A three-branch bank in Los Angeles this month pulled off a tricky feat that lots of small banks would love to match: It raised money from new investors — at a good price.
Among the wave of community banks that have gone to market this month, 1st Enterprise Bank (FENB) was the rare bank below $1 billion of assets to sell shares at a premium to its equity. Its $12.5 million private placement on May 16 shows that Wall Street will indeed pay up to buy into tiny lenders, if they have a number of key things going for them.
1st Enterprise has $580 million of assets and has been growing fast. It has zero bad loans, and it operates in a wealthy area. Many of those traits are missing from similarly sized banks in Maine and Maryland that recently have raised money at a discount to their tangible book values.
Its chief executive, John Black, knows his bank is an outlier.
"There are very few banks right now that are raising capital north of tangible book," he said in an interview. "We felt that we had such a clean bank and such a good story to tell that we would demand a premium in the marketplace."
It did, issuing about 962,000 common shares at $13 per share, or about 107% of tangible book value per share.
A need to return aid money to the Treasury, retire trust-preferred debt and fuel growth has compelled a wave of community banks to commence capital offerings in recent weeks.
Several banks have priced private placements, stock sales or rights offerings at steep discounts to their tangible books. They include Northeast Bancorp (NBN) of Lewiston, Maine ($600 million of assets); Howard Bancorp in Ellicott City, Md. ($323 million of assets); and Intermountain Community Bancorp of Sandpoint, Ohio ($958 million of assets).
Though demand for bank stocks has risen this year, investors have been particularly choosy about which small banks to buy, says Sharon Weinstein, managing director with Deloitte Corporate Finance in New York. That is because many large and small banks are trading at similar multiples. Since bigger banks are generally a safer bet than smaller ones, smaller bankers have to be top-flight players to draw investor interest, she says.
"The market is open — what it is open for are very strong, clean banks," Weinstein says.
Investors want to buy institutions that can deliver returns on tangible common equity over time of at least 15%, she says.
1st Enterprise, founded in 2006, is getting there, Black says. It posted returns on equity in the first quarter that would equal nearly 12% over a full year.
It has a core deposit base and a fairly low cost of funds of roughly 15 basis points. It also has a fairly liquid balance sheet, with a loan-to-deposit ratio of 62%. Total loans increased 35% in 2011 while deposits rose 13%.
It went to market because it wanted to broaden its investor base from individuals to institutions and to maintain healthy capital ratios, Black says. It opted to do a private placement rather than an open offering because private placements are faster and more efficient, he says. It also wanted to target its offering specifically at a swelling class of institutional investors focused on community banks.
It issued a cumulative 25% of its outstanding common shares to six investors: Commerce Street Investment Management, the Banc Funds, Stieven Capital Advisors, Bluepoint Partners, JCSD Partners, and Davis Capital partners.