Banks investing in other banks is nothing new, but some are looking for returns beyond dividends and stock gains.
German American Bancorp Inc., a multibank holding company in Jasper, Ind., has invested in four start-ups over the last two years. But before it would plunk down any money, the organizers of those banks had to agree to share large loans with German American, give it a seat on their boards, and give it first dibs if they ever decide to sell.
Mark A. Schroeder, the $1 billion-asset company's president and chief executive officer, said that because start-ups take a long time to mature, traditional returns on investments can be years away. However, if German American can get a piece of a large loan, a payoff can come much sooner, he said.
"It is a business strategy for us that we will utilize on a very selective basis," Mr. Schroeder said. "It's a strategy to supplement our existing loan volume."
Banks often buy stakes in other banks simply as investments. But John C. Donnelly, a managing director of Donnelly, Penman & Partners in Grosse Pointe, Mich., said a growing number of established banks see investing in small or start-up ones as opportunities to boost loan volume and pick up fee income. Such investments are also a good way to get a look at new markets without having to commit a lot of capital, he said.
"It's a growing trend and one we are big believers in and big sponsors of," Mr. Donnelly said. "By having the presence of a sophisticated regional bank on your board and on your loan committee, it is like having training wheels on your bike."
His firm advised German American on investments it made in Symphony Bank of Indianapolis, which opened in June of last year, and in 2004 when it bought a 9.9% stake in Bank of Evansville, which opened in 2001.
Banks that invest in start-ups have worked out deals to provide processing and other back-office functions, Mr. Donnelly said. To encourage loan participation, start-ups often will use the credit underwriting standards of the investing bank, he said.
German American started including its stipulations after an investment six years ago in a Bloomington bank did not work out as planned. "While that has been a good investment, we didn't get the loan opportunities that we wanted," Mr. Schroeder said.
German American has also invested in banks in Louisville and Lafayette, Ind.
Mr. Schroeder said it needs about $20 million of loans for every million it invests to get the kind of returns it wants. He said that because it often gets $2 million to $4 million of loans from each large credit, that is a reasonable goal. It is too soon to tell whether German American will hit that goal with its most recent investments, he said.
The strategy takes the middle ground between a passive investment and one made with an eye toward an eventual takeover.
The $14 billion-asset TCF Financial Corp. of Wayzata, Minn., which started a fund to invest in start-ups in 2002, is an example of a company that uses the passive strategy. Jason Korstange, its senior vice president of corporate communications, said TCF is happy with its investments but does not try to be a business partner with the banks in which it buys stakes.
"We're looking at it strictly as an investment," he said.
At the other end of the scale is the $3.6 billion-asset Capitol Bancorp Ltd. of Lansing, Mich., which will put up 51% of the money needed to start a bank and ask local organizers to raise the rest. At the end of three years Capitol typically buys out the minority shareholders.
Texas Capital Bancshares Inc. in Dallas does not invest directly in start-ups, but some of its founders are investors in and advisers to BankCap Partners, a private-equity fund created this year to help fund start-ups. Through its TCB Services, the $3.4 billion-asset Texas Capital will offer services such as back-office processing to the banks in which BankCap invests.
Donald J. Grill, the president and CEO of the $621 million-asset Fentura Financial Inc. of Fenton, Mich., cited competition as the primary reason why his company has minority stakes in four banks, and why he encourages others to invest in his. "We're a community bank holding company that is promoting the notion that community banks need to band together to survive a banking environment that is growing more competitive each day," Mr. Grill said.
Like German American, Fentura looks to share loans with the banks in which it invests. He said the minority stake makes it easy for large customers to accept the idea that their loans will be shared with other banks.
"If we're participating in a loan from one of their large customers who is curious about why this bank from another community is involved, the response can be, 'We're invested in their company, they are invested in ours, and they share the same values,' " Mr. Grill said.
