Stock market valuations and capital access have clearly improved for many banks. Credit has improved. The number of problem banks has gone down. The economy is recovering. And that is making many investors interested again in bank stocks, bank debt and a variety of capital raises. Private banks also are seeing an improved market for capital raises, explains Dory Wiley, the president and CEO of Commerce Street Holdings, the parent company of Commerce Street Capital and Commerce Street Investment Management in Dallas.
What is the improved market doing to capital raises?
Bank is no longer a four-letter word. There are more than 80 banks trading north of two times book value and quite a few above three times book. I remember investors telling me [a few years ago] that banks would never trade above two times book. A lot of these banks [trading above two times book] are growing, have access to capital and have credibility with investors. We have seen an increase in the IPO [initial public offering] side.
What banks are best positioned to consider an IPO?
Size is one of the issues. It’s best if you are $700 million in assets or higher, especially $1 billion in assets or more. Also, you should consider the structure, the compliance requirements, the IT structure and the reporting structure for being public, and make sure it is all set in place ahead of time. If the board wants to build the capacity of the bank, they might be ready to go public and do acquisitions and really grow. Being public gives you a currency to buy other banks.
What are the capital raising prospects for private banks?
That market is open. Institutions are buying. We do private placements for many community banks. There is quite a bit of difference in the valuation between public and private raises. Green Bank and Independent Bank [both in Texas] were hoping to go public at 17 or 18 times earnings and trade up to 20 as they built credibility. Independent Bank went up to 25 times earnings. But in private placements, earnings are just part of it. You won’t get a big multiple on price to tangible book value. The institutional investors want to come in cheap and get a pop in two to four years when they exit. If they can’t get that pop, they don’t want to come in. That is why we are doing local, community raises, because local community investors will tolerate a higher valuation. It promotes the bank, it brings new customers to the bank and it brings new capital to the bank.
What is happening to community-based capital raises in the economic recovery?
We have done 60 local community private placement capital raises in the last five years. Post-crash, it was taking six months or longer to do a capital raise for the local community, but in the last year, that timeframe has gone down to three months. It’s great for those community banks that need equity. I am also seeing the multiples move up on those private placements, when they were at book value maybe a year ago. We did one for a $2.3-billion asset private bank called Happy Bancshares in Canyon, Texas. We raised $28 million at 1.9 times book on a private placement. Not all banks are going to get that, obviously. But investors are willing to pay up for the right story. Happy Bancshares is a very good acquirer and has a great growth rate. When we were marketing it, we pointed out the bank had faster growth rates than other public banks in Texas and the valuation was lower than the others. It was a good value.
What types of capital are available and at what price?
There is preferred stock, there is sub-debt available [with interest rates from] 6 percent to 8 percent, and senior debt or senior loans [loans made by other banks] coming in at 3 percent or 3.5 percent. That’s assuming the banks don’t have any issues. For the banks that want to access capital, it’s about as good a market as they can find. There are some haves and have nots. Some banks don’t have the size. Some banks are not in the right markets. You can’t do an IPO in Georgia and raise it at the same multiple as you can in Texas. The market is really picky about where you are and what’s going on.