Bank Deals Easier for PE With Ex-Regulators' Help

Getting through regulatory hurdles is a tough slog for many private-equity firms that want to buy or start banks, but some have found that having former banking regulators by their side can smooth the way.

Some of these ex-regulators are high-profile, like former Federal Housing Finance Agency Director James Lockhart, who signed on in August with WL Ross & Co., Wilbur Ross' private-equity firm. Others have worked at the Federal Reserve for decades.

"There are firms out there that have brought on former bank regulators as part of their bank acquisition strategy," said Charles Horn, a partner at the law firm Mayer Brown LLP. "Getting a workable private-equity proposal through a regulatory review process can be a daunting task, and having people who have worked on this process from the other side can be very helpful."

A private-equity investor group made up of Parthenon Capital LLC, Lovell Minnick Partners LLC and Continental Investors turned to former regulators for help as it set out to acquire a controlling interest in Three Shores Bancorp., the parent company of the $830 million-asset Seaside National Bank and Trust in Orlando.

The advisers included Paul Pilecki, a former bank examiner with the Philadelphia Fed and now a partner at the law firm Winston & Strawn LLP.

"The fact that some of the attorneys were ex-regulators made a tremendous difference," said Brian Golson, a managing partner of Parthenon Capital.

Three Shores received a capital infusion of more than $40 million in the deal, which closed on Thanksgiving eve.

Parthenon and Lovell Minnick led the investment, each putting in $15 million for roughly 23% stakes. Though Continental did not specify how much it invested, the firm combined with existing shareholders to add at least another $10 million. It took a 9.9% stake.

As Golson sees it, the former regulators were able to parse through concerns expressed by their counterparts at the Fed, which had to sign off on the deal. The task might sound simple enough, but the regulatory agency drew up a list of 29 points to discuss with the investors, Golson said.

The private-equity consortium hashed out the concerns over the course of two and a half months.

"Bringing a regulator in creates confidence in respect to the team's integrity; you bring some level of regulatory sensitivity and knowledge to the table and that makes you a better buyer," said Edwin del Hierro, a partner at Kirkland & Ellis who led the legal team for the investors.

Dealmakers like Robert Fiallo agreed that having former regulators around is a key to getting regulatory approval.

Like many others looking to buy a banking company, Fiallo wants a springboard to do more acquisitions. The intent is to grow by rolling up banks, particularly troubled ones.

Fiallo had been the chief executive of the $461 million-asset Fidelity and Trust Bank in Bethesda, Md., before its sale in September 2008 to the $1.6 billion-asset Eagle Bancorp Inc., also of Bethesda. Now he is ready to get active in the banking industry again and he plans on hiring an ex-regulator for his team.

"The idea is to bring a former senior regulator on as our chief risk officer and a well-seasoned senior bank CEO that has successfully run a model predicated on quality acquisitions," Fiallo said.

Fiallo is in talks with several bank holding companies with assets ranging from $300 million to $1 billion.

Nick Kirk, a co-founder of Hickory Group, a New York investment banking boutique, is helping Fiallo round up private-equity capital for the bank play.

"The template which has been successful for private equity is partnering with a management team that possesses both regulatory and operating experience," Kirk said. "Without these two pieces, groups will be missing valuable process insight."

Still, there are aspects to operating in the banking industry that may come as a surprise to some private-equity executives. Take the case of New York's Herald National Bank, which opened last year after raising $62 million from an investor group that included Palladium Equity Partners, FrontPoint Partners and Carpenter & Co.

When executives at the $366 million-asset Herald were still awaiting regulatory approval, a half-dozen Federal Deposit Insurance Corp. officials showed up at the bank's Fifth Avenue headquarters like a regulatory version of a SWAT team. The group swarmed the bank's offices, putting its business operations and computer systems through a battery of field tests — procedures that examiners have long carried out.

Herald's efforts at managing the regulatory aspects of the process were enhanced by the presence of its chief credit officer, Joseph Harpster. Previously he had been the chief credit officer at HSBC Bank USA and, for two decades before that, at Republic Bank of New York, which is now part of HSBC. He also spent six years as an examiner at the New York Fed, working with banks of all sizes.

"It's always helpful when you have someone on the team that's a former bank examiner; the regulators like that," said David Bagatelle, president and CEO of Herald, a middle-market commercial bank. In addition, "it helped us when we went out to raise capital."

Bagatelle said Harpster made the Office of the Comptroller of the Currency and the FDIC comfortable that Herald had its safety, soundness and operating procedures in order.

"They're basically assessing the quality of the bank by looking at the quality of its assets, capital adequacy, earnings ability, liquidity and management," Harpster said.

As is often the case in finance, no new tactic is truly original. Consider the $124 million-asset CenTrust Bank in Deerfield, Ill., which raised more than $20 million of private capital before opening in February 2006. Its staff included Carl Vander Wilt, a 33-year senior veteran of the Chicago Fed who led CenTrust's formation as its CEO.