Most private-equity groups that invest in banks and thrifts keep their holdings to less than 10% so that they can avoid registering as holding companies, but a Memphis firm with $50 million burning a hole in its pocket has no such reservations.
Black River BancVenture Inc., whose investors include several former bankers, has applied to become a bank holding company with the intention of acquiring 15% stakes in three separate banks and a 42% stake in a fourth.
It has targeted four other banks and thrifts in which it wants to buy or increase its stake, and within three years it aims to have stakes in 15 to 30 community banking companies.
Black River officials would not discuss its investment plans, but if a private offering memorandum American Banker obtained from the Federal Reserve Board through the Freedom of Information Act is any indication, it is unlikely to be a passive investor.
Its intent, it said, is to "build ownership slowly in companies and then ask for a board seat" when ownership reaches 25%.
"As we accumulate significant positions, we intend to engage in active dialogue with management about ways to increase the value of our investment," the memorandum said.
Many banks and thrifts are in need of a capital cushion as loan losses mount, and some would certainly welcome an infusion from Black River. But others might view an investment from the firm as a threat to their independence, observers said.
Black River's organizers include John W. Spence 3rd, a longtime bank investor and the owner of a community bank investing Web site, www.vulturesroost.com; William E. "Bill" Lucado, a venture capital investor and a former community bank president; and Brad L. Champlin, who was an executive vice president of Regions Financial Corp. until 2007.
The firm's primary targets appear to be small, publicly held banks whose shares are thinly traded. The seven it has identified in Fed filings all have less than $500 million of assets.
Its plan, according to its offering memorandum, is to acquire large stakes in some banks and thrifts and smaller stakes in others. The memorandum also said that Black River does not intend to make an investment that bank management would deem "hostile."
Still, it plans to play an active role, which could make some bankers anxious, said Sanford "Sandy" Brown, the managing partner in the Dallas office of Bracewell & Giuliani LLP.
"If they were acquiring shares in my bank, I would be very wary of them," he said.
The investment strategy is "just unusual enough that I would want to know what they are up to," he said.
Private-equity firms investing in banks and thrifts often keep the investment under 10% to avoid the regulatory onus that would come with a controlling stake. Specifically, registering as a bank holding company could prevent them from investing in anything other than financial institutions — a trade-off many investors are unwilling to make.
But others will take on the regulatory burden because community banks have been good investments over the years, even if their stocks have been floundering of late.
"Community banking is a segment of the economy where you can make great returns," Mr. Brown said. "If you look at the typical community bank model over the life of the entity, they will make between 10% and 15% returns on equity every year and then sell for two or three times book."
A spokeswoman for Belvedere Capital Fund II in San Francisco, which has invested in several banking companies in recent years, said in an e-mail that the rewards of being a bank holding company outweigh the drawbacks.
Most important, it can invest more than a 9.9% stake in a company, which means it can get a larger return on its investment.
"In addition," the spokeswoman wrote, "we can work with management in a much more active role" on issues such as strategic direction, hiring executives, and selecting board members.
Another private-equity group that won approval last year to become a holding company is JLL Partners Fund FCH LP in New York. It has invested $75 million in FC Holdings Inc., a $646 million-asset banking company in Houston. It currently owns 54% in FC Holdings and has said it could eventually invest another $75 million in the company.
T. Alan Harris, the principal of Harris Law Firm PC in Houston, said the requirements for registering as a bank holding company are not hard and fast.
Investors holding less than a 5% stake do not have to register and, in general those with stakes of 5% to 9.9% do not have to register, either. Those that own stakes of 10% to 24.9% generally do have to register as holding companies but can be exempted if they can prove they will be passive investors. An investment group owning 25% stake or more must become a bank holding company.
So far Black River lists only one company, the $64 million-asset Michigan Community Bancorp Ltd. in Sterling Heights, in which it plans to increase its stake and take a board position. It currently owns 9.7% of the company and wants to increase it to 42% of outstanding shares with Federal Reserve approval.
The privately held Michigan Community is the parent company of the eight-year-old Lakeside Community Bank. Like many Michigan banks, Lakeside's loan quality has deteriorated as the state economy has weakened. At Dec. 31 its ratio of noncurrent loans to total loans was 4.21%, versus 1.11% a year earlier.
Michigan Community officials did not return calls from American Banker.
Black River also intends to increase its stake in Allegiance Bank of North America in Bala Cynwyd, Pa., from 8.97% to 15%, according to the offering memorandum.
John Carrozza, the chief financial officer at the $160 million-asset Allegiance, said his company is happy to have Black River's attention.
Black River accumulated its current stake by acquiring stock from shareholders. It would reach the 15% ownership threshold by acquiring shares directly from the company, which would add to Allegiance's capital, Mr. Carrozza said.
"They were interested in being part of this organization," he said. "They have a great belief in our ability to do well and grow."
