Several of Los Angeles' community banks, considered by some to be the worst hit institutions in California's continuing recession and real estate slump, are seeking to raise capital to brace their crumpling loan portfolios.
Currently, four community banks in Los Angeles are trying to raise about $6 million total. And banking sources there said three other institutions will attempt to raise capital in the coming months.
That these small, relatively new institutions need more capital is indicative of the turn in fortunes for small banks in Los Angeles, once one of the most fertile markets for new banks.
In a Down Cycle
Californians in the past haven't had a lot of experience in down cycles," said Steven Fried, chief executive of Western United National Bank, a 10-year-old bank that needs to raise about $1.32 million to survive, at least in the short term.
"The thing to remember is that it is cyclical. It is going to come back," he said.
Barry Rubens, chief executive of California Research Corp., a bank consulting company in Santa Monica, said small, Southern California banks are struggling, even though their bigger California brethren have recovered nicely because of their geographic diversification.
"Small community banks in California have had their troubles," Mr. Rubens said. "The ones with the worst problems are all in West Los Angeles. It's a very high-cost area, and these banks had to take risks outside their area to compete and grow."
A Surge in Failures
So far this year, 11 California community banks have failed, compared with eight in all of last year, according to Mr. Rubens.
And an analysis of data provided by Sheshunoff Information Services shows that of the 130 banks in Los Angeles County with less than $1 billion in assets, 25% have nonperforming asset ratios of greater than 5%, and 27% are losing money.
Illustrating how hot the market for new banks was in the last decade in Los Angeles, a full 34% of the city's community banks were formed in the boom times of 1980,86.
Mr. Rubens added that the prospects that these Los Angeles banks will raise the needed capital are mixed.
"There's a lot of competition for money right now and only so much money to get," he said. "They not only have to compete but against big institutions like Glendale Federal Savings. It means the insiders are going to have to foot more of the bill."
In addition to Western United. Bank of Los Angeles, Bank of San Pedro, and Mid City Bank currently have offering circulars on the street for either stock rights, new common stock, or both.
All of these banks are niche banks, serving upscale business and professional communities from Beverly Hills to Brea in north Orange County.
Paul Ling, chief executive of the Bank of Los Angeles, said his bank is trying to raise $3.75 million in a stock rights offering. Bank of Los Angeles is not critically undercapitalized, but it is under a memorandum of understanding with federal and state regulators to raise its leverage capital ratio to 6%.
"We're in better shape because our directors have already committed to buying a large portion of the offering," Mr. Ling said. "We'd like to broaden our shareholder base, so we are actively trying to raise money from outsiders."
Difficulty Raising Capital
Though confident of his own success, Mr. Ling said the other three Los Angeles banks trying to raise capital are in worse condition and will probably have difficulty.
"There's capital out there to be had." he said. Whether or not people choose to invest it in a community bank is another matter."
Western United has the biggest hole to climb out of. On June 30, its leverage capital ratio was only 0.16%, according to its prospectus, making it "critically undercapitalized."
Its memorandum of understanding with the Federal Deposit Insurance Corp. calls for the bank to attain a 6% leverage ratio.
Western United wants to sell al least $1.32 million and as much as $4.5 million in a combination of new stock and stock warrants. For $3, investors in the deal get 10 shares of common stock and warrants for five more shares.
The bank's management believes that the minimum amount raised in the offering will only forestall an imminent federal takeover, and that significantly more capital will have to be raised to meet the tenets of its memorandum of understanding.
Western United's Mr. Fried said he is still confident he can raise the money.
Seen as Undervalued
"Bank stocks, especially community bank stocks out here, are undervalued," he said. "Now's the time to do this. I'm sure the real estate market isn't continuing to decline, but I don't think it's turned up yet. It's not going to be boom times again, but it will come back."
"And when it does the fortunes of this bank will increase," he added. "The intrinsic value of a community bank franchise is greater than it ever has been."
Officials at Bank of San Pedro and Mid City Bank could not be reached for comment on their capital-raising activities.