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Thursday, Mar 28, 2024
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Bank Investor Looks to Turn the Negatives Into Positives

Dan Yates, is Neighborhood’s CEO.

A community development bank that serves low- and moderate-income areas in San Diego has been thrown a lifeline by an investor with an eye for troubled banks with potential.

After years of losses caused by problem loans, compounded by an increase in spending to strengthen the bank’s anti-money laundering capabilities under orders from the federal government, National City-based Neighborhood National Bank has $6.4 million in new capital and a champion with a history of investing in community banks.

Stephen Taylor, a Los Angeles-based investor, said the financial crisis spurred his initial interest in small and mid-sized banks looking for capital.

“We thought there was an unmet need and a market opportunity for banks that were trying to raise $2 million to $10 million,” he said. “They weren’t doing deals big enough to attract Wall Street, and some also had exhausted local sources of capital.”

He started out investing, through Chicago-based Taylor Asset Management Inc., of which he is chief executive, in Pan Pacific Bank in Fremont. He also put money into Coast National Bank in San Luis Obispo. Last year, he invested in Tri-Valley Bank in San Ramon.

“In addition to market opportunity, the great thing about these banks is they never really got too far away from the basic business of banking, and we like that,” he said. “With the big banks, their balance sheets have gotten so complex I’m not sure the CEOs even know what’s going on.”

In Underserved Areas

Taylor led Neighborhood National’s recent recapitalization, which was initially expected to total $6 million but grew to $6.4 million.

The bank, which opened 20 years ago, lends in areas of San Diego that traditional banks have historically shunned, such as Southeast San Diego and National City.

Whereas previously he had invested through Taylor Asset Management, his investments into Tri-Valley and Neighborhood National have been led by Taylor personally, rather than through his fund. That’s because the federal government caps the percentage of a bank an investment firm can own; pass that percentage and the firm is considered a bank holding company, which can limit its other activities.

Previous investments have ranged from a voting stake of 9.9 percent to nearly 25 percent. This investment in Neighborhood National topped 50 percent; Taylor is now the bank’s chairman.

He brought along two new members to the bank’s board of directors, Dan Bandi and Jeff Maher, to join longtime members Richard Castillo and Kurt Chilcott. Dan Yates, who became the bank’s president and chief executive in 2013, also remains a director.

Preserving Community Focus

It was Taylor’s previous investment in Coast National that led him to Neighborhood National.

Anita Robinson was president and chief executive officer of Coast National in 2014 when Taylor participated in the bank’s recapitalization.

“He was on my board until we sold the bank to Bank of the Sierra,” she said, a deal which closed in July.

Today, Robinson is market president of the San Luis Obispo area for Bank of the Sierra.

Her relationship with Neighborhood National Bank dates back to the 1990s, when she formed a friendship with the bank’s founder, Bob McGill. (McGill, a native San Diegan, died in May.)

Robinson met McGill at a conference in Washington, D.C., in the early 1990s. A few years later, they began trekking parallel paths as they each worked to open a new bank.

“Bob and I were constantly helping each other, problem-solving and mentoring each other,” she said.

When McGill told her he wanted to recapitalize the bank, she introduced him to Taylor.

“I said, ‘I think I might have an investor who might be a nice fit for you,’” she said. “He’s really interested in community development banking and could help you not only recapitalize, but preserve the community focus of Neighborhood National.”

They began talking. Then in May, McGill died.

Without McGill as the effort’s “guiding force,” “it was the most complicated and drawn-out process that we’ve encountered yet,” Taylor said. In the end, “we were able to work out an agreement and ultimately close.”

Regulators’ Concerns

A consent order still hangs over the bank, a result of its business that comes from money services businesses (MSB), which regulators require banks closely monitor for signs of suspicious activity.

Taylor said the bank is working to ameliorate regulators’ concerns — but that Neighborhood National doesn’t intend to cease serving its MSB customers. Many are Chaldeans, a group of Christians who emigrated from Iraq, fleeing persecution from the country’s Shia government.

“A lot of them are small entrepreneurs, first- or second-generation immigrants with a strong affinity for cash,” he said.

Although staying in that line of business means the bank will have to invest more to ensure it’s in line with regulatory requirements, he’s not particularly fazed.

“The type of banks we and I have invested in, that kind of goes with the territory,” he said. “All these things can be scary, but if you have a decent management team and an adequate capital plan, in a sense, all the negatives become positives on the way back up again.”

That, of course, includes the shares he now owns, which he hopes will increase in value as the bank continues its recovery from the lean years.

For Yates, the infusion of capital is a welcome relief.

“It increases our legal lending limit and our capital ratios which positions us to book new loans and grow our balance sheet,” he said. “We have a big pipeline of loans from clients, so I know the best thing we can do with our capital is meet those needs and beyond that, it’s gravy.”

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