RALEIGH, N.C. — Rising valuations are making it harder for private-equity firms to justify holding their stakes in healthy banks, according to a prominent investor.

The firms have an obligation to consider cashing out as valuations rise, James Lockhart 3rd, the vice chairman of W.L. Ross & Co., said in an interview Wednesday after addressing the American Mortgage Conference hosted by the North Carolina Bankers Association.

Frequently, the parting is bittersweet for investors who spend years working with management to turn around a company, he said.

While it has cashed out of BankUnited and Bank of Ireland, W.L. Ross still holds stakes in other community banks, including active consolidators Cascade Bancorp in Bend, Ore., and Talmer Bancorp in Troy, Mich. Another investment, Sun Bancorp in Mount Laurel, N.J., recently announced an aggressive overhaul as it continues to work through problem loans and elevated expenses.

Lockhart, a former director of the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Agency, said he is still upbeat about community banking and the prospect for more consolidation. He also discussed the regulatory environment and the evolution of board governance. Here are edited excerpts of the interview.

What is your view of community banking right now?

JAMES LOCKHART: We believe community banks are a very important part of America. They are obviously being overwhelmed by regulators and compliance costs, so we think there will continue to be consolidation. But we hope they don't get too big. Our sweet spot is what I call super-community banks, with $5 billion to $10 billion in assets. Those are big enough to handle the regulatory burden but, at the same time, are fast enough to be close enough to the community.

It seems like we're still waiting for consolidation to hit full stride.

We are, but we also know that 2,200 banks have gone somewhere, with 500 sold through the [Federal Deposit Insurance Corp.] The consolidation is sort of under the screen. Some of it is just charters being consolidated. We're seeing in some of our banks a lot of activity. Cascade just bought Home Federal in Idaho. Talmer alone has totaled 10 acquisitions. First there were the FDIC deals, where we were very active there. Then there were the [Section] 363 bankruptcies. And now it is going to be more about consolidating mergers of equals. That was pretty much what the Cascade and Home deal was. And you'll see fill-in acquisitions, like Talmer's deal in Big Axe, Mich.

Your firm has remained open to other exit strategies beyond M&A, including secondary offerings.

From our standpoint, bank valuations are starting to move up, which is good. So we're looking selectively to start exiting. We have done that not only with banks, but in other investments in the financial sector. We recently exited Bank of Ireland after three years. We still very much like the bank, but valuations had just gotten to that point where, as an investor-driven organization, we had to sell. Certainly that's what we did with BankUnited, which has a great management team. Again, we were sad to do that,but part of our job is to help build companies and, at the appropriate time, sell them to others.

Sun Bancorp, another W.L. Ross investment, has struggled and recently embarked on a bold restructuring plan. What are your thoughts on its progress?

We put in a new CEO [Thomas O'Brien] who is very talented. We knew him because he was on the BankUnited board. He has put in a restructuring plan. We were probably a little bit slow to put in that change, but we're very pleased with where it is going. We believe he is on the right course. Sun had a pretty large troubled loan portfolio when we invested in it. We knew it. In the case of Sun, we think it is well-positioned now to make the changes that are being implemented.

We're seeing a lot of regulatory scrutiny in terms of the Fair Lending Act and the Bank Secrecy Act, particularly after banks announce acquisitions. Any thoughts?

When we invested in [certain banks], they had problems but they got fixed. Many of our banks were troubled, one way or another, and they put in new management teams. Certainly they sold bad assets and strengthened the team and capital positions. Now they are getting regulatory approvals and have proven they can do it rather successfully.

How have you seen board involvement evolve since Ross began investment in banks?

I think boards are more involved. We meet with regulators often twice a year and certainly are very much involved in the credit process. The loan committees are much stronger than they used to be. Often, there are lower limits so the board gets involved in a lot more decisions, which has plusses and minuses actually. Many boards are paying a lot more attention, and rightfully so. And the boards over time have been upgraded, too. Many of the community bankers had nice people on their boards but didn't have a lot of financially savvy directors. We're seeing more people going on boards who have good financial experience.

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