For an ailing bank, capital is like nitroglycerin.
Investors recapitalized several ailing banks in the second half of 2010. With their coffers overflowing, some of those banks used the fresh equity to purge problematic assets, while others went on the hunt for acquisitions. Regardless of the strategy, most reinvigorated banks snapped to, wasting no time to get back on track.
Each rebound began with improving the psyche of employees. That is particularly true for the employees of AmericanWest Bank in Spokane, Wash.
"Our plan was to take a community bank that has been struggling for three years to stay alive and transform it to one that can compete with the largest of institutions," says Scott A. Kisting, AmericanWest's chairman and chief executive. "That begins with really convincing the employees that it is a different organization."
A group led by SKBHC Holdings LLC bought AmericanWest last year. The holding company was put into bankruptcy, and SKBHC bought the then $1.6 billion-asset bank in an auction by the U.S. Bankruptcy Court for the Eastern District of Washington, for $6.5 million. SKBHC injected $185 million into the bank, but has $500 million on the sidelines to support future growth.
By late May, AmericanWest emerged as an acquirer when it said it would buy the $146 million-asset Bank of the Northwest in Bellevue, Wash., from the struggling Capitol Bancorp Ltd. Since then, AmericanWest has also acquired the $292 million-asset Sunrise Bank in San Diego, another Capitol Bancorp unit, and the $406 million-asset Viking Financial Services Corp. in Seattle.
Next year, Kisting says he would like to close a few more acquisitions, particularly for deals that would bridge the gap between San Diego and Seattle, though he is also looking at building a franchise across the West.
"You wouldn't normally jump from the Canadian border to the Mexican border, but we found a great opportunity there and would like to look for fill-ins," Kisting says, adding that he is looking in states such as Colorado, Idaho and Utah.
AmericanWest has about $2.3 billion in assets and Kisting says the goal is to reach $7 billion with acquisitions with an additional $5 billion from organic growth as the bank works its way to $12 billion in the next five years.
That would put AmericanWest in the same asset class of the $9 billion-asset Sterling Financial Corp., also in Spokane. (Pat Rusnak, the former CEO of AmericanWest Bancorp is Sterling's chief financial officer.) In August 2010, Sterling raised $730 million; $342 million came from private-equity firms Thomas H. Lee Partners LP and Warburg Pincus LLC and $388 million from a public offering.
Sterling achieved profitability in the first quarter and has been "building momentum," says Greg Seibly, its CEO. Since the third quarter of 2010, Sterling has reduced classified assets by 65%. It launched a multifamily business line that has made $750 million in loans so far this year. With three quarters of earnings, analysts are also wondering when Sterling will recoup the $330 million valuation allowance it created against its deferred tax asset. Auditors have said they are generally looking for at least four to six quarters of solid earnings before approving such measures.
"Without the safety and soundness issues, our people are more active and more outbound," Seibly says. "We think we've hit the inflection point."
The company's Sterling Savings Bank remains under an informal agreement with regulators, but last month's announcement that Sterling would buy the healthy operations of the $796.5 million-asset First Independent Bank of Vancouver, Wash, was an indication that the company is in the good graces of regulators and the order could soon be lifted. Such deals are rarely unveiled without front-end talks with regulators.
"There are a lot of people reading the tea leaves on that deal," Seibly says. "I have no official comment, but I won't refute other people's observations, either."
Seibly says he is looking for more deals with small banks that are finding it challenging to exist in the new regulatory environment, but they are not the focus of Sterling's rebound. "We do think there is substantial opportunity, but we're not fixated on that," Seibly says. "Our real goal is to grow organically and augment that through acquisitions."
While AmericanWest and Sterling have opted to address problem assets with workout divisions, Patriot National Bancorp in Stamford, Conn., used a $50 million lifeline from New York financier Michael Carrazza to arrange a bulk sale, which cut its nonperforming loans to $32.5 million at March 31 from $90 million just three months earlier. At Sept. 30, such loans totaled $26.5 million.
"We went right after our asset quality. It was not the prettiest way to do it, but it took the biggest risks off the table," says Christopher Maher, Patriot National's president and CEO.
Maher's attention has been on right-sizing the company since its October 2010 infusion. Patriot National once had more than a $1 billion in assets, but had contracted to $628 million at Sept. 30. Maher, meanwhile, is making the company's expenses reflect its smaller size. The company closed four branches in June. At Sept. 30, its noninterest expense was $5.9 million, down 21% from a year earlier.
"The bank was left with an expense structure of a billion-plus bank," says Maher, who joined the company at the time of its recapitalization. "We needed to get to a place where we were not burning capital by just turning the lights on."
"We're a smaller bank, but a better-capitalized bank, with a better expense structure and hopefully the foundation to start building profitability," Maher says.
The steps appear to be working — Patriot National earned $255,000 in the third quarter, its first profit following 12 consecutive quarterly losses.
The smaller size might also be temporary. The company has restarted its jumbo lending business, an important product in the tony area of suburban New York City. Maher says there is also a $100 million of commercial and industrial loans in the pipeline for 2012.
"Our plan is to be evenly split between C&I and jumbo residential," Maher says. "But we are not going to create another risk scenario by moving too rapidly to grow."
Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, says that several of 2010's recapitalized banks are approaching the end of the credit recovery phase. While the next phase was expected to feature growth largely through acquisitions, the environment has also changed. The pace of failures has slowed dramatically and the lack of organic growth opportunities could force some of the new investors to cut their strategy short.
"I think some of them are going to hit the wall after the 'credit recovery' phase," Fenech says. "A lot of them were thinking they could take the bank, fix it up and leverage it for other deals. By now, they thought there would be an improvement in the economy. I think some of them are going to look to hit the exit button."