Capital Issues: Taking Stock

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From left to right: Carl Dodson, executive vice president and COO; John Maxwell, chairman and CEO; Edward Harrington, regional president (Maryland and the District of Columbia); Sonia Nga Johnston, regional president (Arlington County, V.a.); Paul Bice, regional president (Loudoun County, Va.); Bill Ridenour, president and chief administrative officer; Mark Moore, executive vice president, chief lending officer.

In Virginia, John Marshall Bank’s common stock offering goes gangbusters

By Kathryn Jackson Fallon

For any community bank, conducting a public stock offering is a complicated, intense gambit to find new investors. At times it can feel like playing a high-stakes, no-limit Texas Hold’em poker hand, but pulling one off can lead to a jackpot of assets. A successful capital raising could be the difference between securing a more stable, high-growth future and just getting by.

This past November, John Marshall Bank in Reston, Va., embarked on a capital-raising campaign to fuel more rapid growth planned for the $630 million-asset community bank’s future. The bank’s common stock sale, marketed to investors in eight metropolitan areas outside its home-base market of greater Washington, D.C., was an unqualified success by several measures.

The capital-raising effort sold 2.4 million shares of common stock in just three weeks at the price of $13.50 per share and grossed $32.4 million—more than $7 million over the bank’s initial goal of $25 million. “We had several individual investors around the $1 million level,” notes John Maxwell, the bank’s chairman and CEO. “The average individual investment was about $50,000.”

“Look for a good investment banker and a good investment bank, with emphasis on the banker. And make sure the firm mirrors your goals and values.”
—John Maxwell, John Marshall Bank

Well-positioned in a strong market and with a solid reputation, SNL Financial recently listed John Marshall Bank as one of the best-performing banks in the United States. Maxwell is quick to point out how Washington’s suburban banking market is the seventh-largest metropolitan service area in the United States and contains five of the country’s top-10 counties with the highest median household incomes. The market contains about $154 billion in deposits.

John Marshall Bank’s public stock sale was geared to help the bank, which focuses primarily on serving small businesses, meet its target growth over the next three to four years, Maxwell says. The 8-year-old bank plans to use its common stock offering capital to grow by $400 million in assets over the next few years.

The bank’s leaders first considered raising capital through a private offering to local investors, tapping into the contacts of the officers and directors, but they decided to explore the possibility of reaching out to institutional investors outside of its marketplace. “Our model is based upon strong community support,” Maxwell says. “A diverse shareholder base in our market is critical in this model, providing current and future capital investment, as well as a good base of customers and referral sources.”

Maxwell’s Maxims
John Maxwell, chairman and CEO of John Marshall Bank, offers a few observations of the current capital markets climate, derived from the $630 million-asset community bank’s recent $30 million public common stock offering.Buyers are out there. There is a lot of investment money looking for a good investment opportunity.Market-makers are hungry. Investment bankers are eager for work and looking for transactions.Reasonable expectations have returned. The market has adjusted to the new reality, tempering investment return expectations for community banks.

The big fish are swimming. Institutional investors are regaining confidence in the community bank model and are willing to invest. Look for those with a goal of total return over time, not short-term gains.

Look local first. Don’t underestimate your market’s local investor demand. It could be stronger than you think, and local investors are also potential customers.

Tell a short story. Understand your community bank’s model. Keep the investment story simple, concise and focused on what makes your community bank different and successful.

Be candid. The institutional fund managers appreciate open, honest discussion about your community bank, including the challenges it faces now and in the future. You don’t have to sell the story if it is already a good one.

Behind the stock sale

Nationwide, the past recession and lingering economic doldrums have resulted in a decreased variety of capital accessible to community banks, leaving common equity as the best type of capital out there. “Our board and officers were confident in our ability to raise $10 million from our local investors, but felt we needed a broader market to raise over $25 million,” Maxwell explains. “As a result, we decided to expand the offering to include institutional investors and additional retail outlets through our investment bank.”

John Marshall Bank is privately held, and its board and officers want to keep it that way. But the bank’s leaders wanted to grow in the bank’s market for long-term capital. For that reason, Maxwell says, the bank’s stock offering targeted a mix of local investors, investment brokers who serve individual investors as well as institutional investors. “We felt that bringing in the three sources together would give a balanced ownership in the bank, focused on long-term, total return,” Maxwell says.

