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More fintechs could follow Jiko's lead buying 'vanilla' community banks

Fintech Jiko Group Inc. recently purchased a small community bank in the Midwest. Observers said the tie-up makes sense and could be a harbinger of deals to come.

While some fintechs have opted to partner with banks or establish bank startups, Jiko chose to purchase an existing lender outright, in the process cutting some of the time and expense related to setting up a de novo. As Jiko CEO and co-founder Stephane Lintner told S&P Global Market Intelligence: "A bank comes with processes and supervision already in place. It was a very smooth and incremental path."

The target of Jiko's deal was Mid-Central National Bank, a Minnesota-based bank with about $124 million in assets, the right size for the fintech's ambitions.

"While there are over 6,000 banks in the U.S. ... most have assets over $500 million, with price points in the $50 million or more range, and branches and complex balance sheets," Lintner said. "This bank was small enough to fit into a series A round of funding."

Mid-Central came to Jiko's attention in part because one of the fintech's investors and co-founders had owned a stake in the bank for more than 25 years. "So what started as a friendly exploration turned into a mutual decision to merge and lead us to where we are now," Lintner explained.

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There can be strategic benefits to buying a bank like Mid-Central, which has a national charter and received an 'Outstanding' rating in its most recent Community Reinvestment Act examination.

Mid-Central has a lower Texas ratio, which measures the risk of bank failure, than the median for a group of 20 nationwide community bank peers selected by S&P Global Market Intelligence. But it also has a lower return on average tangible common equity before tax, a lower loan growth rate and lower net interest margin, and a higher efficiency ratio and net charge-off ratio, compared with the peer group median.

"When you look at this acquisition, the thing that stands out is the bank that they acquired is pretty vanilla," said Lane Martin, a partner at Capco, a management and technology consultancy focused on the financial services industry. "The bank is not overwhelmingly large. They have a solid and stable relationship with regulators established. They've got basic online banking functionality."

Martin said the bank's relationship with regulators was likely a large part of what made it an attractive target. "They have a great reputation with the regulators in the OCC, and they're nationally chartered, which is a big deal," Martin said. "So I think the regulatory angle here — when they're valuing the acquisition, that's probably No. 1 or No. 2 on the priority list with respect to why they would acquire the bank."

The acquisition received approval from the OCC and the Federal Reserve Bank of San Francisco. Jiko's CEO described the regulatory process as "friendly and thorough, therefore, lengthy."

"In our case, the balance sheet concerns were not there, since all securities are fully paid off, and all the money accounted for," Lintner said. Jiko's business model is to keep customers directly invested in liquid U.S. government-backed Treasury bills instead of holding customer deposits.

"So the main focus [for regulators] was on the industrial robustness of our technology stack (IT audits, processes, recovery, data resilience) and on our governance. We had to turn our startup into a young bank holding company," he said.

Some observers say the pandemic could make small lenders increasingly amendable to selling. With an acting comptroller at the helm of the OCC who has been vocally encouraging fintech innovation, more firms may follow Jiko's lead in seeking to acquire existing banks and all the infrastructure and regulatory relationships that come with an established company.

"Given the current economic and interest rate environment, there may be some small banks that may want to sell themselves," said Arthur Long, a partner at law firm Gibson Dunn & Crutcher LLP who specializes in bank regulation.

Martin agreed. "I think that we're going to see more [fintechs buying banks], frankly, because the process to do the application in the first place creates a lot of undue pressure for firms without the experience and without the legacy relationship with regulators," he said.