When Alex Meruelo invested in Brentwood’s NCAL Bancorp late last year, people weren’t exactly sure why. NCAL had been losing money for years, battled lawsuits and a federal probe related to its payment processing business, and still owed the government money from the days of the financial crisis.
But Meruelo, chief executive of Downey conglomerate Meruelo Group, has big plans for the bank. Big as in billions of dollars.
Xavier Gutierrez, chief executive of Meruelo-owned Meruelo Investment Partners, which in turn owns Commercial Bank of California in Irvine, said the NCAL investment is just the first phase in a plan to build a bank with between $1 billion and $5 billion in assets. The bank will focus on serving a base of business owners and entrepreneurs by targeting areas of Los Angeles and Orange counties – Brentwood and Irvine, for example – with lots of those types of customers.
In December, Alex Meruelo personally invested about $13 million in NCAL, parent company of National Bank of California in Brentwood, giving him about 89 percent of the company. He also has the right to purchase an additional $10.2 million in common shares over the next 12 months.
Gutierrez said building a banking platform is a logical step given the Meruelo Group’s current investments and team members, and the strength of the L.A. market.
“When we look at our investment strategy, it’s how do we marry our capital, how do we marry our operating expertise, and then how do we actually take an asset we currently have and expand it?” Gutierrez said. “We obviously had a banking license and a bank. What could we do beyond that? This is a great opportunity and a great market.”
Unlikely target
Despite its glitzy Brentwood address, National Bank has had a rough few years. It has been bleeding cash, was one of the few banks that still owned money under the Troubled Asset Relief Program, and had to deal with lawsuits and a federal probe stemming from its role in processing payments for payday lenders. The bank was also under a consent order from the Office of the Comptroller of the Currency, which forced it to adhere to more stringent capital requirements that hurt profitability.
Alex Meruelo had actually agreed to invest in NCAL back in September 2013, but that was just a few weeks before the payday lender lawsuits came out.
“We have had a few regulatory hurdles to get over,” said National Bank Chief Executive Henry Homsher, who is staying on in the same role.
One of the biggest hurdles, Homsher said, was that the Treasury Department still owned preferred stock in the bank, which it had purchased through TARP. As part of the recapitalization, Meruelo contributed $2.1 million toward buying back the Treasury’s preferred stock. Current bank directors ponied up a remaining $1.8 million.
Homsher, who joined National Bank in 2011, insists that the underlying value in the bank has always been there, and the institution’s recent struggles have largely been due to stubbornly low rates and precrisis problem assets.
“When I arrived, the core deposit franchise of this institution was a gold mine,” he said. “Rates just had to go up 1 percent and we’re making bank. But the challenges were a little bit bigger. Interest rates didn’t move.”
In certain ways, that rocky road made National Bank an attractive target for Meruelo Group, a value investor.
“We like to look at assets that we think are mispriced,” Gutierrez said. “We look at diamonds in the rough.”
Its payment-processing saga kept National Bank in the tall grass for some time. The bank has long had an outsize presence in that world, consistently ranking as one of the biggest players nationwide, despite being a small bank – even by L.A. standards.
But in 2013, National Bank and other financial institutions were accused of aiding illegal high-interest lenders by processing loan payments on their behalf, and were the target of federal regulators who wanted to hurt the payday lenders by making banks think twice about working with them.
Despite the lawsuits – which were dismissed last year – Homsher and the Meruelo team have no intention of abandoning the payment-processing business. In fact, they’d like to grow that practice, which is a big generator of fee income.
Since the probe was launched, OCC regulators have frequently been on site at National Bank, and they’ve assured Homsher that everything is above board, he said.
“We have repeatedly had the OCC here expressing that we are the best practices in the business,” he said, “better than the big banks. So we’re comfortable with what we’re doing.”
Diamond in rough
The Meruelo Group is best known as the owner of Latino-focused chain La Pizza Loca, but it also owns the Grand Sierra Resort in Reno, Nev., and a few Spanish-language TV stations and other assets – notably the bank.
Alex Meruelo’s banking strategy is largely directed by his former personal banker, Ash Patel, who became chief executive of Commercial Bank of California in 2013. Patel also co-founded Premier Commercial Bank in Anaheim, which was acquired by Encino’s CU Bancorp in 2012.
Shortly after taking over at Commercial Bank, Patel identified National Bank as a logical target for Meruelo’s roll-up plan.
“They were looking for capital,” he said. “Alex had capital. We had a bank. It made sense for us to be looking at it.”
Patel, who became chairman of NCAL after Meruelo’s investment, said the plan is to combine Commercial Bank, which has about $323 million in assets, and National Bank, which has about $348 million. Both banks will become part of NCAL Bancorp, which Meruelo intends to use as the holding company for the entire platform, though the banks themselves – and others he plans to acquire through NCAL – will keep their current names for branding reasons.
Patel wants to grow the platform, organically and through more acquisitions, to have assets of between $1 billion and $5 billion, a bank that would be big enough to serve the needs of growing businesses but small enough to still feel like a community bank. Patel said there aren’t enough banks like that in Southern California.
Of the 55 banks headquartered in Los Angeles County, just 11 fall into that range, and many of those have an ethnic focus or are subsidiaries of a larger bank.
But Alan Rothenberg, chairman of Century City’s 1st Century Bank, said he hasn’t observed a shortage of supply in any area of the banking spectrum and that, even with a bigger balance sheet, NCAL will face plenty of competition.
“Right now, there are a lot of banks with a lot of lending capacity fighting for the same few deals,” Rothenberg said.
Bank roll
Meruelo is not the first to attempt a Southern California bank roll-up in recent years. Two examples are downtown L.A. bank holding company Grandpoint Capital Inc. – which agreed to buy NCAL in 2012 before the sale fell through – and Irvine’s Opus Bank, both of which are backed by private equity.
But those banks started buying years ago, when there were more local banks and more bank owners looking for an exit strategy. Now, said Rothenberg, there aren’t as many good ones to buy.
“It’s a little slimmer pickings than it was when those other guys started,” he said.
With fewer options, the Meruelo team will need to make sure it is being a selective shopper and not just adding banks indiscriminately to get to a certain size, said Tim Chrisman, chief executive of bank-focused executive search firm Chrisman & Co. in downtown Los Angeles.
“Even though you might pay a premium, it’s better to buy a good bank than a troubled bank,” he said. “You inherit the troubles.”
But Gutierrez said Meruelo is a patient investor, willing to wait for the right kind of deals, and that his entrepreneurial nature should give Meruelo Group an edge in providing services to the small-business owners Gutierrez anticipates making up the core clientele of the new bank.
“We want to bring our experience to other entrepreneurs who started just like Alex did 30 years ago with La Pizza Loca,” he said.
