Professional Business Bank in Pasadena may not be well known, but it has accomplished what few other troubled small institutions have been able to do: raise new capital.
It had to resort to an unorthodox strategy to do so, though.
The bank, which has been struggling with losses in its commercial real estate portfolio, quietly announced last week that it has received a capital investment expected to bring the institution back into compliance with regulatory standards.
“We’re one of (few) banks that have been able to successfully recapitalize themselves in the state of California,” said Mary Lynn Lenz, a bank turnaround specialist who was brought on as chief executive in 2009 to address Professional’s problems.
Professional, which is operating under a cease-and-desist order from regulators, has secured a $12.6 million investment from the owner of its parent company, ending a nearly yearlong search for capital.
While several larger L.A. institutions, including Hanmi Bank and Preferred Bank, have found much needed capital in recent months, many smaller banks have had less luck and been shuttered by regulators. Capital, the key indicator of an institution’s financial health, cushions a bank against losses in its loan portfolio.
To complete Professional’s recapitalization, San Francisco private equity firm Belvedere Capital, the owner of Professional’s holding company, named SoCal Bancorporation, pursued an unusual financial maneuver. Rather than put money into debt-laden SoCal, Belvedere bypassed the company and invested directly into Professional.
The move reduced SoCal’s stake in Professional from 100 percent to less than 4 percent. After the investment, which took place in May and was announced July 4, Belvedere, through its Belvedere Capital Fund II, became the holding company of Professional.
With its ownership stake nearly gone, SoCal may not continue as a going concern, its auditors have found, which could stiff its creditors but clean the slate for Belvedere and Professional.
For Belvedere, there was more at stake in this recapitalization than just Professional. Belvedere also holds stakes in community banks in California and Texas, and under federal law regulators could seize all of Belvedere’s subsidiary banks if one of them, such as Professional, failed.
Bert Ely, a bank consultant in Alexandria, Va., said Professional and its clientele will not likely see many direct effects of the turmoil, but the veteran bank analyst said the recapitalization was unique.
“Not sure I’ve seen anything quite like that before,” he said.
Founded in 2001, Professional, which has assets of $305 million and about 60 employees, primarily serves small businesses in the communities surrounding its two branch locations in Pasadena and Glendale.
In 2007, Belvedere acquired Professional in a $51 million deal in order to enter the lucrative Southern California market. A year later, the firm acquired Spectrum Bank in Orange County and merged it into Professional.
At the time, the firm said that it intended to grow the institution into a regional powerhouse, expanding its assets to as much as $5 billion. Those plans were quickly derailed, however, when the financial crisis hit.
“Commercial real estate in California took it on the nose,” said Lenz. “We are a business bank, and we do a lot of lending in the communities we serve. I believe that our underwriting was sound, but because of the depreciation in the commercial real estate market, we, as many of our peers, have suffered.”
In August, Professional received a cease-and-desist order from regulators directing the bank to raise capital levels and reduce problem loans. Belvedere began looking for capital on the open market but struggled to convince outside investors to put money into the bank.
According to sources familiar with the situation, investors were reluctant because in addition to the problems facing Professional, SoCal also was in need of capital due to the decline in value of its assets, primarily its stake in Professional. As of Dec. 31, SoCal’s liabilities exceeded its assets by nearly $12 million.
“Notwithstanding the stabilizing national economy and improving equity markets, SoCal has continued to struggle as a result of a decline in the value of SoCal’s assets,” the company said in a recent statement.
In March, the Federal Reserve Bank of San Francisco entered into a written agreement with Belvedere, Belvedere Capital Fund II and SoCal directing the entities to utilize their “financial and managerial resources … to serve as a source of strength” to Professional.
With the capital-raising environment unfriendly, the firm decided to sell certain of its holdings in order to recapitalize Professional out of its own pocket.
“When they realized it was going to be tough to attract capital from other venues, they decided that this was an important enough franchise that they would liquidate their investments in other banks in order to protect this company,” Lenz said.
‘Little bit easier’
Over the past year, regulators have closed a number of L.A. banks that failed to raise capital, including California National Bank and First Federal Bank of California.
Recently, however, several local institutions have found saviors: Preferred Bank in downtown Los Angeles completed a $77 million stock sale, while Hanmi Bank in Koreatown has sold a majority stake to a South Korean financial conglomerate for more than $200 million.
Ely admitted that “it’s gotten a little bit easier” to raise capital in recent months, though not by much. Analysts have noted that banks such as Hanmi and Preferred had the distinct advantage of Asian-American ownership, which gave them entre to potential investors in the Chinese-American and Korean-American communities. Nonethnic banks typically don’t have that kind of access.
Indeed, Professional is among the first non-Asian banks in the financial crisis to be recapitalized after falling below the well-capitalized regulatory threshold.
To raise the money, however, Belvedere had to sell some of its holdings.
Since it was founded in 1994, Belvedere has held stakes in more than a dozen community banks, many of which have been sold off. According to regulatory data, as of March 31, Belvedere subsidiaries served as holding companies for three banks: Professional, San Francisco-based Presidio Bank and Houston-based Green Bank.
A representative of Belvedere declined to say which of its holdings were recently sold, but according to the Federal Reserve Bank, the firm has reduced its stake in Presidio over the past year. Meanwhile, Green announced recently that it had received a capital investment from a group of private equity firms not including Belvedere.
Ely said Belvedere had little choice but to rescue Professional because if the bank was closed by regulators, Belvedere also could have lost Presidio and Green despite the fact that those two institutions are relatively healthy. Under the so-called cross-guaranty provision of the Financial Institutions, Reform, Recovery and Enforcement Act of 1989, if a bank fails, regulators can seize all the other institutions owned by the parent company.
That happened in October when regulators seized all nine subsidiaries of Oak Park, Ill.-based FBOP Corp., including L.A.’s California National Bank, even though at least one of the banks was considered financially sound.
“You’re looking at a situation that is somewhat similar to FBOP,” Ely said. “If Professional Business Bank were to fail, then Belvedere essentially would lose substantially all or all of its ownership interests in the other two banks.”