Banking Law

Some Denver investors (who, not surprisingly, are former bankers) are in the process of pursuing a game plan that's become increasingly common: buying a relatively small, distressed commercial bank before it fails and using it as a platform to make acquisitions of other solvent banks and/or of deposits and assets of failed banks form the FDIC. The business model is sometimes referred to as "an inflatable charter," because, obviously, you start small but "blow it up." That's "blow it up" in the sense that you blow up a balloon (grow it through acquisitions), not "blow it up" in the sense of the favorite activity of Bruce Willis in the "Die Hard" movie series. At least, the owners' plan is not to intentionally "blow it up" in the latter sense.

I think the reason we're seeing this trend is that garnering a shelf charter route has been a tough row to hoe for many who've pursued it. While there have been some winners of failed asset bids from the FDIC among those groups that have acquired a shelf charter, they've been few. Buying an existing bank and using it as an acquisition vehicle gets you in the game more quickly. In addition, as private equity investors who been trying to enter the financial institution business by bidding on failed banks can attest, existing financial bidders have a competitive edge over those outside the system.

Of course, when I use the term "more quickly," I have to put that in context. The Denver investors stated that they'd been working on the acquisition of the small community bank they'd targeted for over a year. And this group includes such credible "players" as the former chairman of the Federal Reserve Bank of Kansas City, so it's obvious that if you don't have a management group in place that has credibility with the regulators, you're wasting your time. According to the linked article, a portion of that delay was due to the difficulty in raising capital to do these types transactions in a depressed economic environment. Although not mentioned in the article, another portion of the delay was likely the result of the regulatory application process. As I repeatedly tell folks, this stuff takes time and the regulators don't give a fig about your "need" to put your capital into productive use as quickly as you can. They're going to cover their posteriors no matter how long that takes. Thus, this is not a game to played if you have a low threshold of boredom or you suffer from ADHD.

Here's another free tip not found in the article. If you're business plan involves acquisitions and growth, you better have specifically identified and on board the human and financial resources to support that growth from the get-go. Approval will not be given to acquire the "inflatable bank" unless you can demonstrate that, when "blown up," you'll got everything you need to run the bigger bank. If you think that might be expensive, you're right. Therefore, in addition to time, be prepared to invest plenty of cash.