With less than 1.875 million shares outstanding and fewer than 300 shareholders, Centrix Bank in Bedford, N.H., is not on many investors’ radar screens.
Centrix executives are trying to change that, though, and in May they took a small step in that direction when they appeared at an investor conference in Boston. Though the $221 million-asset bank is not seeking a capital infusion at the moment, it is looking to make contacts with analysts and investors for when it is.
“Our interest in going to the investor conference was to get our name out there, to get people to understand our story,” said chief operating officer Lucy T. Gobin.
With a market value of just $31 million, Centrix faces a lot of competition for investor interest. Indeed the fight has become more difficult, because brokerage firms have cut back on equity research in the last two or three years, curtailing an important source of information for investors.
“It’s a battle,” said Daniel E. Coughlin, the president and chief executive officer of Howe Barnes Investments Inc., a brokerage and investment banking firm in Chicago that often works with community banks. “You have to fight for the spotlight.”
But even banks as small as Centrix can attract investors beyond their own backyards through conferences, listing their stock, and generally being accessible to the investment community, several sources said. They can even pay for research coverage if so inclined.
Moreover, though analyst research on small banks has dwindled, institutional interest appears to have grown over the past decade, said David Downs, a managing director in investment banking for BankAtlantic Bancorp’s Ryan, Beck & Co. of Florham Park, N.J. The average exchange-listed bank and thrift with less than $500 million of assets — of which there are about 700 — has 6.5% institutional ownership, analysts said.
“It’s a function of the excellent outperformance this group has had over the last 10 years,” said Collyn Gilbert, an analyst with Ryan Beck.
Centrix’s decision to participate in the Northeast Super-Community Banking Conference in Boston seems to have had the desired effect. Ms. Gobin said that a number of independent investors and fund managers have called or e-mailed her or Joseph B. Reilly, the bank’s chief executive officer, since the conference.
Some have asked specific questions about the bank’s business, she said. Others have asked to be put on the bank’s mailing list for financial reports. And two in the week right after the conference asked if they could meet with the bank’s executives.
By all accounts, visibility among investors is critical for small but expansion-minded banks. “If you’re a growing bank, you’re always going back to the capital markets for additional equity,” said Randy P. Helton, the president and chief executive officer of American Community Bancshares Inc. in Charlotte.
American Community, launched in 1998, has $402 million of assets and enough capital, Mr. Helton said, to see it through another $150 million to $200 million in asset growth — or about two or three years. But then it will need more if it wants to hire experienced bankers, build new branches, and make bigger loans.
Centrix, which opened in 1999 with $8 million in capital and raised another $8 million in 2003, will likely begin its next hunt for capital in late 2006 or early 2007, Ms. Gobin said.
Since visibility is not achieved overnight, banks should get to work well before they actually need capital, investment bankers say. Hoping to earn underwriting commissions and advisory fees for mergers and acquisitions, investment banks specializing in community banks are helping even those whose stock barely trades develop some of that visibility.
For example, under an arrangement announced in April, Howe Barnes is to make a market in the stock of Independent Community Bankers of America members. It is also to sponsor OTC Bulletin Board listing, which provides ticker symbols, inclusion in the electronic information systems brokers use, and often listings in local newspapers.
The firm will also include participating banks in a new publication — a compendium of performance data about small-cap banks — that lacks the depth of its full-fledged research.
Ryan Beck, which recently presented a seminar on raising capital for mature community banks, introduces clients to institutional investors. ACB’s Mr. Helton said a Ryan Beck analyst recently arranged a whirlwind visit to more than a half dozen investors in New York.
Analysts, investor relations consultants, investment bankers, and bank executives say there is no single right way for small companies to generate visibility among prospective investors. But explaining their strategies at investor conferences is widely regarded as an important element in any plan.
Many investment banks host investor conferences throughout the year, though they are ofen limited to companies their research divsions cover.
Other options are independent conferences, such as five each year in the Super-Community series organized by Margolin & Associates, an investor relations consulting firm in Cleveland. Another independent, the Burkenroad Conference, is organized by the Freeman School of Business at Tulane University in New Orleans.
Small-bank executives should not overlook the value of speaking in their own communities — for example, to chamber of commerce and Rotary Club gatherings — said Barbara Carey, the president of Communications Institute, an investor relations firm in Baton Rouge.
Executives with Southern Connecticut Bancorp Inc. in New Haven agree. The $82 million-asset company, founded in October 2001, invites local stockbrokers to dinners at which its executives talk about their plans to boost assets to $500 million over the next four or five years, said Michael M. Ciaburri, the president and chief operating officer.
