Financier Flowers Targets New Jersey Bank in Rare Private-Equity Takeover

Financier J. Christopher Flowers won U.S. approval to buy a two-branch bank in New Jersey, in a rare bank takeover by a private-equity fund manager that may revive a debate about such investors’ role in the banking system.

The U.S. Office of Thrift Supervision cleared the purchase of the Saddle River Valley Bank by seven funds set up for that purpose by Flowers, according to an Oct. 14 approval letter on the OTS Web site. The bank has $82.8 million of assets. Terms of the deal weren’t disclosed.

Federal regulators restrict private-equity investments in banks, arguing that such owners might put depositors’ money at risk. The OTS’s decision last year to allow a similar takeover in Michigan sparked criticism from Congress and tighter regulation by the Federal Deposit Insurance Corp.

“For private-equity firms, there may still be some flexibility in the thrift charter for them to invest in banks,” said Ralph “Chip” MacDonald, an Atlanta-based banking lawyer at Jones Day.

The Saddle River bank transaction is the first so-called silo deal by a private-equity fund manager, which walls off the stake from other investments, that the OTS has approved since 2009, according to William Ruberry, a spokesman for the agency. He declined to comment further.

“We can’t comment on a pending transaction,” said John Bianchi, a spokesman for J.C. Flowers & Co.

Deposits

The bank opened in 2006 in suburban Saddle River, New Jersey, and had $76.3 million of deposits as of June 30. Karen Hall, chief financial officer of Saddle River Valley Bank, declined to comment on the acquisition.

Flowers, 52, is known for takeovers of big financial companies, such as Japan’s Shinsei Bank. The New Jersey bank wouldn’t be Flowers’s first foray into small-town banking. In 2008, he personally bought the First National Bank of Cainesville in Missouri, which had $14 million of assets, renaming it Flowers National Bank.

Last year, Flowers’s New York-based buyout firm, J.C. Flowers & Co., helped lead a group of private-equity and hedge fund managers to pump $1.55 billion into the collapsed IndyMac Bank in California. That transaction avoided restrictions on private-equity investments in banks by distributing ownership among enough partners that no fund manager has control.

Flowers’s New Jersey approval comes as the U.S. Dodd-Frank financial-overhaul bill calls for the end of the OTS and the assumption of some of its duties by the Office of the Comptroller of the Currency. The OTS regulates thrifts, also known as savings and loans, which are typically small institutions that focus on home lending.

Flagstar Purchase

In January 2009, the OTS allowed MatlinPatterson Global Advisers LLC to buy Flagstar Bancorp Inc. in Troy, Michigan. MatlinPatterson won the approval through a silo fund, one of the first of its kind.

Last year, the Federal Reserve, which regulates other lenders such as commercial banks, told private-equity companies it wouldn’t permit a firm that isn’t regulated as a bank to own a majority stake in a lender, even if the funds are segregated, according to a Fed lawyer who declined to be identified.

Barbara Hagenbaugh, a Fed spokeswoman, declined to comment on whether the Fed has changed the policy.

Senator Jack Reed, a Rhode Island Democrat, told bank regulators and Treasury Secretary Timothy F. Geithner last year he had “serious concerns” that rules for sales of banks to private-equity firms are inconsistent.

Deals such as Flagstar “represent another, particularly dangerous example of regulatory arbitrage whereby institutions and firms are shopping around a potentially risky activity until they find a regulator who will allow it,” Reed, who leads a Senate Banking subcommittee that oversees the securities industry, wrote in a May 2009 letter.

Last year, the FDIC toughened rules on private-equity firms buying failed banks by requiring higher capital ratios and prohibiting sales of banks for at least three years.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net.

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