Les Lieberman thinks more bank failures are imminent. And when they happen, he wants to be ready.
Lieberman is seasoned in buying failed financial institutions. When hundreds of banks were spiraling following the 2008 financial crisis, Lieberman and a group of fellow investors
Now, he sees an opportunity to employ a similar strategy as risk rises in the commercial real estate sector and high interest rates keep pressure on banks' underwater bond portfolios.
"If you put it all together, you've got an environment where those bond portfolios haven't improved, yet credit and commercial real estate could deteriorate," Lieberman said. "And that combination could be lethal."
That's where Lieberman's latest venture comes in. He and a group of investors called Porticoes Capital plan to take advantage of what's known as a "shelf charter,"
The strategy may prove moot if no more banks end up failing. But if they do, shelf charters like Porticoes' open up more options for regulators as they consider bidders, experts say.
"Shelf charters are a good answer to bank failures," said Brian Graham, partner at Klaros Group. "They're not a good answer to bank recapitalizations or mergers. So the more banks that fail, the more likely a shelf charter path is going to make sense. … We think that there will be bank failures, but we think that far more banks are short of capital than are likely to fail."
Porticoes is raising $1 billion, at least, based on the hypothesis that credit challenges coupled with poor investments will be the downfall of a scattering of banks.
"If it occurs — I don't even know if it will occur — but if it does occur, it will be a handful here and there," Lieberman said. "I don't predict any widespread disaster."
Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at Columbia University, said bank failures come in waves, and that overexposure to commercial real estate will likely be the downfall of some small institutions. He added that the turbulence will prime an opportunity for private capital to clean up those companies.
Lieberman said that last spring's turmoil — when Silicon Valley Bank, Signature Bank and First Republic Bank collapsed within weeks of each other — was the catalyst for Porticoes. His "knee-jerk reaction" to that mess, he said, was to get a shelf charter back in play. His group submitted its application to the Office of the Comptroller of the Currency in the fall.
"This is what we're good at," Lieberman said. "We know how to run those types of institutions, and we know how to raise capital for those types of institutions. … I wish I had been thinking about this in the summer of the previous year, or in time so that we were ready."
Porticoes was founded 13 years after Lieberman helped lead an investment vehicle called Bond Street Holdings, which raised more than $700 million in private capital to purchase a number of tiny failed banks in Florida. The company, which used the name Florida Community Bank,
Porticoes' iteration of the game plan looks a little different. This time around, the investor group, which is made up of large asset managers and family offices, is looking to acquire one or two medium-sized banks — instead of a handful of small ones — before doing cleanup, going public and selling, Lieberman said.
The group's analysis showed that the most at-risk banks were ones that grew quickly when rates were near zero, and now stand at about $5 billion to $75 billion of assets.
Unlike the liquidity troubles of 2023 that contributed to some of the largest bank failures in U.S. history, Porticoes is betting that outsize commercial real estate portfolios will kick out the legs of some banks, Lieberman said.
Many banks are already seeing credit quality weaken as commercial real estate, especially in the office sector, work-from-home policies, interest rates and inflation tamp down property values.
First-quarter earnings reports showed that credit is deteriorating at regional and community banks, driven by commercial real estate loans, David Chiaverini, an analyst at Wedbush Securities, wrote in a research note.
Valley National Bancorp announced in its first-quarter earnings that it
Although some
Earlier this year, New York Community Bancorp's stock price went into free fall after it reported a fourth-quarter loss and revealed trouble in its commercial real estate portfolio by taking a surprisingly large loan-loss provision. Only after being thrown a $1 billion lifeline in March did the Long Island-based bank's fortunes stabilize.
Graham of Klaros Group predicted that going forward, some banks will fail, but the reasons for those collapses will largely involve underwater bond portfolios, not commercial real estate.
Last week, Philadelphia-based Republic First failed after years of issues — ranging from governance battles, lost capital investments and insolvency that stemmed from $425 million in "unrealized" losses on its bond investments, per regulatory filings. Fulton Bank in Lancaster, Pennsylvania,
"This dynamic is not limited to Republic First," Graham said last week. "It's playing out in a whole bunch of other bank balance sheets, even as we speak. This disconnect between the economic reality of how much capital a bank really has and the stated regulatory capital level … is troubling."
Graham sees a larger opportunity in recapitalizations of banks that are troubled but have not failed. He estimates that banks are sitting on $700 billion to $1 trillion of unrealized losses due to higher interest rates but says that the losses are widespread enough across the industry that few banks will collapse.
The Philadelphia-based bank's parent company, Republic First Bancshares, had been roiled by a yearslong proxy battle involving activist investors groups and its former CEO.
Assembling a shelf charter group isn't like putting together a normal investment vehicle, Baker said. Even though an investor group can't have a specific target bank in mind, applications to the OCC must include a business plan and the names of members of the management team. A group also needs to prove both that it has an appropriate amount of capital and that it can maintain that capital while waiting for the opportunity to bid on a failed institution.
"Part of the challenge with a shelf charter is you have to show that your new regime is going to be able to effectively run a bank," Baker said. "You have to have your management structure in place, and you don't really know how troubled the bank you're going to be buying is."
Along with Lieberman, who is slated to be executive chairman, Manolo Sánchez Rodríguez, a former chairman, president and CEO of BBVA Compass, USA, would serve as president and CEO of an institution acquired by Porticoes.
Directors would include Tom Naratil, who held leadership roles at UBS Americas; former Bond Street Holdings independent directors Howard Curd and Tom Constance; and Phil DeLeonardis, a former officer at First Community Bank.
Although Porticoes has been granted a shelf charter by the OCC, it is still waiting on the Federal Deposit Insurance Corp.'s approval, and it plans to submit its application to the Federal Reserve soon, Lieberman said.
Buying failed banks can be an advantageous investment, Baker said, pointing to the recent earnings report of First Citizens BancShares,
"A shelf charter seems like a good idea, to be ready," Baker said.
