In the years following the financial crisis, retail investors abandoned the equities of community banks, while institutional investors were highly selective of the franchises in which they decided to deploy capital. Asset quality and “burned down” tangible book values were areas of focus as new investors looked to stabilize banks’ balance sheets. The form of recapitalization and growth capital was primarily pure common equity; however, depending upon structure, both preferred equity and subordinated debt were utilized. Hybrid capital elements such as Trust Preferred Securities, which were once more favorable, began to lose favor in accordance with the new Basel III Regulatory Capital Framework. The banking landscape was one that contained both the “haves” and the “have nots” as it related to accessing the capital markets. Larger franchises located in primary markets with attractive demographic profiles and future growth prospects found accessing capital a much easier task than that of their brethren that were smaller or located in more rural communities.

The total dollar amount of community bank capital offerings saw a decline beginning in 2010, with a lag depending on the type of offering. Common equity offerings dropped from $7.8 billion in 2010 to approximately $2 billion in 2012, and appear to be tracking toward $5 billion this year. In contrast, preferred equity offerings dropped from $3.2 billion in 2010 to a bottom of $211 million in 2014, and appear to be tracking toward $500 million this year. Subordinated debt offerings, on the other hand, remained relatively low — between $100 million and $260 million between 2010 and 2013 — but surged to $735 million in 2014. This year, subordinated debt offerings will likely approach $800 million.

Raising Capital for Growth
The focus today is less on stabilizing balance sheets and more on growth opportunities, both organically and inorganically through mergers and acquisitions. Additionally, given the rise in valuations of the community banking sector over the last few years, it has become an opportune time for many to issue new common equity. As bank equity prices continue to rise, we expect to see an increase in initial public offerings, follow-on offerings, private placements, subordinated debt and senior debt issuances as more banks try to take advantage of the increased optimism in the markets. Many community bank management teams will use their new equity capital or debt financing to retire TARP or SBLF capital. Other management teams are seeking additional capital to bolster organic growth, pursue acquisitions and also to possibly position themselves for an eventual sale or IPO at a higher price than they might achieve today.

During the crisis, many community banks were faced with limited options for capital. Today, community banks possessing a simple capital structure, significant growth potential and balance sheet clarity will attract investor interest. Whether you are positioning for an IPO, growth through M&A, fueling organic growth or working through TARP and SBLF issues, the capital markets are open. The difference today, compared to the period during and right after the financial crisis, is that both discounts to current equity prices and dilution of current shareholders can be averted in many scenarios. We expect this trend to continue as long as we see improvement in credit markets and the overall economy.

Clear Vision Needed
For those banks seeking to attract investors, there needs to be an internal preparation and a clear vision for the future. Investors want scale, typically targeting an asset size of approximately $500 million to more than $1 billion in assets, or the ability to get there quickly. The company needs to operate in attractive markets with growth potential, possess a solid core deposit franchise, and existing credit issues must be identified with a high degree of clarity. The management team should provide confidence to potential investors that they are able to carry the bank to the next level. Finally, the return for investors must be achievable in a short amount of time, maybe as early as five to seven years.

We feel confident that the positive trends in the capital markets will continue to improve through competitive pricing as well as the increased availability of capital to banks of all sizes.  It will all come down to each individual scenario and management’s ability to successfully execute their strategic plans.


Michael Corso

Ward Rice