A de novo bank veteran shortened the runway of the launch of his third banking venture by purchasing and recapitalizing Michigan-based First State Bank of Decatur to secure quicker regulatory approval.
Traverse City, Michigan-based bank holding company GTSB Financial acquired First State Bank of Decatur in a deal first announced April 10 and then closed on Oct. 30. The acquisition recapitalized First State of Decatur, Michigan's oldest bank charter and an institution in need of a liquidity injection and a succession plan, and expedited Gregg Bigger's path to starting a bank.
The "hybrid" qualities of the deal structure, which included both an acquisition and a recapitalization, helped facilitate the regulatory approval process, according to GTSB Financial's deal advisers, Greg Cunningham and Andrew Christians of Donnelly Penman & Partners Inc.
The two entities put together a business plan that regulators "couldn't figure out how to find an objection to," First State Bank of Decatur deal adviser Charley McQueen of McQueen Financial Advisors II Inc. said in an interview.
Another option
After successfully running two de novo banks in Santa Barbara, California, Bigger relocated to Traverse City and submitted a de novo application under the name Sovereign Bank in May of 2022, according to FDIC records. But after connecting with First State Bank of Decatur executives, he withdrew the de novo application in October of 2022.
Bigger, who is GTSB Financial's CEO, saw a path to owning a bank without the "brutal" regulatory process of opening a de novo bank. Through acquiring First State Bank of Decatur, he could accelerate the timeline and cut organizational expenses compared to what is necessary to establish a de novo.
"We spent about half the amount of risk capital buying the bank than we would have trying to start the bank from scratch," Bigger said in an interview.
Under the merger agreement, First State Bank of Decatur will continue to operate as it did before, but with a new board appointed by Bigger, who is its chairman. The 154-year-old bank's CEO, James Creagan, will retire in the near future but continues to run the institution until he decides to step down.
Bigger also filled GTSB Financial's board, which will oversee the creation of multiple uniquely branded banks across the state. The first will be located in Traverse City. Bigger plans to seek regulatory approval to offer full banking services there under the name Grand Traverse State Bank in early 2025 with a goal of being operational by June 2025.
Bigger said the next market will be Detroit, where he wants to establish a bank with a new name offering digital and fintech services. Bigger estimates he will begin the process of building out the Detroit bank in the second half of 2025.
"Grand Traverse State Bank is a great name, but it won't work in Detroit, you need to have something that's more Detroit-centric," he said. "When the regulatory environment changed to allow for naming these [banks] as wholly owned divisions, we thought that by looking and feeling more present in the communities in which we serve, having advisory boards under our board of directors in those areas, would help us understand these markets at even a greater level."
Unusual structure
GTSB Financial raised $14.5 million as per the definitive agreement to acquire First State Bank of Decatur, but the raise was extended to the end of November, with the option to extend through the end of 2024, Bigger said. The firm has reached $14.5 million and will most likely not raise more than $18 million, he said, adding that the capital raise should be enough to sufficiently recapitalize First State Bank of Decatur and satisfy all regulatory ratios.
In the transaction, the acquirer is effectively recapitalizing First State Bank of Decatur through a tender offer, which has an easier path to regulatory approval than an acquisition in which the bank is dissolved, McQueen said.
Donnelly Penman & Partners structured the capital raise needed to purchase First State Bank of Decatur as if it was a de novo capital raise. This is the first deal of this structure to be successful for the adviser, Cunningham and Christians said.
Similar deal structure approaches could be put to use in the future to side-step the FDIC's scrutiny on de novo banks, McQueen said. The amount of fundraising needed to start a bank, and the accessibility of recapitalization funding are both hurdles that many de novo organizers cannot clear, depressing the number of new banks opening each year in the US, he added.
"I do think that the regulatory agencies deserve some recognition and credit," Christians said. "All the regulatory agencies that were involved in the review and ultimate approval of this transaction, I think we were all very helpful in doing so, especially given the circumstances of it being relatively unique."