Essential Steps to Buying a Bank for Sale
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
About 98% of Americans have some kind of bank account, and banks in the US collectively hold about $3 trillion in customer assets. Banking is one of the world's most profitable industries, and banks are the consumer-facing side of the financial industry.
As such, sophisticated investors may eventually throw around the idea of buying a bank for sale. And while buying a bank for sale is absolutely a possibility, the process of doing so is complicated and requires much in the way of time, money, and effort.
Here, we'll cover what commercial real estate investors should know about buying banks for sale. We'll cover costs, approval processes, revenue, and profitability.
Let's get started.
What's Needed to Buy a Bank for Sale?
Banks are some of the most heavily regulated businesses in the nation, and opening a bank requires a significant amount of paperwork, permits, and licenses. If you're trying to buy a bank, you'll first need to create a bank holding company (BHC) and register it with the Federal Reserve. This approval process can take up to a year.
Once the Federal Reserve approves your BHC, you can approach sellers and negotiate a deal. Any purchase will be heavily scrutinized by the Fed to ensure your BHC has the appropriate funds and follows banking regulations. We highly recommend working with an attorney on your investment team to ensure due diligence with all legal requirements.
How Much Does It Cost to Buy a Bank for Sale?
It depends on the type and size of the bank. Small, local banks for sale will most likely cost an average of about $12 million to buy outright. Larger, regional banks will usually fall somewhere in the range of $20 to $50 million, while the largest commercial banks can easily cost hundreds of millions to buy.
The two methods that exist to assess a bank's real estate financials are its book value and price-to-earnings ratios. The book value is the value of all the bank's tangible assets as reflected in its financial statements.
The price-to-earnings ratio is the price of the bank's stock divided by its total earnings. These two metrics can help you properly assess value when buying banks for sale, so you can bring that knowledge to future sales negotiations.
As with most things in commercial real estate, having an experienced real estate broker in your corner can make buying a bank much easier. Brokers understand the dos and don'ts of buying commercial property and can take the lead in correspondence with sellers.
Costs to Build a New Bank
It's generally easier and more straightforward to purchase an existing facility than it is to build one from scratch. The same is true with banks: Starting a new bank will often require far more in the way of financing and time, as you'll have to worry about buying land, financing construction, and establishing a brand identity.
The costs of land acquisition alone may prove to be a significant obstacle in your journey to building your own bank. Land costs vary heavily from state to state, and banks are usually more hesitant to offer land loans due to the elevated risk.
Commercial construction costs average about $313 per square foot, and with an average bank branch size of 3,400 square feet, you're looking at an absolute minimum of $1 million in construction costs.
However, the real difficulties will be found in regulatory hurdles. Starting a new bank requires obtaining a bank charter from the Office of the Comptroller of the Currency (OCC) and acquiring deposit insurance from the Federal Deposit Insurance Corporation (FDIC). You can start operating your bank only after you get approval from these two agencies, which could take anywhere between one to two years.
How Much Money Is Needed to Run a Bank?
Non-interest operating costs for the average commercial bank come out to about $5.5 million a year. The typical bank spends about half of its operating budget on employee compensation (e.g., wages, benefits, insurance, etc) and about 16% on real estate and other fixed assets.
The remaining third consists of corporate overhead, legal & accounting, information technology, consulting fees, and building upkeep.
Bank Reserve Ratio
In bank terminology, the reserve ratio is the total amount of liquid capital a bank is required to keep on hand to pay its depositors. Banks base their reserve ratios on total deposits, so a 10% reserve ratio on $1 billion in deposits would be $100 million.
In March 2020, the Federal Reserve set the effective reserve requirement for US banks to 0%, meaning banks are not required to have any reserves to loan money. Before 2020, federal reserve requirements were 10%.
How Profitable Is Owning a Bank?
The only real job a bank has is to turn its money into more money. That means charging and collecting interest from the mortgages, auto loans, personal loans, credit cards, and other sources of debt they provide. Banks take money from their customers, loan it out, return the money to their customers' accounts, and take the profit.
According to data collected by NYU, the average regional bank makes a gross profit margin of nearly 99% and a net profit margin of about 30%. Given that average business profit margins across all industries come in at about 9%, banks perform significantly higher than the average business.
How Hard Is It to Own & Operate a Bank?
Owning and operating a bank requires a lot of specialized knowledge, long-term planning, patience, and motivation to get through the lengthy approval process. Banks also demand significant startup costs, meaning the idea of starting your own bank is usually out of reach for first-time commercial property buyers.
However, a bank could be an interesting asset for an experienced and accredited special-purpose real estate investor who wants to try their hand in the high-margin financial services industry.
A smart investor could potentially make a lot of money from buying a bank for sale, provided they can keep up with the industry's financial and regulatory landscape.
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