An investor group including two bankers from a Washington, D.C.-based firm has bailed out two California institutions with more than $8 million in new capital.
In return, Newport Beach-based West Coast Bancorp and Los Angeles-based Hancock Savings Bank gave up control of almost half of their banks to the investors, Western Acquisitions LLC and Western Acquisition Partners LP.
"We act as a friendly shareholder and supply additional capital resources to the institution," said Eric D. Hovde, executive vice president of Washington's Hovde Financial Inc., and one of the investors. Other members of the Western investors include Mr. Hovde's brother and some "major outside investors," he said.
To pay about $3 million in subordinated debt, West Coast sold $2.52 million of stock in its wholly owned subsidiary, Sunwest Bank, to Western Acquisitions. Western also paid $1.08 million in cash for new common stock issued by Sunwest.
The deal gives Western about 43.5% of Sunwest, a $108 million-asset bank based in Tustin, in Southern California. It also allows Western to elect four of the bank's 11 directors.
With $195 million-asset Hancock, the Western investors injected $4.5 million in cash for 43% of the thrift and the right to elect one of Hancock's six directors.
Although these transactions are not common, Mr. Hovde said that Hovde Financial, which is both an investment banking firm and a merchant banking firm, had been involved in similar deals before. Such private placements save many institutions time and fees, and many investment bankers aren't interested in placing an offering for less than $5 million.
But Scott Burford, principal of institutional brokerage GBS Financial in La Crescenta, Calif., speculated that the unusual transaction could create a valuation problem for the banks. When a single group holds almost half a bank's stock, other investors can have a tough time telling what it is worth, he said.
West Coast is trading at only 34.3 cents per share. Hancock last traded on Aug. 15 at $10.
"What is the holding company worth?" Mr. Burford asked of West Coast. "I have no idea."
Sunwest plans to use its newfound funds to bolster capital for expansion. The bank wants to increase its loan portfolio by 5% to 7% this year; future growth is targeted at about 10%.
West Coast lost about $562,000 on the deal, because it sold its Sunwest stock for less than book value. But the company is used to that; it sold its other subsidiary, Sacramento First National Bank, to Professional and Business Bank of Sacramento in 1994 at a loss of $1.8 million.