Mr. Downs said moving a bank’s stock to higher-profile exchanges when possible can make a difference. Stock in the smallest banks, sometimes called “pink sheet stocks,” typically are not listed at all. “They can move up the ladder by listing on the OTC Bulletin Board as a first step,” Mr. Downs said. A broker-dealer must agree to make a market in the stock, but there are no minimum share or trading volume requirements.
Bulletin Board listing, if it generates trading activity, can pave the way to a listing on the Nasdaq Small Cap Market and then the Nasdaq National Market, Mr. Downs said. Eligibility for the Small Cap listing is based on equity, net income, number of shareholders and market makers, and operating history. The National Market listing has more stringent requirements, particularly in corporate governance.
Capturing analyst and investor attention, however, takes more than speaking at conferences and moving up the stock exchange ladder, said Kevin T. Timmons, an analyst at C.L. King & Associates Inc. in Albany, N.Y. Banks need to report results on a timely basis and to talk about their results, he said.
“When you release earnings, the CFO and/or the CEO had better be around to have discussions with analysts or investors about whatever issues are embedded in the press release,” Mr. Timmons said.
Equity research coverage, traditionally viewed as a window to a wider world of investors, is tough for small banks to come by. Though there is no strict size threshold, Mr. Timmons said analysts generally look for companies with enough trading volume to generate commissions for their firms if a report piques interest in the stock.
That means about $50 million to $100 million of market cap, or roughly $250 million to $500 million in assets, bankers and others said.
American Community, which two analysts follow, has a market cap of about $65 million. Southern Connecticut, which none cover, has a $23 million market cap. Coverage is not yet possible for Centrix, since it is not registered with the Securities and Exchange Commission and its stock is thinly traded.
A number of firms publish equity research on small companies for a fee, but interest in that is modest. Nasdaq Stock Market Inc. and Reuters announced a joint venture in June that they think will give the idea a boost. The new venture will hook up small companies with analysts and distribute their research through 500,000 Reuters terminals used by investment professionals.
Because investors may put less faith in paid than in independent research, the venture will take steps to ensure its credibility, said Bethany Sherman, a Nasdaq spokeswoman. For example, it is requiring companies to sign on for three years of coverage, regardless of whether it is favorable or unfavorable.
But the price, $100,000 a year for coverage by three analysts, could prove discouraging. “For a small community bank, that would be a big hit,” American Community’s Mr. Helton said.
Some institutional investors follow small banks closely. Institutional investors in small-bank stocks include funds managed by large, broad-based companies as well as smaller funds organized just to buy shares in financial companies.
Wellington Management Co. LLP in Boston, the investment adviser to First Financial Fund Inc., may be the most prominent large institutional investor in small-bank stocks. First Financial is a closed-end fund that invests in financial stocks; its 141 holdings last Dec. 31 included dozens of banks with less than $1 billion of assets and several with less than $300 million.
Then there are investors like Fortress Partners Capital Management Ltd. in Hartland, Wis., which has $27 million under management and manages money for foundations, trusts, and wealthy families. Fortress invests in bank and thrift stocks with as little as $50 million in market capitalization, said Jon Bruss, its chief executive officer.
It is easy to understand institutions’ interest in small banks. As Fortress shows on its Web site, the mostly small-bank Nasdaq bank index has significantly outperformed the big-bank-heavy Philadelphia bank index over the last decade. The Nasdaq index produced a total return of about 1,100% since 1991, compared with about 300% for the Philadelphia index.
Most immediately, Centrix’s board would like to spur trading of its stock, if only to ensure that current shareholders can occasionally sell at a good prices. In the longer term, investor interest can help only when Centrix raises additional capital.
It has raised capital twice with self-managed, local stock offerings and might be able to do the same thing again, Ms. Gobin said — but with many investors in its initial offering buying stock again in the secondary offering, “that will only go so far.”
“At some point we need to expand beyond that,” Ms. Gobin said. Visibility to institutions improves Centrix’s prospects for a successful offering and gives it more options, she said.
Many small banks are buying out shareholders so they can abandon SEC registration of their stock. Centrix still has few enough shareholders to avoid registration, and its directors are thinking about remaining there.
A private placement with one or two institutions, rather than a public offering to retail investors, could let it do that and still grow. “Some of those institutions have the ability to put up large sums of capital,” Ms. Gobin said.