John Marshall Bank’s executives promoted the bank’s relatively young lifespan as an attraction. “Our advantage is that all our loan growth is based on current market conditions, with asset appraisals obtained after the significant downturn in real estate valuations and underwritten using conservative loan to value and cash-flow coverage guidelines,” Maxwell says. “The result is a very clean portfolio of loans to solid-performing and diverse companies within the commercial real estate, government-contracting and small-business sectors.”

Basel III capital rules, which will increase the costs of capital for community banks and decrease capital-raising options, were not the reason behind the capital raise, Maxwell says. “We have always maintained capital levels in excess of the ‘well-capitalized’ levels, and also manage our capital on the basis of our risk composition in the bank.”

Regulatory Capital Estimation Tool Available
Federal bank regulators have developed an estimation tool to help community banks understand the potential effects of the revised regulatory capital framework on their capital ratios.ICBA strongly advocated for the tool and supports its release. The revised framework approved in July implements the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Wall Street Reform Act. The agencies said the estimation tool is not part of the revised capital framework or a component of regulatory reporting.The agencies also noted that results from the tool are simplified estimates that may not precisely reflect banks’ actual capital ratios under the framework. They said the estimation tool requires certain manual inputs that could have meaningful effects on results and that banks should reference the revised capital framework when using the estimation tool.

Find the estimation tool online at: www.federalreserve.gov/newsevents/press/
bcreg/20131119a.htm
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John Marshall Bank chose BBT Capital Markets/BBT Scott & Stringfellow to manage the stock transactions because the bank’s executive team knew the firm from previous capital-raising campaigns. The firm put together a marketing campaign to provide presentations to institutional investors within the Washington, Baltimore, New York, Philadelphia, Boston, Chicago and Minneapolis metro areas. Presentations geared for local investors were given in the Washington, Richmond, Va., and Norfolk, Va., markets. BBT Capital matched up the institutional investors’ values with the bank’s objectives.

The bank’s executive team also chose the law firm BuckleySandler in Washington, D.C., to handle the legal aspects of the stock sale, including the details of related securities laws.

Getting the sale done

How might other community banks with no prior experience going this route find this kind of stellar outside assistance? “Look for a good investment banker and a good investment bank, with emphasis on the banker,” Maxwell says. “And make sure the firm mirrors your goals and values.”

Don’t settle for the first capital investment firm that comes along, he adds. “Make sure you talk to several investment banking firms, both small and large. Everything is negotiable, even more so today as the volume of transactions has lessened. Getting a mix of fees and commission rates is important in negotiating the final deal.”

The bank’s top executives all played a part in promoting the public stock sale, with Maxwell having primary responsibility for strategy, marketing and overall management of the offering. Bill Ridenour, the bank’s president and chief administrative officer, managed the local investor stock offering, both operations and sales. Carl E. Dodson, the bank’s chief operating officer and chief financial officer, was responsible for working with the investment bankers, attorneys and accountants in preparing the offering circular. Dodson participated in marketing presentations with Maxwell, and a representative from BBT Capital attended every meeting.

During the marketing roadshow phase of the stock offering, Maxwell says, most of the questions from interested investors were similar to those asked in previous offerings, but because of the economy, investors particularly wanted to know: “What is John Marshall Bank’s model and why does it work?”
Using an investment banking firm can open up a whole new world of potential investors and give a community bank a heightened profile that paves the way for future capital-raising transactions, Maxwell says. “This increased visibility is important for future capital raises and provides better liquidity for your investors,” he says. “Opening up to a public market also makes pricing your stock more efficient, making other transactions easier.”

“Opening up to a public market also makes pricing your stock more efficient, making other transactions easier.”
—John Maxwell, John Marshall Bank

For community banks contemplating following John Marshall Bank’s lead in conducting a public stock offering, Maxwell recommends first having a comprehensive capital plan with measurable metrics to use as a framework. The board of directors should decide on the amount, type and form of the stock sale.

“Make sure you incorporate your bank’s strategic plan into the analysis,” he adds. “From there, it’s just a matter of assembling the team—attorneys, accountants and, if required, investment bankers—to draft the offering circular, establish the timeline and form the strategy.

“With the right mix of advisors, it is relatively simple.”


Kathryn Jackson Fallon is a writer in New York.

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