First Commerce Corp. is raising its capital ratios to the skies.
The New Orleans bank holding company raised $ 47.8 million last week through a sale of common shares. As a result, First Commerce increased its Tier 1 capital ratio to about 15% - up from about 9% at the end of the first quarter and almost four times the level required by regulators.
Why does the bank need so much capital?
David Kelso, chief financial officer, said the bank will use the equity to maintain its position as Louisiana's strongest large bank and for future acquisitions.
Freedom to Expand
"We are the only bank in Louisiana that regulators will allow to do a fairly sizable acquisition," he said. "We have an active effort to looking for in-market candidates."
Two other large Louisiana banks, Premier Bancorp and Hibernia Corp, have been staggered by bad loans.
First Commerce sold 1 million shares at $47.75 per share through underwriters led by Keefe, Bruyette & Woods Inc. The offering price equals more than two times the company's book value. The stock was trading at $46.75 Friday afternoon.
One reason for First Commerce's stellar risk-based capital levels is that the bank has increased deposits by 33% in the last year and invested the money in low-risk U.S. Treasury securities. Treasuries have a lower risk weighting than loans.
At the end of March, First Commerce held $2.9 billion in its investment portfolio, half of which was Treasury securities with maturities of slightly over one year, Mr. Kelso said. In comparison, the bank had $2.1 billion in loans at the time.
First Commerce has benefited from a flight to quality among depositors and borrowers leaving weaker financial institutions, Mr. Kelso said.
Sharp increases in capital create a challenge for companies because there must be a corresponding increase in earnings or returns on equity will fall.
This is particularly difficult amid the current weak loan demand, and Mr. Kelso noted that First Commerce does not expect to boost income solely from new loans.
Rather, First Commerce will aim to increase profits by selling consumer loan products to new depositors.
In addition, it hopes to widen its net interest margin by reducting funding costs and increase the yield on its investment portfolio by lengthening its maturity a bit, he said.