Ed Francis is writing a new chapter of an increasingly familiar story: veteran banker seeks to buy small bank rather than pursue de novo charter.
An investment group organized by Francis, a former chief banking officer at Hancock Holding in Gulfport, Miss., is in talks to buy a bank in the Denver area, with hopes of expanding its trust operation.
"I'm going to try and focus on being more 'Northern Trust-like' instead of being the traditional community bank," Francis said, referring to one of the custody giants. "I'll pick some other business lines that offer opportunities with fee revenue but don't require as much capital."
He declined to name the bank he has in his sights or any of his fellow investors.
Several investor groups have surfaced in recent months to acquire existing charters rather than undergo a laborious de novo process with uncertain odds of success.
Captex Bancshares, formed by George Lea and Michael Thomas Jr., agreed in September to buy the $165 million-asset Trenton Bankshares in Texas. An hour south in Dallas, A. Haag Shermon and the partners of a Texas accounting firm are looking to buy the $207 million-asset T Bank.
Meanwhile, First Boston Holdings, a group of bankers with historical ties to Boston Private Financial Holdings, agreed in October to buy the $446 million-asset Admirals Bank in Boston.
"I was looking for existing charters," Francis said. "It's a whole lot easier than starting a de novo and having carryover losses for the first couple of years. … My intent is not just to get bigger – the economics have to work."
Francis has a sound plan, said Greyson Tuck, a banking lawyer at Gerrish McCreary Smith.
The Federal Deposit Insurance Corp. "is really cheerleading de novos right now, but it doesn't make market sense," Tuck said. "The capital requirements are such that you can't get the return you need when you need it. … Why would someone spend 18 months putting applications together when it is a lot easier to find a bank, price their problems into the deal and get [an existing] charter?"
Lee Burrows, CEO of Banks Street Partners, an Atlanta investment bank, agreed that high initial capital requirements are a strong disincentive for investors – and so are the thin net interest margins that prevail today.
Francis' buyout effort will still require hard work. The group plans to take advantage of section 382 of the U.S. Bankruptcy Code, which he said would minimize the target bank's tax exposure by protecting its $23 million net operating loss carryforward. While the bank has a clean balance sheet, its management team quickly burned through its capital in recent years, he said.
"The economics of not having to pay taxes and being able to drop every profit into capital would allow us to accelerate growth and provide investors and myself with a really good return," Francis said.
Navigating through a 382 bankruptcy is complicated, but it can be fruitful if handled correctly.
"You can shield [some of] your future earnings from taxation to the extent of the carryforward," Tuck said. "That allows you to build retained earnings faster because 100% of your gross income is falling to the bottom line."
There is some risk involved.
"You're dealing with the interplay of two very technical sections of the law – the Bankruptcy Code and the IRS tax code – so the big risk is that you somehow miss something," Tuck said, noting that an honest mistake could be costly.
There is also a small chance that another bidder could swoop in. "You go through a technical auction and bankruptcy process … but you have vetted the market to largely know how it will play out," Tuck said, adding that "it is rare that somebody else comes in."
Francis said his group has done its homework, evaluating prospects in Houston, Dallas and Denver before zeroing in on its choice, which has less than $150 million in assets.
Based on his numbers, Francis said his group should be able to build up to $70 million in tangible capital by tapping into the net operating loss, setting the stage for a $700 million-asset bank that he'd like to run for the next decade or so.
"The markets out there are dominated by U.S. Bank and Wells Fargo, and I know where we're going to pick on those guys," Francis said. "I think there will also be opportunity with the strategy and the bankers that I like to employ. … The timing is right. We're going to get some regulatory relief and some tax relief. I feel good about where we are."
As for dealing with regulators, Francis said he has been impressed so far. He noted that his team is looking to buy a bank with management issues, which could resolve a potential problem for the Federal Reserve and the Office of the Comptroller of the Currency.
"The OCC and Fed have been easy to work with," he said. "They like what we're trying to do."