Capital Connections


The market interest in community bank stocks is heating up

By Ted Peters

With community bank stocks on the rise and a promising future for the industry, community banks have a tremendous opportunity to raise capital to support expansion. Simply put, to lay the framework for future success, banks must grow!

For this reason, initial stock offerings and secondary offerings by community banks around the country are increasing. In addition, a plethora of subordinated debt issuances are being placed in the market, usually placed privately by the investment firms.

Before planning a stock offering—either an initial or secondary one—a community bank’s management should understand what investors are looking for and be prepared to meet their needs.

When my colleagues and I at Bluestone Financial Institutions Fund analyze a stock offering, we use the same analytical methodology that we employ before buying a community bank stock in the open market. We conduct heavy analysis during our research, and the quality of earnings per share and the projected momentum of those earnings are most critical. We look for repeatable earnings-per-share growth of a minimum of 10 to 12 percent a year.

Once we evaluate those metrics, we conduct our normal due diligence on loan quality, the business model of the bank and the risk profile. We also look at the bank’s deposit make-up, especially at the level of noninterest-bearing deposits. This indicates the quality and depth of a bank’s relationship with its customers.

Another important factor of our evaluation, which other investors likely note, is the quality of management. Questions we ask during this process include: What is their background; have they executed effectively on growth strategies in the past; what is their vision for the bank and the core strategies to achieve that vision; and lastly, how much stock does management and, in particular, the CEO own?

People make a significant impact on a bank’s value. Great management can turn a mediocre bank into a top performer in a few years, whereas weak management can take a high-performing bank and quickly turn it into a failure.

When analyzing community bank stock offerings, investors today are looking for banks that have the potential to grow loans, deposits and earnings per share at double-digit rates. The business model of the bank is integral in determining whether these metrics can be met. Additionally, investors realize that a community bank stock’s capacity for growth and value largely depends upon the economic health of its marketplace.

If a bank needs capital, it should move quickly and strike while the iron is hot. Now is an excellent time to bolster the capital on balance sheets and prepare for future growth and independence.

Ted Peters is chairman and CEO of Bluestone Financial Institutions Fund, a hedge fund that invests in publicly traded banks.