liquidate their existing IRAs they hold the money in money-market accounts at First Regional until they are ready to reinvest in start-up bank stocks and other investments.
Mr. Sweeney said he does not think helping other community banks open gives him more competition, because he does not view the start-ups as competitors.
