Patriot Financial Partners in Philadelphia has largely shied away from troubled banks, but some opportunities are too good to pass up.

The private-equity fund that specializes in banks is part of a group of investors that have placed the first bid on 1st Mariner Bank, which is set to be auctioned as part of First Mariner Bancorp's (FMAR) Chapter 11 bankruptcy.

For buyers, such bankruptcy auctions, known as 363 sales, are tricky but attractive. If successful, the buyers get a bank that is still under considerable stress but free from things like the holding company's trust-preferred securities debt.

"There haven't been many deals like this, but we like the structure," says W. Kirk Wycoff, Patriot's managing partner.

Patriot is a fairly active investor in community banks. Its sweet spot is banks with $500 million to $5 billion in assets. Its portfolio is packed with banks that have been active consolidators in recent years, including Banc of California (BANC), Heritage Oaks Bancorp (HEOP) and Provident New York Bancorp, which bought Sterling Bancorp (STL) last year and adopted its name.

In that regard, the bid for 1st Mariner is a bit outside of Patriot's wheelhouse. Industry observers say, however, that companies like Patriot are focused on opportunities and tend not to box themselves in.

Although a wave of bankruptcies is not immediately expected, some industry players believe the number of bankruptcies will rise as debt-rattled holding companies hit the five-year deferral period for trust-preferred debt service this year and look to contain the uncertainty it brings.

"I don't think anyone knows what will happen when the deferral period expires," Rich Buckner, a director at Houlihan Lokey, said last month in an interview at BankDirector Magazine's Acquire of Be Acquired conference. "It is clearly going to put extra pressure on the BHC's nearing the end of the five-year deferral period."

Still, Buckner said it is a tough decision to make.

"It makes a lot of sense when you look at the [bank holding companies] that are dead on equity," Buckner said. "But a lot of stakeholders, particularly the equity investors, do not fare well in a bankruptcy proceeding."

Wycoff says bankruptcy provides a solution for the deferral problem, since a solution from regulators and legislators hasn't come about.

"I'm not a regulator or public policy person, but there are banks out there with distressed debt," Wycoff says. "That tells you there is a need for a market solution."

Beyond the bankruptcy wrinkle, Patriot's 1st Mariner investment is similar to many of its other holdings. The bank has $1 billion in assets and Patriot likes its markets. Patriot is also backing Jack Steil and Robert Kunisch, the men leading the bid.

Steil is set to become 1st Mariner's chairman and chief executive, and Kunisch is set to be president and chief operating officer. The men were previously executives with Mercantile Bankshares, which was acquired by PNC Financial Services Group (PNC) in 2007.

"We are bullish on Baltimore and the surrounding area and we like the team coming from Mercantile," Wycoff says.

If the group emerges as the successful bidder, then the venture would be the third investment in Patriot's second bank fund, which has $150 million to invest. Wycoff declined to name the other two, but said they are privately held banks. He says the company also has 300 other potential targets on its list.

"The big question is why invest in banks with all the increased regulation and no increase in rates to help margins," Wycoff says. "The answer is if you can acquire good loan customers and recognize reasonable loan growth, for banks with a $1 billion in assets or larger, it is still a good business."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.