A few years ago, Rainier Pacific Financial Group Inc. had money it needed to put to work, so, like many of its peers, the Tacoma company turned to pools of other banks' trust-preferred securities.

It seemed like a good idea at the time. The banking industry was doing well, the securities paid a floating rate, and with hundreds of banks represented in the pools, the risk was diversified.

Since then, of course, the banking sector's fortunes have worsened across the board, and trust-preferreds have become a source of pain for their holders. At Rainier Pacific, the losses were so steep that the $872 million-asset company ran afoul of regulatory capital standards.

John A. Hall, its president, chief executive and interim chief financial officer, said further losses are possible because more banks are expected to begin exercizing their right to defer dividend payments on trust-preferred issues. Rainier Pacific needs to raise $40 million to $60 million to fully account for exposure to its trust-preferred holdings, which are now valued at about 13 cents on the dollar, Hall said.

"We are looking at all options to enhance our capital position," he said. Among those options, he said, the company is talking to potential investors about a stock offering that would greatly dilute the stakes of existing shareholders.

Last month Rainier Pacific restated its fourth-quarter results, posting a $14 million loss for the period, seven times as much as originally reported. The revised loss was largely the result of an $18.9 million "other than temporary impairment" charge for the trust-preferred securities portfolio.

The wider loss eroded the capital base of its operating subsidiary, Rainier Pacific Bank. Before the restatement, the bank met the regulatory definition of "well-capitalized." Now, with a leverage ratio of 7.29%, a Tier 1 risk-based capital ratio of 7.58% and a total risk-based capital ratio of 8.83%, it is "adequately capitalized." Hall said Rainier Pacific is working closely with regulators.

The market for pooled trust-preferreds dried up in mid-2007 as investors soured on collateralized debt obligations, a category that included the pooled bank issues.

A big problem for holders of pooled trust-preferreds is that the securities are thinly traded, so marking them to market prices is difficult.

Compounding the problem is that in many cases the securities are throwing off less cash. Regulators have pressed banks to conserve capital, so they have begun taking advantage of a feature that lets issuers defer dividend payments for up to five years.

"People are stopping payments because they don't have earnings," said John Ziegelbauer, the national managing partner in the financial institutions practice at Grant Thornton LLP in Washington.

Few institutions are heavily concentrated in trust-preferreds, and many are choosing to hold on to the securities because there is a good chance the price will go back up when issuers resume paying, he said.

"Many of those payments are accumulative" — meaning that even a deferred dividend must eventually be paid. "And even if they aren't accumulative," he said, "the principal still has to be paid. It could turn out to be a good investment if people bought them now. There is a lot of upside potential. … If things get better, then the value goes up, and it could go up significantly. That is why a lot of institutions aren't in a rush to sell these assets. They think they are worth more than they can get for them."

Raising capital in today's market is tough, and with a government infusion from the Treasury Department's Troubled Asset Relief Program not an option for Rainier Pacific, industry watchers said the company must look to the private sector.

To get its capital ratios back up, Rainier Pacific is also considering asset sales and slowing or suspending loan originations, Hall said.

Timothy N. Coffey, a research analyst at FIG Partners LLC, said he does not believe selling assets would be best for Rainier Pacific.

"I don't think they can get high enough prices right now," he said. "The problem with a lot of banks is, they can sell at less than par, but at significantly less than par, it eats at their capital."

Instead, Rainier Pacific should "do a common stock offering," he said. "It's going to be dilutive, and at the price it is now, it is going to be incredibly dilutive to existing shareholders."

Coffey said mark-to-market accounting is partially responsible for Rainier Pacific's capital problem.

"The really frustrating thing for this bank, and what sets them apart, is [that] this is a securities portfolio issue, not a loan portfolio problem," he said. "They have a serious capital problem right now and one that is going to need to be fixed with a capital injection, and in this market it is extraordinarily difficult to achieve."

Like others in the Pacific Northwest, Rainier Pacific has loan portfolio problems as well. Nonperforming assets grew from six basis points at the end of 2007 to 3.6% of total assets at the end of 2008, largely due to problems with construction loans. But its loan problems are not as bad as those of other area banks, according to Federal Deposit Insurance Corp. data. The average ratio of nonperforming assets to total assets in Washington state at Dec. 31 was 4.36%; the national average was 1.88%.

During the last year, Rainier Pacific's stock has fallen roughly 95%, and the shares closed at 60 cents Thursday.

In mid-February, the company said it was selling its Visa credit card portfolio to U.S. Bancorp for $21.9 million, giving it about a $3 million pretax gain. Hall said the company had been trying to sell this portfolio for years and the timing was coincidental with the restatement of results.

On Feb. 27, Joel G. Edwards resigned as chief financial officer. Hall, who preceded Edwards in the post, has assumed the CFO duties while Rainier Pacific seeks a successor.

Hall said Edwards had decided to take a job at another bank, but he declined to name it.

Rainier Pacific bought about $240 million of pooled trust-preferred securities from 2003 to 2005 as a way to deploy fresh capital after a public offering, Hall said. More than 500 banks were represented in the pools. Rainier has sold some of the securities; others ran off; and the portfolio now stands at $108 million.

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