A heavy concentration in commercial real estate is an asset when Warburg Pincus comes calling.
The New York private-equity firm has invested in three banks recently. Its $150 million investment in National Penn Bancshares Inc. seems counterintuitive given the Boyertown, Pa., company's strong commitment to commercial real estate lending as others put more emphasis on commercial and industrial loans.
But it was that plan that caught Warburg's eye.
"While there are opportunities in C&I … to be a community bank you have to be in the CRE business, and you have to do it in a way that you can control the risk," Michael Martin, a managing director of Warburg's financial services group, said in an interview last week. "That is very much in sync with our view."
Warburg invested $63.3 million in National Penn on Oct. 6 and plans to invest the rest by yearend. Weeks earlier, Warburg invested $170 million in Sterling Financial Corp. as part of the Spokane, Wash., company's recapitalization. Warburg also invested $115 million in Webster Financial Corp. of Waterbury, Conn., in October 2009.
For the $9 billion-asset National Penn, the funds will accelerate plans to leave the Treasury Department's Troubled Asset Relief Program and pursue acquisitions as activity heats up in the Northeast.
Although the National Penn investment comes later in the cycle, the approach is still the same for Warburg. "Find good, durable regional franchises, supply them with capital so they can stabilize their business and shore up their balance sheet, and then watch them and help them grow through acquisitions, or otherwise, going forward," said Martin, who will join National Penn's board.
Scott Fainor, National Penn's chief executive, said its first priority is to repay its $150 million Tarp investment and get out from under a regulatory order that required it to boost and then maintain a total risk-based capital ratio of 12%.
Like many in the region, National Penn was plagued by its construction and development book, and its securities portfolio also took a hit. At the end of 2009 it named Fainor CEO, ushered in a new management and took aggressive measures to boost loan-loss reserves, resulting in huge losses. "We wanted to address the issues, get them behind us, have a stronger balance sheet and then focus getting the company back to positive earnings growth so that we could play offense," he said.
It seems to have paid off, analysts said. National Penn swung to a $10.3 million third-quarter profit from a net loss of $5.5 million a year earlier. Nonperforming loans and net chargeoffs declined and the ratio of loan-loss reserves to nonperforming loans had risen to 163% at the end of the quarter. At Sept. 30, its total risk-based capital ratio was 15.2%. The Warburg investment would increase that ratio about 300 basis points, to 18.2%, and would boost the tangible common equity ratio to 8.7% from 7.2%.
Fainor said that provides enough capital for acquisitions. His company plans to pursue traditional deals across Pennsylvania, New Jersey and Maryland. Having Warburg's seal of approval won't hurt. "We believe that Warburg standing shoulder to shoulder with National Penn is a strong catalyst for people saying we've got the capital that we need to continue to grow and to do it through consolidation in the industry," Fainor said.
Fainor should strike a deal soon, said Jason O'Donnell, an analyst with Boenning & Scattergood Inc. Steps to fortify the balance sheet — such as selling Christiana Bank and Trust Co. in Wilmington, Del., earlier this year — have led to higher capital levels, he said. "They were in great shape already," he said. "If they're not able to execute on an attractive deal in 2011, then this capital raise in hindsight will not look nearly as attractive."
While one could argue that the company raised too much capital, David Darst, an analyst at Guggenheim Securities LLC, said, "It does allow them to have more confidence when they go to the regulators to have the informal agreement lifted and also to repay Tarp."
O'Donnell expects the company to repay Tarp by early 2011 and said it could be out from under its memorandum of understanding by April. "Then all of a sudden the bank is very much in the driver's seat and able to aggressively pursue small-bank opportunities," he said.