Capital markets are open — for now — and community banks have taken note.
The coronavirus pandemic and recession have created an attractive environment for banks to raise certain types of capital. Executives bracing for a potentially years-long recession are asking themselves how much capital their bank will need to guard against low earnings prospects, higher credit costs and unforeseen strategic opportunities. For a number of banks, their response has been to raise capital.
A number of banks are taking advantage of interested investors and relatively low pricing to pad existing capital levels with new funds. Other banks may want to consider striking the markets with their own offerings while the iron is hot. Most of the raises to-date have been subordinated debt or preferred equity, as executives try to avoid diluting shareholders and tangible book value with common equity raises while they can.
“I think a lot of this capital raising is done because they can: The markets are open, the pricing is attractive and investors are open to the concept, so do it,” says Christopher Marinac, director of research at Janney Montgomery Scott. “Banks are in survival mode right now. Having more capital is preferred over less. Hoarding capital is most likely going to be the norm — even if it’s not stated expressly — that’s de facto what they’re doing.”
Shore Bancshares’ CEO Lloyd “Scott” Beatty, Jr. said the bank is “cautiously optimistic” that credit issues will not be as dire as predicted. But because no one knows how the recession will play out, the bank decided to raise “safety capital” — $25 million in subordinated debt. The raise will grow the bank’s Tier 2 capital and boost overall risk-based capital from 14.1% to about 16%, according to analysts.
“If credit issues do not develop, we will be in a position to use this capital offensively in a number of ways to improve shareholder value,” Beatty said in the Aug. 8 release.
That mindset resonates with Rick Weiss, managing director at PNC’s Financial Institutions Group, who started his career as a regulator at the U.S. Securities and Exchange Commission.
“I’ve never seen capital I haven’t liked,” he says. “I feel safer [when banks have higher] capital — in addition to avoiding any regulatory problems, especially in a bad economy, it gives you more flexibility with M&A, expanding your business, developing new lines, paying dividends, doing buybacks. It allows you to keep the door open.”
Raising capital is especially important for banks with thinner cushions. Republic First Bancorp raised $50 million in convertible preferred equity on Aug. 27 — a move that Frank Schiraldi, managing director at Piper Sandler & Co., called a “positive, and necessary, development.” The bank had capital levels that were “well below peers” and was on a significant growth trajectory prior to the pandemic. This raise boosts tangible common equity and Tier 1 capital by 100 basis points, assuming the conversion.
Banks are also taking advantage of current investor interest to raise capital at attractive interest rates. At least three banks were able to raise $100 million or more in subordinated offers in August at rates under 5%.
Lower pricing can also mean refinancing opportunities for banks carrying higher-cost debt; effortlessly shaving off basis points of interest can translate into crucial cost savings at a time when all institutions are trying to control costs. Atlantic Capital Bancshares stands to recoup an extra $25 million after refinancing existing debt that was about to reset to a more-expensive rate, according to a note from Stephen Scouten, a managing director at Piper Sandler. The bank raised $75 million of sub debt that carried a fixed-to-floating rate of 5.5% on Aug. 20.
Selected Capital Raises in August
|Name||Location, size||Date, Type||Amount, Rate|
|WesBanco||Wheeling, West Virginia $16.8 billion||Aug. 4, 2020
|$150 million 6.75%|
|Crazy Woman Creek Bancorp||Buffalo, Wyoming
|Aug. 18, 2020 Subordinated debt||$2 million 5% fixed to floating|
|Republic First Bancorp||Philadelphia, Pennsylvania
|Aug. 19, 2020 Preferred equity||$50 million 7% convertible|
|Atlantic Capital Bancshares||Atlanta, Georgia
|Aug. 20, 2020 Subordinated debt||$75 million 5.5% fixed to floating|
|CNB Financial||Clearfield, Pennsylvania
|Aug. 20, 2020 Preferred equity||$60.4 million* 7.125%|
|Park National Co.||Newark, Ohio
|Aug. 20, 2020 Subordinated debt||$175 million 4.5% fixed to floating|
|Southern National Bancorp of Virginia||McLean, Virginia
|Aug. 25, 2020** Subordinated debt||$60 million 5.4% fixed to floating|
|Shore Bancshares||Easton, Maryland
|Aug. 25, 2020 Subordinated debt||$25 million 5.375% fixed to floating|
|Citizens Community Bancorp||Eau Claire, Wisconsin $1.6 billion||Aug. 27, 2020 Subordinated debt||$15 million 6% fixed to floating|
|FB Financial||Nashville, Tennessee $7.3 billion||Aug. 31, 2020 Subordinated debt||$100 million 4.5% fixed to floating|
|Renasant Corp.||Tupelo, Mississippi
|Aug. 31, 2020 Subordinated debt||$100 million 4.5% fixed to floating|
*Company specified this figure is gross and includes the full allotment exercised by the underwriters.
**Date offering closed
Source: company press releases