Trust makes the difference in $38 million bank deal
| Saturday, Sep 12 2009 08:00 PM
Last Updated Saturday, Sep 12 2009 08:00 PM
Images
Felix Adamo / The Californian Bart Hill, president and CEO of San Joaquin Bank, in April 2009.
Bart Hill courtesy photo / The Californian Bart Hill, president and CEO of San Joaquin Bank, right, meets Pawan Kumar Bansal, then India's minister of finance, now minister of parliamentary affairs, in New Delhi, India, in September 2008.
Photo courtesy of Randeep Dhillon / The Californian Bakersfield Indian-American businessman Randeep Dhillon, with former President Bill Clinton, at a June 22, 2009 fundraiser at the home of Los Angeles Mayor Antonio Villaraigosa.
Bakersfield banker Bart Hill set out for his 25th wedding anniversary in India about a year ago, unaware it would turn into probably the most important business trip of his career.
The two weeks Hill and his wife toured the country’s Golden Triangle were “a dream,” he said. The two immersed themselves in Indian culture and cuisine — and through introductions by Hill’s Indian customers back home, met some very wealthy businessmen.
These contacts proved valuable shortly afterward as Hill’s San Joaquin Bank came under pressure from federal regulators to raise a large amount of cash.
In a deal industry people call unique and promising, the bank announced July 20 that 11 Indian investors had pledged a total of $38 million to help recapitalize San Joaquin. If the money comes through (it has been delayed but is expected to arrive any day), the investors would together own 62 percent of the Bakersfield-based institution, though no individual would own more than 8 percent.
The deal originated — quite by accident, Hill insists — during the September vacation in India, where he met some of the investors for the first time. The personable, 6-foot-4-inch president and CEO apparently left a good impression.
“That tall guy, American guy, is big boss with American bank. I know him,” one of the largest investors in the group, New Delhi clothing factory owner Prem Chand, said by phone from India last month. Chand first met Hill during the India visit.
Hill’s success in attracting the Indians’ investment underscores the importance of personal relationships in doing business abroad. It also illustrates the depth of San Joaquin Bank’s financial need.
Triumph of trust
At least part of the investor group’s willingness to help the bank stems from its members’ confidence not only in Hill but also in one of his banking clients, Bakersfield agriculture businessman Randeep Dhillon, a well-connected Indian who recommended the investment to the group and has been instrumental in arranging the transaction.
Dhillon has considerable clout: He has family in the Indian government, and he counts former President Bill Clinton and Secretary of State Hillary Rodham Clinton as personal friends.
Beyond that, he said he has known and worked with Chand and others in the investor group for years.
“Whatever (Dhillon) says, we are there for him,” Chand said. He added that although he knows little about the bank, his children know it “very well.” No others among the investor group could be reached for comment.
For his part, Dhillon credits Hill for winning the investors’ trust during the banker’s first and only trip to India.
“They trust Bart big time,” he said. In addition, several of the investors visited Bakersfield three or four years ago and consequently came to “know the bank,” he said.
The role of trust in this investment comes as no surprise. In India much more than in the United States, personal relationships make the difference in business.
“Trust is something which works in India,” said Lunkim Thangboi, vice president and manager of State Bank of India’s Bakersfield branch. “Without trust, things don’t work.”
In this case, Hill said, trust has been backed up by solid inquiry on the group’s part. He recalled sending packets of information about the bank’s finances to members of the group.
But he does not deny that personal relationships have been important.
“It’s hard to tell how far (the investors) have been digging, and how much they’ve been relying on others,” he said.
Either way, the investment is of relatively little consequence for such wealthy individuals, Dhillon said.
“This bank for them is nothing” from a standpoint of financial risk, he said. He added that the investors hope their involvement will help the bank and the local community.
A time of need
For San Joaquin Bank, the $38 million is crucial. Although the money could still come from other sources, the bank needs to raise cash somehow, or potentially face being shut down by regulators.
On Nov. 7, not long after Hill’s trip to India, bank officials signed an informal agreement with federal regulators requiring the bank to bolster its financial reserves, among other stabilization measures.
The bank’s financial condition was deteriorating quickly. In the third quarter of last year alone, the bank charged off more than $11 million in bad debt.
The bank’s holding company, San Joaquin Bancorp, declared a net loss of $4.3 million in the third quarter of last year. In the first quarter of this year, the company’s net loss came to more than $18 million. Its stock price has slipped to less than $3 a share from about $20 a year ago.
Recently San Joaquin Bank’s shortage of capital resulted in the termination of two arrangements that it had found beneficial. One offered insurance on new deposits over $250,000; the other afforded the bank protection against financial risk tied to fluctuating interest rates.
Options
Alternatives to the Indian deal may exist. Hill said the bank has explored turning to institutional investors and selling more company stock publicly.
Neither is easy to achieve in the current market, especially with so many local banks searching for money, and so the Indian investment compares favorably, people in the industry say.
Ideally, the bank would look to institutional investors, except that such groups are generally “waiting for the bottom” of the market, said Dan Doyle, president and CEO of Fresno-based Central Valley Community Bank.
San Joaquin Bank’s agreement with the Indians, however, is “very unique,” Doyle said. Although the deal would have the effect of diluting the shares of existing investors, “if you need the capital, you need the capital.”
San Francisco bank analyst Tim O’Brien agreed that the Indian deal is uncommon (“remarkable” was his term). He said that any arrangement for new capital in this market “bodes well” for San Joaquin Bank.
“It’s a tough environmental to raise capital, but capital is more valuable right now and so it’s worth more,” he said, “and so if a bank’s able to recapitalize, that’s what counts.”
Waiting
The money was originally slated to arrive from India at the end of July, though the agreement contained no deadline.
Hill said there is no reason to worry — that regulators have given the bank no final date by which the money must come through, and for that matter, no minimum amount that must be raised, despite “an obvious need for capital.”
Moreover, Hill said he has been informed that the transfer has been approved.
“I’m going to stop predicting, but it just seems like it’s moments away,” he said. “You’ve got a foreign government to deal with.”
Any large transfer of money from India to the United States would have to be reviewed by the Reserve Bank of India.
The main factors regulators at RBI would look for are whether the amount of money contributed exceeds a per-individual limit, and whether taxes had been paid on the money, said Thangboi, at the State Bank of India, which until recently was owned in part by RBI.
In general, he said, the Indian government encourages its citizens to invest in the United States in hopes of bringing in dollars.
“Everyone would like to have a dollar currency in their country,” Thangboi said.
Dhillon said the deal will go through.
“It’s gonna happen,” he said. “We need to save the bank.”
