Many start-up banks have integrated the ability to own stock within an IRA into their money raising efforts. As a result, many report funding up to 25 percent of initial capital through the sale of community bank stock. With bank stock returns often averaging in the double digits and sometimes more, this can also be a good investment option for investors. Frequently, investors are the ones inquiring about their ability to invest with their retirement accounts. Banks tend to welcome retirement account funds because investors might have longer investment time horizons and, therefore, will allow the bank the requisite time to turn a profit and return shareholder equity. Historically, because bank stock has offered stable, solid performance over time, individuals who invest in the small bank sector often continue to do so repeatedly.
Find community bank stock opportunities
Investors who are interested in this option can learn more about community banks in formation through the Department of Financial Institution’s (DFI) Web site for their particular state. Every state has a DFI site; California’s, for example, is www.dfi.ca.gov. The DFI offers newsletters and other information on state chartered banks. The FDIC also offers information on their Web site for federally chartered banks, www.fdic.gov.
Contact the bank
Once opportunities for investment are identified, the investor can contact the bank for the offering circular, information on capital raising meetings and/or private presentations. He or she can perform proper due diligence by looking at factors such as sector, how banks in that area have typically performed and demographics of potential depositors. A solid, experienced management team is also a plus. Start-up banks are subject to state and federal regulation, as mentioned, which includes a fairly rigorous pre-opening approval process, further reducing the possibility of impropriety. The process by which banks are judged and opened is unlike any other business model, and this transparency assists investors’ evaluation of their own risk. In some cases, the bank may enlist an IRA custodial firm to help retirement account investors complete their transactions.
Find a custodian
The investor will find a self-directed IRA custodian capable of handling alternative investment transactions. The custodian will educate the client on how to open an account, transfer funds and, ultimately, make the investment into the de novo bank. The new account process is no different than the process most account holders go through the first time they open a retirement account. Most custodians require that the investor show photo identification, pay establishment fees and complete new account packets before an account number can be assigned.
Although more and more firms are beginning to offer expanded investment options, investors may still have to spend time locating one that will allow them to invest in a full complement of “alternative” investments. Investors interested in finding a firm specializing in these transactions should ask their financial advisor and/or de novo bank contacts for recommendations. They can also perform Internet searches and research the companies through articles written in the mainstream media on this topic and the respective Web sites of the companies. Finding a capable self-directed IRA custodian with years of experience, direct experience in de novo bank stock transactions, a consistent track record and a wealth of expertise are the most important factors for investors to examine. Private bank stock is a multi-step process that requires familiarity with the process of the bank, retiring custodian and the individual client/investor. Financial institutions that handle “alternative” assets do not provide investment advice; that is why it is referred to as a self-directed account. Still, the custodial firm’s staff will normally help investors with some of the more technical aspects of IRA and qualified retirement plan rules and regulations, as well as the ins and outs of alternative assets to make the process easy for the investor and the bank.
Transfer retirement funds
Once an account number is assigned, the transfer process can begin. Upon completion, execution and furnishing of the most recent statement from the account the client wishes to transfer, the transfer paperwork will be submitted to the resigning custodian. This part of the process can be especially lengthy but with a proper custodian, transfers are greatly simplified. In general, account holders are instructed to liquidate, making available the cash desired to invest in the de novo community bank stock.
Once the funds reach the custodian, the investment can be made shortly thereafter. The new custodian will have already pre-approved a particular bank’s offering circular. The document approval is restricted to a cursory administrative review, as opposed to a due diligence review, to ensure IRA guidelines are met. Once the offering circular is approved, each individual self-directed IRA investor is only required to deliver the subscription documents for the de novo bank. Generally, banks use an escrow bank while they are raising capital, ensuring that funds are collected and counted to meet the bank’s minimum capital requirements. Once the minimum capital is met, the bank will go through a final approval process by the governing regulatory body. When the bank is approved and money is released, the bank registers stock in the name of the self-directed IRA custodian for the benefit of the self-directed IRA investor.
For those individuals interested in expanding their options when it comes to saving for retirement, community bank stock offers the potential for long-term growth, greater diversification and the ability to give back to the community. Because of its solid, stable performance, many investors often come back to the community bank for stability and returns. For more information on this subject, read Investing in a Community Bank with a Self Directed IRA.