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May

5

2010

JOSEPH LAW NEWSBRIEF: FDIC Paves the Way for Private Investors to Recapitalize Troubled Banks and Bid for Failed Banks

The recently announced high profile recapitalization of Pacific Capital Bancorp by investor Gerald Ford and affiliates, coupled with the newest FAQ issued by the FDIC on April 23, 2010, indicates that private equity now has several paths to successfully enter the queue for failed bank acquisitions and troubled bank recapitalizations.  However, it is also clear that the FDIC, as gatekeeper, is primarily opening the door to “patient” money invested by “anchor groups” who are willing to subject themselves to federal bank agency scrutiny.  It remains extremely important for such potential investors to engage qualified bank regulatory attorneys and consult closely and early with the FDIC staff as every prospective transaction will inevitably involve a variety of significant bank regulatory and policy judgments.

At the end of August 2009, the FDIC promulgated its Policy Statement for Failed Bank Acquisitions (“Policy Statement”).  It provided that covered private equity investors will be required to hold their investments in subject institutions for a three year period and agree to other restrictions not applicable to non-covered organizations that acquire failed banks.  On January 6, 2010, the FDIC issued Questions and Answers (“Initial FAQ”) to interpret portions of the Policy Statement. Both the Policy Statement and the Initial FAQ appeared to signal the FDIC’s discomfort with the supervisory risks associated with private investors participating in failed bank acquisitions.  As a result, the ability and willingness of private equity investors to participate in the huge recapitalization needs of the banking industry were stymied.  By default, existing banks and thrifts and their holding companies were favored in connection with failed bank acquisitions.

On April 23, 2010, the FDIC issued new Questions and Answers (“April FAQ”) to clarify elements of the Policy Statement and the Initial FAQ.  The April FAQ helped to clarify, among other things,  the “one-third test” first discussed in the Policy Statement, the applicability of the Policy Statement to “less than 5% investors” and requirements for offshore investors. Additionally, and perhaps most significantly for existing “troubled banks,” the FDIC provided a reasonably clear test of when recapitalizations of existing banking organizations will be exempt from the Policy Statement. As a result, a road map now exists for private investors to participate in failed bank acquisitions and recapitalizations of existing banks.

Private equity investors that are seeking to participate in so called “inflatable” banks or “platform” banks (i.e., smaller healthy banks that are super capitalized with the intention to acquire assets of failed or troubled banks) may find one element of good news in the April FAQ.  The recapitalization standard mentioned above provides that the Policy Statement will not apply to investors if a recapitalized institution acquires one or more failed bank in an eighteen month period following recapitalization if the acquired assets in the aggregate are less than 100% of the recapitalized organization’s total assets.   In the final analysis, the Initial FAQ and the April FAQ make clear that private investors wishing to flip their investments or make quick profits will face overwhelming obstacles.  On the other hand, private investors with a long term investment horizon may now potentially enter the banking arena.

Private equity contemplating investments in existing banking organizations will need to clearly understand the restrictions and limitations in the Policy Statement if the institution they invest in anticipates exceeding the “100% of total assets” threshold.   While the FDIC has offered more clarity about the one-third test and recapitalizations, ambiguity regarding the rules in this area is  still plentiful.  Our sense is that bank holding companies and banks seeking to rely on the recapitalization exemption, should probably commit to private investors in recapitalizations that future bank acquisitions will be structured so that the Policy Statement will not apply.  At this point in the economic cycle, banking organizations and private equity investors must work closely together in consultation with the banking agencies, qualified bank regulatory and transactional lawyers and investment bankers in order to wisely and pragmatically manage the complex legal, regulatory and business risks that exist in the current banking environment.

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References:

  • FDIC, Final Statement of Policy on Qualifications for Failed Bank Acquisitions, August 26, 2009 (http://edocket.access.gpo.gov/2009/pdf/E9-21146.pdf).
  • FDIC, Questions and Answers Posted January 6, 2010 (http://www.fdic.gov/regulations/laws/faqfbqual.html).
  • FDIC, Additional Questions & Answers Proposed to Address Recent Questions – April 23, 2010 (added to the January 6, 2010 Q&As).

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