Strong Banks Got Stronger in Rescue

The Treasury Department's investment in banks is looking more like a vote of confidence than a rescue operation.

On Monday, a host of regional banks unveiled some $34 billion in preferred equity investments made from the $700 billion bailout bill approved by Congress earlier this month.

Most of the headlines Monday focused on the larger regional banks receiving the bulk of the investments, but a closer look at some of the smaller banks getting help highlights some very strong institutions that didn't need new capital to survive, reassure depositors or expand lending activity.

Many troubled community banks had hoped, as the bailout took shape, that they would receive a piece of the bailout pie.


Five Smallest Treasury Capital Infusions
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Source: Company filings, Highline Financial, Inc.

There are three capital ratios in the table. To be considered well-capitalized under regulatory guidelines, a bank or thrift needs to maintain respective leverage, Tier-1 risk-based and total risk-based capital ratios of at least 5%, 6% and 10%. Because it takes loan quality and loan loss reserve levels into account, the total risk-based capital ratio is the one that most often slips below the well-capitalized threshold. None of the bank and thrift holding companies on the list were in immediate danger of slipping below well-capitalized.

All of the banks except First Niagara in our table noted significant losses due to exposure to Fannie Mae ( FNM) and Freddie Mac ( FRE) preferred shares in their third-quarter financial results.

Banks have until Nov. 14 to apply for and decide if they will accept investments made from Treasury's $250 billion program. A closer look at some of the smaller players to receive investments in this round, however, may provide clues about who else might receive help.

City National

City National ( CYN), one of the smaller banks on our list, could be a buyer. The company on Monday said the $395 million government investment would help it pursue its strategy of "expanding existing client relationships, adding new clients and colleagues, and making selected acquisitions."

CEO Russell Goldsmith said the government infusion of capital was "a strong vote of confidence" in the $16 billion Beverly Hills, Calif., holding company. After the government investment, its Tier-1 risk-based capital ratio jumped to 12%, from an already-strong 9.10%.

While the holding company's loan quality has declined a bit over the past year, overall asset quality is still good, with nonperforming assets comprising 0.97% of total assets as of Sept. 30. Reserves covered 1.69% of total loans, well ahead of the annualized percentage of net charge-offs to average loans, which was 0.42% for the third quarter.

Valley National

Valley National Bancorp ( VLY) of Wayne, N.J., said it would use the $330 million government investment to increase its lending activity and "support acquisitions of other financial institutions which may become available in the current economic downturn."

Valley had the best asset quality of the five holding companies listed above, as of Sept. 30, with a nonperforming assets ratio of just 0.38%. When discussing the company's stellar loan quality during the $14 billion company's third-quarter earnings conference call, CEO Gerald Lipkin emphasized the collections process.

"We've always had more people collecting loans and making loans," he said. "The squeaky wheel is one that gets the grease. We jump right on a case if somebody goes a couple of days delinquent."

That's community lending in a nutshell. It's very important for a community bank to have servicing and collection staffs that know the borrowers and stay in close contact with them. I emphasized this point almost a year ago, in discussing National City's ( NCC) closing of its two credit administration offices in Florida.

UBCH Holdings

UCBH Holdings ( UCBH) of San Francisco had the weakest asset quality on the list, with nonperforming assets comprising 1.93% of total assets as of Sept. 30. Its loan loss reserves covered 1.36% of total loans, a bit behind its net charge-off ratio of 1.40%. However, the company was strongly capitalized before the Treasury's $298 million investment, with leverage and risk-based capital ratios of 8.25% and 12.51%, as of Sept. 30.

UCBH, which holds United Commercial Bank, has a varied business model, with branches and offices in Hong Kong, Taiwan and elsewhere in China. The company had already boosted capital, raising $93 million by issuing preferred shares to China Minsheng Banking Corp. UCBH expects to raise additional capital from the Chinese bank over the next few weeks.

UCBH made it clear in its third-quarter earnings announcement that it would use newly raised capital to continue the rapid expansion of its commercial and construction real estate lending portfolio.

The company announced on Monday that its risk-based capital ratio would rise to 15% with the inclusion of the capital from the Treasury.

"It is indeed a testament to the strength, safety and soundness of our company," CEO Thomas Wu said. "We intend to put these proceeds to good use for our customers and shareholders. We plan to deploy the funds to support loan growth, to provide a measure of support against uncertainty in the credit markets and to position UCBH for additional market opportunities."

Washington Federal

Because Washington Federal ( WFSL) provides less detail on the holding company level than the other companies on the table, we included numbers for its primary subsidiary, Washington Federal Savings and Loan.

Washington Federal was very strongly capitalized as of Sept. 30, with a leverage ratio of 10.12% and a total risk-based capital ratio of 17.34%.

CEO Roy M. Whitehead steered clear of any talk of using the fresh $200 million from the government for acquisitions. "On top of our already strong capital position, this new equity, which we believe is being provided at favorable market terms, will enhance our competitive position and increase our capacity to lend," he said. "We also view the additional capital as low-cost insurance against the ongoing economic contraction."

First Niagara

First Niagara Financial Group's ( FNFG) $186 million in new capital from the Treasury comes on top of $115 million raised through a common stock issuance completed Oct. 1. The company said it expected to "leverage the proceeds to further accelerate our growth strategy as well as to opportunistically assess acquisition prospects."

This $9 billion holding company, headquartered in Lockport, N.Y., has also fared quite well through the credit crisis. It has also been a favorite of the market, with shares returning 7.82% over the past year through Monday, compared to a negative 42.29% for the S&P 500 Midcap Financial index.

Loan quality remained strong, with nonperformers comprising just 0.53% of total assets as of Sept. 30.

National City last Friday was acquired by PNC Financial Services ( PNC) the same day it announced a $7.7 billion investment from the government.

Capital One ( COF), which on Monday said it received $3.55 billion from the federal government, is "in a stronger position to take advantage of opportunities that may emerge from the current banking environment," spokeswoman Tatiana Stead told the Wall Street Journal.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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