Nature has its own ways of repurposing its subjects. Vultures might feed on a dying animal, and bacteria consume what’s left. Better that than cadavers piling up. The U.S. financial system has even less tolerance for clutter. Sickly banks are often killed — “failed” is the polite term — and sold quickly to healthy ones, so as not to spook customers.
In the wake of the financial crisis of 2008, federal regulators essentially decided they needed more vultures. They expanded the pool of bidders for failing banks by creating “shelf charters,” which allow approved private-equity groups to sit on inactive charters while raising funds. Bankers with ties to the Queen City hope to take advantage of that opportunity and make money while cleaning up the carnage. “Clearly, there’s a fair amount of repair to the banking sector that’s necessary, and I wanted to be part of that repair process,” says Brian Simpson, a former capital-markets executive at Charlotte-based First Union Corp. who’s now CEO of Union National Holdings LLC.
Union National and another Charlotte-based group, Blue Ridge Bank NA, have applied for shelf charters. Union National plans to raise $2 billion. Blue Ridge — led by CEO Milton Jones, who retired last year as president of Bank of America Corp.’s Georgia market — wants to raise $1 billion.
They should have plenty of prey. U.S. bank failures are on the rise — 86 in just the first half of this year, compared with 140 in all of 2009. And the Queen City is an ideal base of operations, says Joseph A. Smith Jr., the state’s commissioner of banks. “There are a lot of high-quality bank executives in Charlotte with experience.”
But the trend is hardly exclusive to North Carolina. “We’re also seeing a lot of private-equity investors doing this in South Carolina, Georgia and Florida,” says Tony Plath, associate professor of finance at UNC Charlotte. In June, North American Financial Holdings Inc., with headquarters in Charlotte and Jacksonville, Fla., agreed to buy control of struggling TIB Financial Corp., based in Naples, Fla., for $175 million. North American CEO Gene Taylor was BofA’s head of corporate and investment banking until 2007. Investors include retired BofA CEO Hugh McColl.
While the potential buyers see an opportunity in ailing banks, the takeover targets know the other side of the equation. “It’s essentially a Faustian bargain: sell your soul to private equity,” Plath says. The process isn’t pretty, but, “at the end of the day, that’s what it will take to rebuild the industry.”
Louis F. Harrelson cut plenty of deals in his 55-year career in car sales, but none were bigger than the one that kept him out of jail. Paying more than $1 million in fine and restitution, the 80-year-old former president of Charlotte-based Harrelson Automotive Group Inc. pleaded guilty to conspiracy to commit mail, wire and bank fraud. Federal prosecutors say he allowed employees to file false loan applications for customers, defrauding at least seven lenders who claim they lost a total of $1.2 million. The employees inflated trade-in values and lied about applicants’ monthly incomes. In June, Judge Frank Whitney approved the plea agreement, which calls for $972,000 in restitution and a $50,000 fine. It forced Harrelson to resign from all management and supervisory positions in the automotive industry and stay out of dealerships owned by him or his family for two years.