“It was like watching someone in an emergency room take their last breaths. There is nothing you can do, and it takes an emotional toll,” Mahnaz Khazen said, recalling the days leading up to the government’s seizure of HarVest Bank of Maryland on April 27.
Khazen, who spent the better part of a year raising money to recapitalize the Gaithersburg thrift, said she is still stunned that all of that hard work amounted to nothing.
The founder of U.S. Immigration Investment Center, a San Jose, Calif.-based firm, was part of a larger group of HarVest officials and local investors trying to raise $16 million to shore up the bank’s reserves.
But their efforts fell short. And regulators swooped in April 27, turning over $145.5 million in deposits, $95 million in loans and $6.2 million in other real estate owned by HarVest to McLean-based Sonabank.
Khazen knew it was coming down to the wire. Once Harvest’s capital reserves fell below 2 percent of its total assets in February, regulators gave the bank 90 days’ notice that it was in jeopardy of falling into the government’s hands.
Troubles at HarVest had been brewing for some time. A soured portfolio of mortgages purchased from Countrywide Home Loan in 2006 caused the bank to hemorrhage money for several years. Regulators hit the bank with an enforcement action in 2010, pressing officials to boost capital and reduce the amount of delinquent loans on its books.
Yet Khazen felt there was still a chance the bank could be rescued. She had raised $5 million through an immigration program, known as EB-5, that grants visas to immigrants in exchange for an investment of $500,000 to $1 million in a U.S. company. Khazen had taken an interest in HarVest with the hopes of creating a case study on the successful use of EB-5 in recapitalizing distressed community banks.
HarVest had the benefit of being in a healthy market and having a team diligently working to raise capital. In late 2010, Mehrdad Elie, a former banker, pledged to buy $5 million in common stock, if HarVest could raise the remaining capital. Other investors, including Rockville financier Robert Senko, also floated money to the bank.
Toward the end, Khazen rustled up another group of investors to buy some of Harvest’s $25 million in troubled loans. All that was needed was another $5 million. Another group of investors came to the table with that amount last month, only to withdraw the offer 10 days later.
“It was heartbreaking because it was impossible to bring in another investor in such a short amount of time,” Khazen said. Officials from HarVest declined to comment for this article. “We were at the maximum investment allowed by regulators and couldn’t add another dime.”
Khazen is exploring investments in 15 other community banks around the country, including three in the Washington area whose names she would not disclose. She said there are over 500 foreign investors on the waiting list to participate in the EB-5 program.
“HarVest was a huge learning experience,” Khazen said. “We are going to make sure we participate in banks that have raised 75 percent of the capital they need, and we would be the last leg.”
To date, there have only been three bank failures in the Washington area since the downturn. Suburban Federal Savings Bank in Crofton shuttered in January 2009, while Greater Atlantic Bank of Reston went down that December. Sonabank scooped up the assets and deposits of Greater Atlantic, with the Federal Deposit Insurance Corp. agreeing to share in any losses.
This time around, the agency did not put the same offer on the table. FDIC spokesperson LaJuan Williams explained that the number of loss-share agreements have simply waned as there have been fewer failures.
Sonabank was one of five bidders on HarVest — the FDIC has yet to disclose the list of all the applicants. The bank acquired the assets and liabilities of HarVest at a $27.3 million discount, which President R. Roderick Porter said gives Sonabank some “flexibility to charge off or sell the [troubled] loans at discounts.”
Chief executive Georgia Derrico said that the HarVest branch network in Montgomery County would likely build upon the success of Sonabank’s location in Rockville. With HarVest’s assets in hand, Sonabank now has a total $720 million in assets and $610 deposits.