California Banks Tapping Investors to Stay Afloat

Despite the spotty record of such deals in recent years, outside investors last week injected new capital into two ailing institutions in Southern California.

But far from suggesting that there's unlimited capital to be had for troubled Golden State community banks and thrifts, the deals illustrate the old Easter egg hunt adage: The ones who scramble the most get the golden eggs.

"Within a two-week period of time we were able to close on this transaction," said Eric Hovde, whose Washington-based Hovde Financial helped put together a complex transaction that saved a San Diego thrift from failure. "There was a lot of effort by a lot of people to pull it off."

Mr. Hovde and representatives of three banks managed to pull off a deal a week ago that saved International Savings Bank, a commercial real-estate- sodden San Diego thrift with almost no capital. International was bought by Oak Park, Ill., holding company FBOP Corp., saving it from a likely regulatory takeover. International was under orders to raise capital by June 30.

But while it was commercial real estate that sank International - the thrift had 17% of its assets in commercial real estate, much of it in the multifamily market - it was residential loans that almost sank the merger. FBOP, which owns banks in Illinois and in Texas, did not want International's residential mortgages with interest rates linked to the 11th District cost of funds index (Cofi). Cofi-indexed loans are best fitted to Western institutions because the interest rate on them doesn't typically jibe with interest rates in the rest of the country.

So International sought out Glendale Federal Bank, which bought its $125 million portfolio of Cofi-indexed loans, clearing the way for the sale to FBOP.

Mr. Hovde said FBOP paid about $1 million in consideration to International's shareholders. The deal worked as a purchase and assumption agreement, with FBOP buying about $150 million in assets and all of International's deposits and three branches.

FBOP officials could not be reached for comment.

An International shareholder, who asked not to be identified, said the process of finding a savior for the thrift was arduous.

"It was a matter of looking at a whole host of options," he said. "And we looked at all of them. What we found was that there's not necessarily a shortage of capital. But what there is is a very thin layer of potential bidders that were willing to do it at the price we wanted. Very thin."

Analysts say the appetite from institutional investors for bailing out troubled banks and thrifts in California is waning after the debacles at Guardian Bancorp, UnionFed Financial, and Fidelity Federal Bank, three Los Angeles institutions that failed after being recapitalized with institutional money.

But Thomas Killian, an investment banker with Sandler O'Neill Partners in New York, said if the price is right and the institution can prove it's stable, there's enough interest from investors.

Mr. Killian and Sandler O'Neill managed a just-completed rights offering for Ventura County Bancorp that raised $6.5 million, satisfying regulators that had put a June 30 deadline on the Oxnard-based company to raise its Tier 1 risk-based capital to 12%.

Ventura, a $270 million holding company with two Southern California banks, has been in trouble for more than two years. In 1993, it brought on a new management team headed by former First Interstate Bank executive Richard S. Cupp. Mr. Cupp bit the bullet on the company's portfolio of soured commercial real estate loans, charging off millions and reserving heavily. The company has been under orders to raise capital for a year.

But Mr. Cupp held on until the rights offering commenced in May.

"The facts here speak for themselves," Mr. Killian said. "These types of transactions are very sensitive to the story. It will work if the story makes it sensible as an investment."

Mr. Killian added that the $6.5 million in new capital, $2.7 million of which came from institutional investors such as John Hancock and Wellington Fund Inc., would give Ventura more than enough to survive even if the economy doesn't get measurably better. The stock sold for $2.25, about 80% of book value.

"If you're a value investor, there aren't many other places around the country where you can buy a bank at that price," Mr. Killian said.

Mr. Cupp, of course, couldn't be happier.

"It shows at least from what we've been able to determine that there's a great amount of enthusiasm from both institutional and small shareholders for our business," he said. "We're very pleased with it, especially because there was so much existing shareholder interest."

About 58% of the proceeds came from existing Ventura shareholders.

Mr. Cupp said that in addition to the relative bargain price, Ventura had another thing going for it: market share.

"We're now the largest community bank in Ventura County," he said, now that Bank of A. Levy has been sold to First Interstate. "That puts us in a good position even though the competition here is intense.

"Now that we've proved we can manage a turnaround, now we have to prove we can make a profit."

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