Private placements of stock and debt are said to be slowly gaining traction among smaller banks.

A multitude of factors are paving the way for more community banks to raise capital from institutional investors, panelists said at the annual University of Mississippi Banking and Finance Symposium late last week.

Increased investor appetite and the emergence of specialized ratings agencies are starting to spur demand. At the same time, smaller banks are looking for ways to fund acquisitions and other kinds of expansion, and to prepare for an inevitable economic downturn.

“We’re seeing debt issues as small as $5 million to $10 million in size,” Chris Hogg, a managing director at Brean Capital, said during a panel discussion Friday. “We used to think that those deals were too small to get done.”

To be sure, there was no sign of that momentum in the latest available data, which was from midyear. The amount of Tier 2 risk-based capital held by banks with $5 billion or less in assets on June 30 was down by nearly 1% from a year earlier to $18.3 billion, according to data from the Federal Deposit Insurance Corp.

But the panelists said they expect banks will issue more subordinated debt in the months ahead because of rising demand from insurance companies, money managers and large banks that want to diversify away from traditional investments. Investors are said to be encouraged by increased banking consolidation, higher interest rates and potential regulatory and tax relief.

“Investors want private deals … that aren’t correlated to the market,” Christopher Marinac, an analyst at FIG Partners, said during the discussion, adding that many firms are recycling money made from prior bank transactions. “The interest level [in the sector] is as high as I’ve seen in years.”

Another contributor has been the rise of firms such as Kroll Bond Rating Agency that provide analysis of smaller issuers, Hogg said.

Community banks are finding varied uses for the capital brought in through private placements, the panelists said, providing examples of recent deals they have managed.

Centier Bank in Merrillville, Ind., raised $50 million in debt in June because the $3.2 billion-asset family-owned bank did not want to dilute existing shareholders, Hogg said. It took Brean about four weeks to navigate Centier through the process, Hogg said.

“We were turning investors away,” Hogg said, noting that 62% of the investors were insurance firms, 34% were banks and the rest were money managers. The insurance firms conducted their own credit assessment of the bank.

Smaller banks’ interest in private placements goes beyond debt.

First Reliance Bancshares in Florence, S.C., raised $25 million by selling common and preferred stock. The move, timed to coincide with the $435 million-asset company’s first bank acquisition, more than doubled its market capitalization.

“They can now double the size of the bank with this capital,” said Michael Hedrei, a managing director at Hovde Capital, which handled First Reliance’s private placement.

Another reason to line up capital now is to prepare for a change in the economic cycle, panelists said.

“A downturn is coming,” Hedrei said. “We don’t know when, but you don’t want to raise capital when it happens.”

Panelists made it clear, however, that smaller institutions must have a clear-cut strategy for using the capital and providing a return to investors.

“You have to have a liquidity game plan for the next three to five years before going to investors,” Hedrei said.

Banks looking to raise capital also need to have a plan to succeed in certain areas such as hiring and to increase core deposits, Marinac said.

“The market will fall in and out of love with banks,” Marinac said. “The key is to execute over the long term.”

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