New S.D. Banks Seek Fresh Capital to Continue Growth

The wave of new bank formations that hit San Diego earlier this decade is now sending out some aftershocks.

Nearly half of the two dozen fledgling institutions established in the last five years are expected to go to the market this year seeking additional capital through stock and bond offerings to raise fresh cash and fuel their continued growth.

The pace at which these offerings will come to market may quicken as government regulators bring increasing pressure to bear on the more aggressive banks to strengthen their balance sheets.

The trend began last year when La Jolla Bank and Trust Co., Torrey Pines Bank, Southwest Bank and Crown Bancorp made private and public stock offerings.

Currently, Balboa National Bank and First Western Bank have offerings under way. Just last week, Bank of Commerce announced plans to issue preferred stock and warrants this spring.

Analysts and consultants say there are at least six more offerings being prepared by San Diego area banks and several more will likely be packaged later in the year.

“A lot of the banks that were formed in 1981 and 1982 have now reached the limit of their leverage,” or the extent to which the company is in debt, said Gary Findley, an analyst with Findley Reports, a research service based in Orange County that covers independent banks in California.

Government regulations require banks to have capital equal to about 5.5% of their total assets. Most of the independent banks in Southern California were capitalized with $2 million to $3 million, and now that they are reaching $40 million to $50 million in total assets they are nearing the government-imposed limit.

“You can roll along with 6% capital,” Findley said. “But don’t ask for anything” from federal regulators because applications will likely be held hostage while subtle hints are dropped that additional funds are necessary.

“Regulators might say ‘If you have 7.5% capital, we can approve a new branch application in our California office,’ ” said Peter Davis, president of Bank of Commerce.

“Otherwise, the application will have to go to Washington” for more lengthy processing, he said. “And you don’t need a college degree to figure out what they’re telling you.”

A post-Depression record for bank failures was set last year as 6 California institutions folded and 79 banks nationwide were seized by federal officials and declared insolvent.

In the wake of the failures, regulators have toughened capital standards.

Balboa National Bank, for example, grew to $97 million in assets since opening for business in February, 1983, with $2.8 million in capital. Even with its retained profits and other reserves, the level of capital fell to about 4.2% of assets by the end of 1984, and regulators ordered the bank back to the market to raise additional funds.

“This bank has leveraged itself very well,” and management plans to continue with that strategy, said President Michael Jones. The bank is seeking to raise $3 million through a common stock offering. If the offering is successful, Jones plans to use the additional capital to fuel asset growth of 30%, or to about $125 million, during 1985.

First Western, in contrast, is dipping back into the equity market in an attempt to restore a capital position depleted through a series of losses. Since opening in August, 1983, with $3 million in capital, losses have reduced its equity position to $1.22 million as of Oct. 31, 1984.

Despite the losses, First Western’s capital ratio stands at nearly 15% because it has only $8.3 million in assets. “We need the additional capital for growth and development,” said Arthur Coren, outside legal counsel to the Pacific Beach-based bank.

Findley says the equity ratio isn’t the only measure to use in determining a company’s need for capital. Other important factors include asset quality, management, earnings and liquidity, he said. “Some banks are OK with just 5% capital, while others with 12% aren’t so good.”

Other offerings are being spurred simply by a need to keep up with a changing marketplace.

James Alexander, president of Los Angeles-based J. Alexander Securities, which specializes in independent bank securities, said that “if the local banks want to keep pace with growth in San Diego County, they’ll need more capital.”

But as inflation slows, he added, there is less incentive for financial institutions to be fully leveraged.

San Diego-based banks were able to raise more than $75 million in the early 1980s through initial common stock offerings, or an average of nearly $4 million each.

In this second wave of offerings, each of the banks is expected to seek $1 million to $3 million in public offerings.

The after-market performance in independent bank stocks has been mixed over the past several years, but, analysts said, the market for the expected new issues likely will be responsive.

“There’s a window opening right now,” said Howard Levinson, president of Western Financial Corp., a San Diego securities firm that trades many local bank stocks.

“Interest rates are down, and the stock market is up,” he said. “And there are fewer new banks being formed (now), so that the competition for capital isn’t as great” as it was in 1982, when several common stock offerings failed to raise all the cash that organizers had sought.