Betting on a Banker's Bank

I have found over the years that one of the most successful investments that one can make is to put a little money in a privately held community bank at its inception.  A common strategy taken during the start up of a community bank is for a group of local investors to acquirer a state bank charter from a small rural bank and then to move that charter to a larger urban area within the same state. Another strategy used to create a community bank is for a group of investors to apply for a de nova state or national charter, while this may allow for clean start it is usually more expensive. Either strategy assures a large return on investment for the original investors.  Community Banks are generally much safer then their larger peers as management is usually more conservative in its lending methodology and does not take positions in opaque financial securities or instruments.    

Typically, the life span of a community bank follows two paths. Both paths start with the bank growing exponentially as it successfully uses the connections and deposits provided by its original investors to fund high return commercial loans. After several years to a decade, the bank will reach $400-500 million in deposits; it is here where the investors will have to make a decision as to whether they wish to remain independent or be acquired by a larger regional bank. In remaining independent, the investors are hoping that the bank’s current management team has what it takes to grow the bank into a competitive but likely smaller regional bank. If they choose to be acquired, they generally see returns of between 200-400% on their original investment and typically receive stock in the acquiring bank. Both paths are extremely profitable but are unfortunately unavailable to the typical retail investor. That is why I find the story of Mercantile Bancorp (MBR) to be particularly interesting.