West Coast Bancorp of Lake Oswego, Ore., one of many struggling institutions in the Pacific Northwest, said Monday it managed to raise all the capital it needed to satisfy regulators — and then some.
West Coast got $155 million from a group of private-equity investors, despite being weighed down by construction loans, suffering heavy losses for five straight quarters, and having a regulatory order.
The private placement, which involved several well-known industry investors, including Michael F. Price, boosted the total risk-based capital ratio at the company's bank unit to a hearty 17%.
Robert D. Sznewajs, the $2.7 billion-asset company's president and chief executive, said the extra cushion was important because there are still plenty of unknowns that could trip up its progress.
"I don't think anyone knows what the correct amount of capital should be," he said in an interview Monday. "By choosing this level, we eliminated the question 'Is it enough?' "
Industry watchers said that, as more money starts to move off the sidelines, banks are likely to overcapitalize because the new investors will not want to see their stakes diluted by subsequent capital raises.
"This is what a lot of institutions need," said Brett Rabatin, an analyst at Sterne, Agee & Leach Inc. "Some banks are going to have to raise too much capital to ensure that these investors, who are buying into these deals, are the last dollar in. They don't want to do another capital raise behind it to fund losses or chargeoffs."
Of course, the extra cushion came at a price. Once the new investors convert their preferred shares into common stock, they will own 83% of the company.
Sznewajs said nearly the entire capital infusion would be allocated to the bank.
That's $115 million more than it needs to be considered well capitalized under the typical regulatory standards. The bank also will significantly exceed the total risk-based capital ratio of 12% it is required to have under the cease-and-desist order, which also was disclosed Monday.
Several other companies that anticipated regulatory orders — largely memorandums of understanding, which are considered softer than cease-and-desist orders — have announced in recent weeks that they raised additional capital through common stock offerings. But industry watchers cautioned that recent capital coups, including West Coast's, most likely do not mean the cash floodgates will open for all.
"A few more banks will get funding, but there will be a pool of institutions that the FDIC ends up with," Rabatin said. "There are a dozen banks looking for money in the Pacific Northwest. I think about half will get it."
Sznewajs said he does not know of any other bank in his region that has raised capital after a cease-and-desist order. "We are the only ones in the Pacific Northwest who have been able to do it," he said. "I hope this will be a positive for the industry and the Pacific Northwest."
Richard Levenson, the president of the San Diego investment bank Western Financial Corp., said that when investors start to really move their funds it will be a stampede.
"When it does start to come in, it will happen rapidly," he said. "Investors are going to want to have the first look at the best deals. Those banks that have manageable loan problems and just need capital will find it. And those where nobody can determine how deep the hole is are going to go to the wayside."
Sznewajs said residential construction lending damaged his company's loan portfolio, as it did many others' in the region. At the end of the third quarter, nonperforming assets were 7.25% of West Coast's total, up 84 basis points from a year earlier.
The company said Monday that it lost $12.4 million during the period, almost double the loss a year earlier.
Analysts who follow the company on average expected it to report a per-share loss of 36 cents, but the actual figure was more than double that, at 79 cents.
The company provisioned $20 million for loan losses in the third quarter, 78% more than a year earlier.
But despite its condition, West Coast was able to lure investors because it has an attractive business with a strong deposit base, industry watchers said.
"Of the names with significant credit issues, this is the one with the most attractive deposit franchise in the Pacific Northwest," said Joseph Fenech, an analyst at Sandler O'Neill & Partners LP. "Investors were eager to see it recapitalized because of the franchise value."
Price is famous for investing in companies that appear undervalued.
"He is the quintessential value investor," Levenson said. "It sounds like they are seeing significant upside here."
Aside from MFP Partners LP, a family investment partnership managed by Price, the investment group included Castle Creek Capital and GF Financial LLC.
As part of the deal, two members of the investment group are entitled to seats on the board, and two others are entitled to send nonvoting observers to board meetings.
Sznewajs said on a conference call Monday that the capital raise would let the company resume lending, which is essential to recovering from its extended credit trouble.
"We knew we had to grow the loan portfolio to create revenue to return to profitability," he said.
Sznewajs said the company had been hunkered down so long that it would take several quarters to get its lenders out into the market looking for new business again.
"Turning on the loan machine is a process that will take six to nine months," he said. "We've been very defensive, just trying to make sure we take care of existing customers."
