Have Patience, Cash Ready: Bank Investor Roberto Herencia

Roberto Herencia knows a lot about recapitalizations, but he might know more about patience.

Herencia's BXM Holdings closed its recapitalization of the $2.4 billion-asset Metropolitan Bank Group in Chicago in June — about 14 months after it was announced.

The deal, backed primarily by Mexican investors, is the latest in a string of recapitalizations involving Herencia, the chief executive of Banco Popular North America from 2001 to 2009.

Midwest Banc Holdings in Melrose Park, Ill., recruited Herencia in 2009 to attempt a rescue.

Under his leadership, Midwest persuaded preferred shareholders, including the Treasury Department, to convert their shares to common equity. However, efforts to raise new equity failed and so did the bank. The Federal Deposit Insurance Corp. sold Midwest's deposits and most of its assets to FirstMerit (FMER) in Akron, Ohio.

Herencia, 53, says the lessons he learned at Midwest guided him in the deal for Metropolitan, which successfully redeemed its Troubled Asset Relief Program shares at a discount.

He is a board member of SKBHC Holdings, the investor group that bought AmericanWest Bank out of bankruptcy in 2010, and he was recruited to serve as chairman of First Bancorp (FBP) in Puerto Rico following its 2011 recapitalization.

The following is an edited transcript of a recent interview with Herencia:

What should be the No. 1 takeaway from this conversation?

ROBERTO HERENCIA: That patience perseveres. We've been pursuing Metropolitan for over two years. We announced the signing of the letter of intent in Dec. 2011, but we formerly approached them directly in the spring of 2011. We announced we had a signed a subscription agreement for a transaction in April 2012. That is a long time.

When else was your patience tested?

It took a long time to get to an agreement with the U.S. Treasury. The Treasury was very busy in April 2012; that is when they began to auction the Tarp stakes. They were burdened by that but getting to a deal with Treasury was a pressing issue for us.

Then the situation at Metropolitan deteriorated, so we had to relook at the transaction.

Our intention all along was to do a transaction where we could preserve the deferred tax asset. Unfortunately, we got to a point where we had to increase the amount of equity we were contemplating. We were talking about $150 million, but it kept getting worse. By increasing it, the change in control — we went over the 90% new-ownership guidelines — was triggered and the DTA went away.

We had to go back to the investors and say $150 million is not enough. We had to convince them that it was $206.7 million we needed. It is never easy when you have to go back.

Also, I don't know of any other $200 million recapitalizations done by 30 to 40 individuals. This is not organized private equity. So that presents some uniqueness, as does the fact that except for myself and a few others, most of our investors are foreign and they had to go through a second and third lens by regulators, as they should.

What came first, the money or the target?

We had the money and we went to find the right investment. Assets had to be about $2 billion or higher. Deposit composition mattered to us. Changing the deposit mix of an existing organization is almost impossible. You can't turn an old savings and loan into a demand-deposit-driven institution. We needed to evaluate the asset side, too. Even if it is not great, we have the ability to deal with bad assets and move them out and price them correctly and then move them out.

If you were looking at that particular time, it stands to reason you were looking for sick Tarp banks because all the other bargains had been snagged or failed.

I would say that the majority of the banks we looked at had Tarp. We looked at over 30 across the country. We looked at banks in Texas, California, Colorado, Florida, New York, Michigan and Chicago.

You know what it is like to be a CEO trying to save an imperiled bank. How did that experience shape you and your ability to get this deal done?

You consider what happened — what went right here, what we could have done differently to make it right, or did we do the best we could and it just wasn't possible, period. That was the conclusion on Midwest. I went into that situation knowing full well that it was extremely difficult and people did not understand just how difficult it was going to get in the short term. I think our work saved the FDIC quite a bit of money in my opinion.

Midwest's assets sold at a premium, right?

They did; we were able to create a lot of interest in the organization by keeping the people together and the customers in place. The lesson is that if I had come in with the equity already raised, we would have had a better chance because the money is backing you and your team. Also, our recapitalization effort became the blueprint for other transactions.

Gerald Ford followed that in the Santa Barbara transaction. Others took notice. This is where you go first. You get a deal from Treasury, because it is important for new common-equity holders to come in without anyone in front of you. Not Tarp, not true preferred stock.

We felt really good about Midwest. We had permission from the FDIC as new management to bid for the organization in the failure and we did with Gerald Ford backing us.

Metropolitan was a multibank holding bank company, but they've now all been merged under North Community Bank's charter.

Part of the agreement called for Metropolitan to seek permission from the FDIC to merge all of the charters into one. Accounting is hard enough. Imagine having to mark five different charters. We would have created goodwill in some and created a bargain purchase option in others.

Chicago is considered ripe for consolidation. Is M&A on your radar or in your budget?

We have a consent order in place that we have to address. We have capital ratios that are above well capitalized and a marked loan portfolio. But you have to get through the process. It is a tough consent order. It is not only the typical classified assets; there are some Bank Secrecy Act issues we are addressing very aggressively.

The timing is good. There is so much competition for assets right now that we can focus on our customer base, focus on resolving approximately $400 million in classified assets. By the time we're done with that, hopefully the other banks have merged among themselves and gotten a few competitors out of the way for us.

What's your long-term plan?

The great thing about our investors is that they are not viewing this like the typical private-equity firm would. We had the discipline of evaluating the opportunities based on traditional private-equity measures, but they never required that of us. They never said, "If you don't show me a 25% return in five years, we are not going to do this." They are also not investing here to own a $2.5 billion bank. The intention is to grow the franchise, but first things first.