DEAL WATCH: CONNECTICUT BANK BUYS CONTROL OF LOCAL BROKER-DEALER BRANCH; IM&R AFFILIATE IS SECOND IN THREE MONTHS TO TRADE INDEPENDENCE FOR CAPITAL

A small Connecticut mutual savings bank is buying a majority stake in the largest and top-selling branch of independent brokerage Investment Management & Research Inc.

With the investment in John W. Rafal & Associates, announced last week, Essex Savings Bank is placing a big bet on financial planning and investment management for its future profits. The 150-year-old community bank, based in the lower Connecticut River valley town of Essex, has just four branches and $130 million in assets.

The boost to the bottom line from Essex’s 60% stake in Rafal “is going to be very significant,” says Gregory Shook, the bank’s vice president of administration. “It has the potential of making as much as we’re making now.”

John W. Rafal, the sole owner of the Niantic, Conn.-based company, has a 10-year contract to continue running the practice, which supervises more than $700 million for 800-plus clients and will continue its affiliation with Atlanta-based IM&R. He’ll retain a 40% stake.

growth in trust

Mr. Rafal plans to put the bank’s capital to use by establishing a trust department within the next year and hiring four new reps to work out of the bank branches.

Mr. Rafal, 48, says he didn’t feel compelled to sell, given that his 16-year-old firm had revenues of about $3 million in the fiscal year that ended Sept. 30 and is on pace for $4.35 million this year. Moreover, he doesn’t have any debt, and his cash flow is more than sufficient to finance his growth.

But the bank approached him with a “substantial” offer for the 60% stake and a promise to finance the new trust operation. Mr. Rafal, who has a staff of 23 including five full-service brokers and seven licensed sales assistants, today offers asset management, investment advice, estate planning and life insurance services. About one-quarter of his business is managing retirement plans for small business owners and their employees.

“No. 1, I think very highly of the (Essex) people I’m dealing with,” he says. “No. 2, they want to remain independent.”

The deal’s terms weren’t disclosed, and valuations of adviser practices are all over the map. But, assuming Mr. Rafal’s business was valued roughly in line with similar shops, the 60% stake probably cost between $1.35 million and $4.2 million.

Essex, like many other banks, saw the investment business as a good outlet for its excess capital, but didn’t like the returns from the traditional bank brokerage.

Instead, with the stake in Mr. Rafal’s business, the bank gets to share directly in the profits from an already-successful investment firm and market commercial loans to his small-business-owner clients.

The deal is just the latest in a slowly increasing number of financial planner acquisitions by banks.

Whipple & Co., an Indianapolis certified public accounting firm with a financial planning practice, merged in January with the Somerset Group Inc., an asset manager and financial planner affiliated with the Indianapolis bank holding company First Indiana Corp.

forging alliances

Another IM&R branch, Financial Service Center Inc. of Silverdale, Wash., was bought by North Sound Bank three months ago. The firm, with $46 million under supervision and another $12 million under management, has been renamed North Sound Financial Services Inc. and is moving its offices this fall to the bank.

“We figured banks because as Willie Sutton said, that’s where the money is,” quips Linda Fortner, former co-owner of the practice with Geri Littlewood. The two, nearing retirement, wanted initially to merge with a certified public accountant firm, but Washington state regulators frown on CPAs taking commissions. They have five-year contracts to continue running the practice and build the bank’s brokerage business.

“A lot of the small banks are looking at advisers as a way to compete in the marketplace,” says Mark Tibergian, a consultant with Moss Adams LLC in Seattle who advises planners looking to sell.

These banks see alliances with financial planners as a means to gain new customers for traditional banking services, as well as a greater share of their existing customers’ wallets. For the advisers, the banks provide capital to grow and a way to realize the value in their businesses.

“It really points to one of the benefits of being an independent contractor,” says Chet Helck, senior vice president with IM&R, which services 1,400 reps. “It gives you the autonomy to sell your business.