Wednesday, September 24, 2008

Failed Bank Specialist JC Flowers starts moving in

Flowers, LBO Investor, Approved to Buy Missouri Bank (Update1)
By Jonathan Keehner and Jason Kelly

Sept. 23 (Bloomberg) -- J. Christopher Flowers, founder of private-equity firm J.C. Flowers & Co., was approved by U.S. regulators to acquire the First National Bank of Cainesville in Missouri, a move that may allow him to buy other lenders.

The U.S. Office of the Comptroller of the Currency cleared the purchase by Flowers personally on Aug. 27, according to a public filing by the regulator. He may use the bank, which has assets of about $14 million, as a platform to buy failed institutions, according to a person close to Flowers, who asked not to be identified because the plans are private.

Flowers's deal comes as private-equity investors press the Federal Reserve to loosen regulations that limit their ability to invest in and influence management of banks. The Fed yesterday released revised guidelines for minority investments in banks, and New York-based J.C. Flowers & Co. is among the firms seeking controlling stakes to profit from the U.S. financial crisis.

``Their competitive advantage is to team up with experts in the industry and really make changes in the business,'' said Robert Kennedy, a partner with the law firm Jones Day in New York. ``That's the piece of financial-institution investing that's been unavailable.''

While buyout firms want the flexibility to buy controlling investments in banks, they are wary of becoming a bank holding company. That status would trigger restrictions on non-banking activities and the amount of debt they can take on. To avoid that classification, some individuals from private-equity firms have considered acquiring banks.

Small Bank
Such was the case with Flowers's Missouri deal, which may be a template for other transactions. First National Bank of Cainesville was the 17th smallest bank in Missouri, by deposits, of the 397 listed on the Web site of the Federal Deposit Insurance Corp. as of June 2007.

``An individual cannot be a bank holding company,'' said Mark Tenhundfeld, director of regulatory policy at the American Bankers Association, a Washington-based trade association, who was unaware of any other major private-equity firm head having bought a bank. ``If the OCC approves a change in bank control proposal by an individual, then that person may avoid bank holding-company regulations.''

An individual may also be able to co-invest with private- equity funds and still avoid bank holding-company classification if those funds take a noncontrolling stake in the bank, according to Tenhundfeld.

Model Deal
The revised Fed guidelines raised the threshold for such stakes to 33 percent from 25 percent.
Flowers, a former Goldman Sachs Group Inc. investment banker, may expand the First National Bank of Cainesville ``by means of internal growth or through the acquisition of troubled or failed depository institutions,'' according to the OCC's filing. Other businesses in Cainsville, a community of 400 in northern Missouri near the Iowa border, include A Thyme to Sow Herb Farm and the Wing Tip Hunting Preserve, according to the town's Web site.

``I don't see why this move by Flowers couldn't be repeated,'' said the ABA's Tenhundfeld. ``This could be a model for private-equity firms looking to acquire banks.''

J.C. Flowers & Co. spokesman Edward Grebow declined to comment. The private-equity firm has led minority investments in banks including buying a 23 percent stake in Japan's Shinsei Bank Ltd. and a 24 percent stake in Hypo Real Estate Holding AG, Germany's second-biggest commercial property lender.

Silo Approach
J.C. Flowers & Co. has also invested in non-banking companies, such as derivatives broker MF Global Ltd.

Making controlling investments plays more directly into private-equity firms' main business model -- using cash and borrowed money to buy troubled companies, fix them and sell them for a profit. Minority investments by buyout firms in Washington Mutual Inc. and National City Corp. have plummeted in value amid the ongoing U.S. financial crisis.

The Fed has explored ways for private-equity to take control of struggling U.S. banks, in addition to yesterday's guidance that loosens some restrictions on non-controlling stakes.
Such minority stakes don't ``allow them to do the things they like to do, which is to take over improve operations,'' said Jones Day's Kennedy. ``They're not typically passive investors.''

With the turbulent state of the banking industry, private- equity firms are more likely interested in controlling banks, such as through a ``silo'' structure that would be walled off from other investments in an attempt to keep Federal oversight of banking companies from their other holdings.

In the silo concept, a fund is specifically designated to own a bank and nothing else. That isolates the investment from other funds, and other companies, under the private-equity firm's control.
To contact the reporter on this story: Jonathan Keehner in New York; Jason Kelly in New York at Last Updated: September 23, 2008 18:03 EDT