To most potential investors, Pan American Bank looked like a money-losing institution that was outgunned by competitors and on the brink of failure. Not a good bet.
But to the 16 West Coast banks that last week invested $6.3 million into Pan American, saving it from closure, the East L.A. lender looked like something else: a way to get credit from bank regulators, now and for years to come.
A federal law that requires banks to serve poor neighborhoods also encourages them to invest in certain kinds of banks – those that are minority owned, or work in poor and underserved areas. Pan American, the oldest Latino-owned bank in California, is both.
Noor Menai, chief executive of downtown L.A. lender CTBC Bank Corp. (USA), one of the 16 Pan American investors, said that’s how he justified participating in the deal.
“We have a mandate to invest in the community,” Menai said. “This falls into that category of investing in your community in an innovative way. It’s a fantastic opportunity.”
It’s the same story for the other banks that participated in the deal. The L.A. banks are Koreatown lenders BBCN Bancorp Inc., Wilshire Bancorp and Hanmi Financial Corp.; downtown’s Grandpoint Bank and Preferred Bank; Chinatown’s Cathay General Bancorp; and Century City’s PacWest Bancorp.
Mick Grasmick, a partner at L.A. law firm Manatt Phelps & Phillips who advised CTBC and other banks on the deal, said clients wanted to make sure their investment would count toward their requirements under the Community Reinvestment Act, or CRA.
“Clearly banks looked to whether this was the right investment for them and whether they’d be able to add it to their list of CRA-compliant activities,” Grasmick said.
None of the investing banks owns more than a 4.9 percent stake in Pan American. Bank founder Romana Bañuelos and her family remain Pan American’s majority shareholders, meaning the bank remains minority owned, preserving a benefit under the CRA.
Now and later
In the short term, banks can expect credit from regulators for their investment in Pan American. But in the years ahead, they could get additional CRA credit by lending to Pan American’s customers.
Robb Evans, a turnaround consultant who took over as Pan American’s chief executive last week, said he expects the investing banks will work with Pan American if customers need large loans or other services the small lender can’t provide on its own. (The previous chief executive, Jesse Torres, left in April.)
By arranging for its partners to provide larger loans and services, Pan American can hold on to customers, while letting the bigger banks into the low-income East L.A. market. That gives them CRA credit, too.
“These are banks that are anxious to lend in this community,” Evans said. “They’re looking for our help to do that. This should be a good marriage.”
This isn’t the first time banks seeking CRA credit have helped out a local lender. Several times in the past decade, BBCN and Cathay have bought stock or loaned money to Mid-Wilshire savings and loan Broadway Financial Corp., the only black-owned lender west of Dallas.
Still, even knowing they could get CRA credit by investing in Pan American, the deal wasn’t a sure thing.
Pan American is the smallest bank in Los Angeles County and hasn’t been profitable since 2005. César Rosas, the bank’s vice president of finance, said he worked for the past two years on recapitalizing the bank, but at least three investor groups walked away from deals over the past year.
Francisco Leal, a Long Beach attorney on the bank’s board, said the most recent failed deal unraveled in May. It involved a bank and other investors, and the promise of CRA credit wasn’t enough.
“It all turned on a particular bank coming forward and putting in a certain amount of money,” Leal said. “But they looked at our portfolio and they just weren’t convinced.”
Timothy Chrisman, chairman of downtown executive search firm Chrisman & Co., helped broker last week’s deal and said that the recapitalization came together in part because bank regulators were desperate to keep Pan American open. Rather than close the bank, they allowed the deal to go through without some of the usual scrutiny.
For instance, regulators would typically have to approve a business plan before signing off on such a deal. In this case, regulators allowed Pan American and investing banks to skip that step, with the understanding that a new business plan will be developed.
Still, banks that participated in the recap had questions of their own.
“I’d call a CEO and they’d say, ‘That sounds great,’” Chrisman said. “Then I’d get a call from the CRA officer or the chief credit officer and they’d say, ‘This looks like kind of a crappy investment.’”
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