PacWest Bancorp has bought 14 banks in the past decade, but deal No. 15, its latest and largest, has hit a snag.
Non-profit groups have protested the Century City bank holding company’s acquisition of downtown L.A.’s CapitalSource Inc., saying PacWest doesn’t do enough lending in poor communities and to small businesses.
The non-profits, led by San Francisco’s California Reinvestment Coalition, have asked federal regulators to hold public hearings about the deal and require PacWest to say how it will improve its lending and community service record. Failing that, the coalition wants the deal nixed.
Such protests are usually reserved for deals involving national banks; indeed, PacWest’s previous acquisitions weren’t big enough to draw the coalition’s attention. But the $2.3 billion proposed purchase of CapitalSource is the biggest bank deal announced in the United States this year. It would create a $15 billion-in-assets bank company that would be the eighth largest in California.
Kevin Stein, the coalition’s associate director, said his group is stepping up now not only because of the size of the deal but because he sees a wave of acquisitions coming and wants bank executives to know they’ll have a tough time unless they meet his criteria.
“There are more mergers going on now,” he said. “We want the regulators to be out in front and set down a marker and say, ‘Don’t forget your obligations to serve the community.’”
PacWest executives did not return calls for comment.
CapitalSource executives said they could not comment because of the ongoing merger approval process.
Opposition from community groups likely won’t kill the deal because PacWest will likely make concessions to keep the deal on track, said Richard Levenson, chief executive of Western Financial Corp., a San Diego investment bank that works with community banks.
“I don’t see this as openly being a hindrance to the closing of the transaction,” Levenson said. “But PacWest will probably be required to address the issue in some manner.”
That could mean a promise to do specific levels of community development lending or specific amounts of donations to local non-profits.
Julianna Balicka, a community bank analyst in the San Francisco office of New York investment bank Keefe Bruyette & Woods Inc., said protests haven’t typically delayed or altered previous bank deals. But she noted that this is one of the few protests filed since the financial crisis and that things could be different now.
“In the old days, these were fairly inconsequential,” she said. “But regulators right now seem to be more concentrated on community and consumer protection. It’s a new environment, so it’s hard to say whether the old rules still apply.”
This is the first deal the coalition has publicly sought to block since 2011, when it lobbied against credit card issuer Capital One Financial Corp.’s acquisition of online bank ING Direct. The deal went through without major concessions.
At the heart of community groups’ protest is PacWest’s lackluster rating in its latest Community Reinvestment Act examination.
Those exams, typically done every three years, rate how well banks are complying with the act, which requires them to lend in poor neighborhoods and to support economic development, low-income housing and non-profit groups in the areas they serve.
In its 2010 examination, the most recent available, PacWest got the lowest possible passing marks. It was rated as “low-satisfactory” across the board. CapitalSource, though, was rated as “outstanding.”
Stein said his group is worried the combined bank will act more like PacWest than CapitalSource. Though several key Capital-Source executives will stay on, PacWest’s chairman and chief executive would maintain those roles after the acquisition.
“There’s a concern the good work going on at CapitalSource is going to be lost,” Stein said.
Groups opposing the merger have voiced specific demands.
Roberto Barragan, president of coalition member Valley Economic Development Center in Van Nuys, said he wants PacWest to commit to specific levels of community development lending, small-business lending and charitable donations based on the bank’s assets and income. For instance, he would like PacWest to commit to donating 2 percent of its profits.
That’s the donation level accepted by San Francisco’s Union Bank, but about four times the level that PacWest had in the last two and a half years. In that time, the bank’s donations have totaled $629,000, according to the merger application filed with the Federal Deposit Insurance Corp. and the Federal Reserve Bank of San Francisco. That’s about a half-percent of PacWest’s profits in the same period.
“These are reasonable things other banks have committed to,” Barragan said.
The Reinvestment Coalition submitted its protest letter to the FDIC and Federal Reserve last month, toward the end of a monthlong period when the agencies accepted public comment about the proposed acquisition. The agencies both confirmed that they received the letter but would not comment further.
One specialist in banking law, Keith Holmes, a partner at Century City law firm King Holmes Paterno & Berliner, said regulators will have to review PacWest’s application and the coalition’s letter. From there, they could call for public hearings, though he doubts that will happen.
Holmes said the protest will likely delay the PacWest-CapitalSource deal by a month or more.
“Regulators have to consider the filings and consider doing hearings,” he said. “This will cost PacWest and CapitalSource some time.”
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