The capital markets, frozen for the better part of the past year, have finally begun to thaw for L.A. banks.
Recently, a number of publicly traded local banks from the largest to some of the smallest have successfully raised capital through common stock offerings.
Just last week, East West Bank, the subsidiary of Pasadena-based East West Bancorp Inc., announced it raised more than $80 million through a stock offering that executives said was "oversubscribed fourfold."
The capital-raising measures open to banks these days are not limited to common equity, either. Several local banks have found success with private offerings and other measures.
"The capital markets have been more open to injecting some capital into the banks, and given the challenges the banks are facing, it's timely," said Aaron James Deer, a stock analyst with Sandler O'Neill & Partners LP, who tracks East West and other local banks. "We'll see how big investors' appetites are, but at this point it seems there are plenty of people willing to put some money into the banks."
The loosening of the capital markets could not come soon enough for many banks, which have found it nearly impossible to raise capital since late last year as investors stayed away from stocks, particularly in banking.
Capital acts as a safety valve of sorts for banks to guard against loan losses. And capital levels have dropped at virtually every institution over the past few quarters as they have been hit by increasing commercial real estate loan losses on top of already weak residential real estate loan portfolios. Additionally, some banks need capital to repay the funds received under the government's financial rescue program.
Though the money is not loaned out, increasing capital also frees a bank to grow its deposit base, which is used to make loans. In that way, analysts said, successful equity offerings can indirectly lead to an easing of tight business and consumer credit.
Now, with a measure of confidence restored, a growing number of banks are trying their hands at public offerings.
City National Bank, the subsidiary of L.A.-based City National Corp., was among the first. The bank, Southern California's largest with $16.6 billion in assets, raised more than $120 million in May by issuing 2.8 million new shares its first stock offering in 16 years. The bank also raised $50 million in a debt offering.
"We are encouraged by both these capital-raising achievements and some of the preliminary signs we are seeing of progress in the economy," said City National Chief Executive Russell Goldsmith in a recent second quarter conference call.
Measure of health
Capital adequacy is of vital importance to financial institutions. The funds provide a cushion against loan losses and regulators use a bank's capital ratios as a key measure of financial health. A number of recent bank failures, including the February seizure of Alliance Bank in Culver City, occurred after capital levels dropped too low.
None of the banks that have recently raised capital are close to being in such dire straits. For example, in the case of East West, capital-raising measures were meant to guard the bank against expected and unexpected future losses.
"We believe we have the capital to weather an even more severe economic environment than we currently expect," said Chief Executive Dominic Ng in a statement, adding that the capital will allow the bank to "keep up an aggressive pace in resolving problem assets."
East West, the second largest bank in Los Angeles, has $12.7 billion in assets.
The bank, which caters to the Chinese-American community, has raised well over $200 million in recent weeks through its public offering, a private offering and other measures, including the exchange of convertible preferred shares to common equity.
On the surface, East West might not look like the most attractive investment option. Last month, the bank reported a $92 million second quarter net loss as it boosted its provision for loan losses, and analysts said there could be significant losses in the coming quarters. Shares are off nearly 60 percent from late last year.
But investors have flocked to East West's offerings in part because there is a better sense now of which banks will survive the current turmoil, said Wade Francis, president of Unicon Financial Services Inc., a bank consulting company in Long Beach.
"Once investors understand who will survive, they're much more willing to invest now at some historically extremely attractive looking prices," Francis said.
There was a tremendous amount of uncertainty in the markets in late 2008 and early 2009 when it appeared as though even the biggest and strongest institutions were vulnerable, he said. These days, "investors are not nearly as skittish about an investment."
The success some banks have had in raising capital has prompted at least one local institution in need of capital to take a second look at the prospect.
FirstFed Financial Corp., the L.A. parent of thrift First Federal Bank of California, has been pummeled by rising losses on its outsized portfolio of option adjustable rate mortgages and has been looking to strengthen its capital levels.
In January, FirstFed, which has $6.8 billion in assets, received a cease-and-desist notice from regulators directing it to cut costs and maintain capital. FirstFed's board had considered a public offering late last year, but scuttled the plans after the markets collapsed. Eyeing the success of bank offerings lately, however, the thrift is reconsidering.
"We're looking to see if that's a viable (option) now," said FirstFed Chief Executive Babette Heimbuch. "The board has not made a decision, but they're contemplating it based on the success that others have had."
A number of banks are now attempting to raise capital in order to repay funds received under the U.S. Treasury Dept.'s Troubled Asset Relief Program.
City National said it hopes to use the proceeds of its public offering, as well as its recent $50 million debt offering, toward repayment of the $400 million it received from the government in November.
Chris Carey, chief financial officer of City National, said during the second quarter conference call that the bank is in a position to be able to pay off the funds this quarter, but will monitor the markets before deciding whether to do so.
"We certainly want to pay it off earlier because it is costly when you can't really leverage it," he said. "We could pay it off certainly before the end this quarter; we just don't want to commit to that at the moment."
Just last week, Citizens Business Bank, with $6.4 billion in assets, did even better than City National with a $133 million offering that was three times oversubscribed.
"There was some pent up demand for it," said Chris Myers, chief executive of CVB Financial Corp., the Ontario-based parent of Citizens. "You're starting to see a differentiation between the banks that will survive and thrive, and the others."
Myers said the bank plans to use the funds to repay the $130 million it received from the government in December.
The Citizens offering is one of a number that exceeded expectations, indicating a growing investor appetite for bank stocks, analysts said.
"Clearly," Francis said, "there will be a lot more offerings."
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Crunch Time for Two L.A. Banks
- Positive Pessimism
- Crunch Time for Two L.A. Banks
- Santa Monica Institution Still Standing Despite Shaky Portfolio
- Update: East West Bancorp Prices Offering
- Local Banks Bleeding After Rate Cuts
- L.A. Savings and Loan in Dire Need of Capital Idea
- FirstFed Fails; Among L.A.’s Oldest and Biggest Lenders