Cheap capital almost killed AmericanWest Bank.
Documents filed with the U.S. Bankruptcy Court on Oct. 27 describe how money raised while the bank was growing snarled efforts to raise new funds that would block the Spokane bank’s seizure by regulators weary of its financial losses.
New investors were unwilling to make their predecessors whole.
The unique bankruptcy petition by holding company AmericanWest Bancorporation sidesteps the problem, and sets its bank subsidiary up for as much as $200 million in new investment.
Pat Rusnak, president and chief executive officer of the bank and holding company, called the outcome the best possible for the bank and its employees, customers, and Spokane.
If Judge Patricia Williams approves.
“We’re in a bit of terra incognita,” Rusnak said.
The holding company is using the same provision of U.S. bankruptcy law – Section 363 – that allowed General Motors and Chrysler to fast-track reorganizations that included the injection of $86 billion in federal money.
Rusnak said AmericanWest, with time running out, also needs fast relief, but with no government money involved.
The company has been under increasing pressure for more than two years from regulators who want the bank to raise new capital to offset losses sustained as its real estate and construction loans turned to dust.
Starting in February 2008, the Washington Department of Financial Institutions, Federal Deposit Insurance Corp., and Federal Reserve Bank demanded corrective action. Finally, in February 2010, the FDIC directed the bank to recapitalize within 30 days.
Only four out of 30 banks in the West to receive similar orders have not been seized.
“We can’t survive indefinitely,” Rusnak said.
He said efforts to recapitalize the bank were repeatedly frustrated by trust-preferred securities issued four times between 2002 and 2007.
The securities, along with those from other banks, were bundled into new instruments called collateralized-debt obligations, or CDOs.
Although the CDOs have been vilified for contributing to the 2008 Wall Street meltdown, Rusnak said the trust-preferred securities were advantageous to small banks like AmericanWest, which benefited from the economies of scale bundling created.
“It was cheaper than issuing shares,” he said.
But as regulators pressed AmericanWest to raise more capital, the trust-preferred securities became a big problem, as they did for crosstown rival Sterling Financial Corp. during its recapitalization.
Trust-preferred holders had first call on whatever new money AmericanWest might raise. Unless the owners could be found, and convinced to take less than the full principal and interest they were due, the first $47 million the bank might raise would never reach the bank’s balance sheet.
That was unacceptable to potential new investors, Rusnak said.
AmericanWest shared its confidential financial information with 67 possible suitors. Through the end of June, there were no takers.
Even a bid for $57 million from the Troubled Asset Relief Program failed. The U.S. Treasury agreed to make the investment, provided AmericanWest could raise an equal amount from private sources. When the bank could line up only $35 million, the FDIC recommended the application be withdrawn. It was.
Rusnak, who was handed the reins at AmericanWest in July 2008 after regulators insisted his predecessor, Robert Daugherty, be ousted, said continuous contact with all regulators, absolute candor about its financial condition, and aggressively addressing problem loans bought the bank time, but the bank exhausted its capital during the summer.
Throughout, Rusnak said, he was determined that AmericanWest not be acquired on the cheap by another bank that simply waited until regulators came in and sold off the assets. “We were going to find a solution here one way or the other,” said Rusnak, who deflected questions about the details of AmericanWest’s capital hunt while it was in progress.
Rusnak said directors made the decision to explore a 363 bankruptcy because it resolves trust-preferred shareholder claims against the holding company without siphoning capital intended for the bank.
But, had regulators shut down AmericanWest, the trust-preferred shareholders would also have lost everything, and the FDIC insurance fund $330 million, Rusnak said. Spokane might have lost as many as 160 jobs.
An agreement by a new holding company, SKBHC LLC, to pay AmericanWest Bancorporation $6.5 million for the bank will give the trust-preferred shareholders something, he said, and take the FDIC off the hook entirely.
Holders of common shares once worth $26 will get nothing, including Rusnak, who said his stock had been worth $260,000. Other directors and officers also had stakes.
“The insiders rode it all the way down to the end with the other shareholders,” he said. “There was pain felt.”
Still, the hook-up with SKBHC was serendipitous. The $750 million fund is one of several raised by former bank executives looking to invest in under-capitalized institutions. Last week, SKBHC bought a bank in Minnesota, its first.
Rusnak said officers of SKBHC were aware of AmericanWest’s situation from earlier conversations. Through the waning days of summer and into the fall, they negotiated a deal with SKBHC as “stalking horse” that submits a pre-arranged first bid for bankruptcy assets.
Sometimes, Rusnak said, those discussions occurred by telephone from his “summer White House,” a trailer parked at Heyburn State Park at the south end of Lake Coeur d’Alene.
Although terms with SKBHC subsidiary Hawks Nest Acquisition Corp. have been negotiated, the outcome could change as the bankruptcy moves toward a scheduled auction in early December. Seattle-based Columbia Banking System, which had once considered purchasing AmericanWest, has intervened, as has an offshore capital management company.
At least, Rusnak said, AmericanWest has a viable, ready solution to a capital shortage that has threatened its existence for more than two years.
“A lot of people wrote our obituary prematurely,” he said.