$50M dash for cash sealed Affinity deal
Just three days before scooping up failed Ventura-based Affinity Bank on Aug. 28, San Diego-based Pacific Western Bank gave a $50 million signal that it was in acquisition mode.
At a time when banks across the nation were struggling to raise capital, PacWest Bancorp, the bank’s holding company, came up with $50 million. The capital came from selling common stock to institutional investors at $18.36 a share, the stock’s closing price Aug. 24.
At the time, Matt Wagner, CEO of PacWest, said in a release that the new capital would “be particularly valuable as new opportunities arise.” And 72 hours later, PacWest pounced, taking over the Tri-Counties’ second-largest banking institution’s 10 branches and $1 billion in assets.
The Affinity takeover also involved a loss-share agreement with regulators that will protect PacWest from some of the downside of Affinity’s troubled commercial real estate loan portfolio.
Mark Adelmann, portfolio manager at Westcore Funds in Denver, heralded the move as a smart way for PacWest, which had $4.5 billion in assets before the Affinity takeover, to grow incrementally and tackle a new market.
“It’s what they do,” Adelmann told the Business Times. “They take weaker banks and integrate. They go in and restructure a bit and come back with something stronger.”
Adelmann said PacWest’s move to snatch capital and act quickly on an acquisition opportunity fits with what he’s seen from PacWest in recent years.
“They are able to raise capital; they did it last year during a crisis and again [Aug. 25], right before they got Affinity Bank,” said Adelmann, who works under the umbrella of Denver Investment Advisors, one of the largest institutional owners of PacWest stock with 696,000 shares, or about 2 percent of its outstanding shares.
Ventura-based Affinity Bank was seized by federal regulators Aug. 28 in the first tri-county bank failure in almost 20 years. After taking Affinity into receivership, the Federal Deposit Insurance Corp. said Pacific Western would assume Affinity’s 10 branches and $922 million in deposits.
FDIC spokesperson LaJuan Williams-Dickerson told the Business Times that when Affinity’s “charter was pulled and the institution was closed, the FDIC just needs to sell the deposits and assets to a healthy institution. In this case, that was Pacific Western Bank.”
Williams-Dickerson said Pacific Western agreed, essentially, to buy all of Affinity’s $1 billion in assets.
Affinity’s depositors will automatically become Pacific Western customers, the FDIC said. Depositors can still get their money by writing checks or using ATM and debit cards, the FDIC said, and borrowers should make payments as usual.
Affinity’s former branches in San Francisco and San Mateo reopened Aug. 29 as Pacific Western branches. The other branches reopened Aug. 31.
In what may be a reflection of the FDIC’s concerns about its own thinning insurance fund, regulators said they had entered into a loss-share agreement with Pacific Western for $934 million of Affinity’s loans. That means Pacific Western and federal regulators will share in any losses on the loans, a move the FDIC hopes will maximize the return on those loans by keeping them in the private sector, regulators said.
Affinity is part of a flood of implosions among regional banks this year as commercial real estate markets have followed their residential counterparts. Bank of Santa Barbara was sold, Ventura County Business Bank is looking for capital, Pacific Capital Bancorp cut jobs and reached an agreement with regulators improve its capital position and the parent of Los Padres Bank sold off branches in the Midwest.
At Affinity, commercial real estate lending made up about 70 percent of its loan portfolio and accounted for most of its troubled assets.
The day regulators seized the bank, they unsealed a July 31 directive that describes Affinity’s steady march toward collapse over the spring and summer.
In April, the FDIC sent Affinity a letter warning the bank that its capital was low and demanding a plan to boost it. Affinity submitted a plan by mid-May, but regulators said that plan was “unacceptable” and asked for a new one, according to the directive.
On June 15, regulators from the FDIC and the California Department of Financial Institutions came to Affinity’s offices to examine its books. The result was a July 7 letter warning the bank that it was “critically undercapitalized.”
The directive gave Affinity two options: By the end of August, either sell enough stock to recapitalize or agree to be taken over by another bank.
“[T]he Bank’s unacceptable capital plan and deteriorating condition and management’s inability to return the Bank to a safe and sound condition require that prompt corrective action be taken immediately,” the FDIC directive said.
The last round of bank seizures in the Tri-Counties happened in the early 1990s, during the savings and loan crisis.
In April 1990, regulators seized Santa Barbara Savings, according to press reports at the time. In 1991, the Santa Barbara-based County Bank, which had $1.2 billion in assets, came under federal control after losing more than $70 million, according to press reports at the time.