Sierra Vista Bank (SVBA) fits the profile of a bank seller. It is fighting the temptation — at least for now.
The Folsom, Calif., bank has assets of just $78 million and had reached a crossroads, but its leaders decided to seek more capital instead of packing it in, Chief Executive Gregory Patton says. "Our board considered everything. Should we sell? Should we look locally for a merger-of-equals partner?"
The economy and new regulatory demands are making it tougher for banks of Sierra Vista's size to survive, and many will look to sell out, experts say. Patton concurs and says Sierra Vista, which has had good luck raising funds, may still look to sell at some point — he just wants his bank to make that decision from a position of strength.
"There are going to be changes, and there is going to be consolidation. There are reasons for banks to talk to each other," Patton says. "We are going to have to make some decisions, but we want those to be opportunistic."
Those decisions could include Sierra Vista even being a buyer, Patton says.
The bank is poised to receive $1.7 million from Taylor International Fund, a Chicago hedge fund. The equity agreement, scheduled to close in the second quarter, was priced at $2 per share, or 66% of its book value. Sierra Vista also raised more than $2 million in a public offering at the same terms in September.
The new funds could fuel growth and make the bank a more attractive M&A target someday.
Sierra Vista's strategy essentially gives it more room to figure out what it wants to do, says Adam Fiedor, a principal at St. Charles Capital in Denver. More small banks, particularly those that still have some credit issues, may explore the same strategy. Even though the capital is raised at a discount to book, it gives the shareholders a better chance at an eventual sale for a premium.
"Without the capital, the bank is perhaps forced to sell at a low valuation. This gives the existing shareholders a second life," says Fiedor, who is not involved with Sierra Vista. "It allows them time to work out nonperforming assets, improve profitability and perhaps grow. It creates a runway to get them to a premium book value."
The new capital would give the bank enough room to double its balance sheet and would allow it to raise its lending limits. Demand is increasing, too, Patton says.
"This gets our capital to a point where we can be part of the conversation," Patton says. "We think the sun is about to come back out. The economy is stabilizing, things are coming up a bit, and companies are maybe looking at new markets and new employees."
The new capital could help clean up legacy issues.
The bank was chartered in March 2007. Banks that were chartered around the downturn have taken divergent rides; some have found a golden opportunity to flourish as seasoned banks ached. Other de novos have sputtered. Sierra Vista managed to find trouble.
"We opened in March and we had $15 million in capital and management wanted to get some of that rolling, so they did participations," says Patton, who joined in December 2007. "Those values changed drastically. …We also lost some money in some commercial deals that were tied to the construction."
Its problems even included the building that houses the bank's headquarters in a commercial strip center. The property is now part of the bank's $2 million in other real estate owned.
"We pay ourselves our own rent," Patton says.
Sierra Vista reported losses of $524,000 through Sept. 30, partly because of writedowns to prepare for the capital raises. It made $159,000 last year.
The bank had $2.2 million of nonperforming loans at the end of the third quarter. Despite the initial wave of problems that the company has been sorting out for the last few years, it had no new problem loans in the pipeline.
Three years ago the board raised roughly $2 million to deal with the problems. The bank also has a memorandum of understanding with the regulators.
Curing the regulatory issues could have been the motivating factor for raising the additional equity, says Kamal Mustafa, the chairman and chief executive of Invictus Consulting Group, who was unfamiliar with Sierra Vista.
"I don't think any bank wants to sell under an enforcement action," Mustafa says. "That's where the vultures circle."
Though Sierra Vista's strategy could gain popularity, the tough part is finding the investors, Fiedor says.
Stephen Taylor, the chairman of Taylor International, says Sierra Vista attracted him because he sees an opportunity to gain market share as other banks consolidate. He describes his firm as one that targets opportunities that others might look over. Small community banks are one of those, because larger investors say small equity deals take as much work as large ones.
"It is flip to say, but nobody from New York is going to fly to California for a $4 million deal," Taylor says. He has a similar investment 100 miles away in the $114 million-asset Pan Pacific Bank in Fremont. (Combining the two was not a motivation for the infusions, he says.)
"The obituary for small and mid-sized banks has been written prematurely. Sure, there are sound economic reasons for economies of scale, but I think it is premature," Taylor says. "Both of these banks could be attractive targets, but I think they also could have a healthy future independently, if they wanted."