Bread-and-butter banks are preparing to sell more higher-risk and higher-yielding securities, encouraged by investors eager to see the tiniest of lenders jump into the bond market for the first time.

Banks began last year selling subordinated debt after years of dormancy brought on by the crisis. The country's largest bank, JPMorgan Chase, two weeks ago sold $3 billion in ten-year subordinated debt, paying investors a 3.78% coupon.

JPMorgan's payout, however, is not the story yield-seekers are giddy to talk about. Institutional investors such as MetLife, the biggest U.S. life insurer, and ManuLife Asset Management, showed Brookline Bancorp in Boston the money on Thursday, helping the bank raise $25 million more than the $50 million it planned to sell — raising in a day a sum equal to 14% of the bank's $5.5 billion in assets. The 15-year notes paid out a 6% coupon.

"There is robust demand for bank paper and exceptional demand for subordinated bank debt," said Todd Mahoney, head of bond syndication at UBS AG.

This activity is the latest example of how the low-rate environment is driving investors to scour for incremental yield.Word has spread fast since June that tiny, first-time bank issuers and, in some cases, old-time issuers that had all but disappeared from memory, are offeringsmall bonds that pay double the 10-year Treasury, which hovered at 2.58% as of Friday morning.

"Small-cap bank deals have a very narrow investor focus," Mahoney said. "The fact that these deals are getting done shows that the market has rebounded postcrisis, and investors are very comfortable owning bank debt again in nontraditional format."

The investors are being dubbed the "buyside mafia," one analyst joked, asking not to be named because of client relationships.

Kroll Bond Rating Agency has courted 11 community banks, nearly all of them under $10 billion in assets, to buy low-investment-grade ratings they say are necessary to broaden investor appeal. Kroll intends to double the number of community banks it rates by the end of October, two people with direct knowledge said, and all signs point to more on the way.

The window to get these deals done is now, dealmakers said, adding that September and October will be the busiest months for issuance, and after that, the story will begin winding down. There may be as many as ten subordinated debt issuances over the next four to six weeks, said Jacques de Saint Phalle, principal at Sandler O'Neill, which has acted as manager on all but three of the fifteen community bank deals tracked by American Banker.

"You are going to see even smaller banks come to market down the line," said de Saint Phalle, who highlighted a string of private placements, such as a $15 million deal they did for First Business Financial Services in Wisconsin. The deal will help fund a pending $30.1 million acquisition of Aslin Group's Alterra Bank.

Sandler runs the most active syndication desk for these community bank deals, but word is leaking out across corporate syndicates. Active underwriters include U.S. Bancorp (which has acted as a lead manager on seven of the last fifteen deals issued by new bank participants,) Deutsche Bank and Royal Bank of Canada. The Swiss bank UBS has not yet managed any of the deals but has several Kroll-rated deals in the pipeline.

It is unclear whether banks are seeking out advisories, or if they are being pulled in by the can-doers at their doorsteps.

Steven Gardner, president and CEO of the $1.7 billion-asset Pacific Premier Bank, said, "Our advisors," whom he did not name, "say obtaining the Kroll ratings may improve pricing and execution if and when we go out for senior-secured or subordinated debt in the future." Pacific sold two weeks ago a $60 million deal rated triple-B by Kroll, and it carried a 5.75% coupon. Sandler O'Neill and Raymond James syndicated the offering, according to people with knowledge of the private deal.

Fitch Ratings' community bank analysts Bain Rumohr and Chris Wolfe said none of the banks they rate have issued any subordinated debt since their last reviews. Fitch would generally be most concerned assigning investment-grade ratings to small community banks because they have "acute geographic concentration" and "often have loan or customer concentrations," said Brian Bertsch, the firm's corporate communications director.

Will Schwartz, senior vice president at rating agency DBRS, also offered a word of caution. "Across all corporate credit, if you only had one factor to rate by, size would have the highest correlation with failure. But there is no doubt there are some high-quality small banks out there," he said.

Banks are using the funding in two ways: selling subordinated debt is enabling them to fund mergers and acquisitions, and the deals count towards Tier 2 capital requirements.

At least six banks, including Eagle Bancorp, Independent Bank Group and Newbridge Bank, are using investors' cash to fund an M&A transaction.

The $3.8 billion-asset Eagle Bancorp, for example, the largest community bank in the Washington, D.C., area, announced in June its agreement to buy the smaller Virginia Heritage for $183 million. Sandler O'Neill underwrote Eagle Bancorp for $70 million in subordinated debt a little over a month later. The notes, rated triple-B minus by Kroll, fetched investors a 5.75% coupon.

The level of M&A activity in 2014 is on track to surpass last year's 229 deal total, with 201 deals announced as of Sept. 8, data from Keefe Bruyette & Woods and FIG Partners show.

Ryan Lentell, managing director at Manulife, said he or a colleague has looked at every offered bond issuance so far. It's a win-win, he said.

"First Business [Financial Services] would have issued trust-preferred securities as a funding tool before the crisis, but now they are moving to subordinated debt as the market picks up and it remains cheap for them to issue." Lentell said.

There are longer-term capital needs that could drive issuance higher among small community banks.

More than 80% of the 281 community banks in the Treasury Department's $4 billion Small Business Lending Fund intend to beat a rate jump in 2016 that will increase their initial borrowing terms of 1%-5% to a hard 9% thereafter. Only 40 banks intend to remain in the program after that date, according to Treasury.

Opportunistic and savvy investors that once singled out Troubled Asset Relief Program banks may grow hungry for small, community lenders with an eye on the bond market to raise capital, Lentell said.

Financial institutions sold $37 billion in debt the first week of September, dominating 83% of the third-busiest issuance calendar for high-grade bonds ever.

The largest issuers included Wells Fargo, Bank of America, Capital One, Fifth Third Bank, Morgan Stanley, Bank of New York Mellon and JPMorgan. Community banks comprise a sliver of new issuance, having sold slightly more than $800 million in recent months, according to UBS data.

Subordinated bank debt has already surpassed last year's issuance level with $15.8 billion issued year to date, compared with $12.3 billion for 2013. Last year's total was four times the amount issued between 2009 and 2012, American Banker has reported.

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