The TARP funds offered earlier this year by the federal government were initially attractive to members of the struggling banking industry, but many banks ultimately decided not to go that route because of the strings attached.
Some small banks and businesses, however, are now in a better position to raise capital themselves, according to Jon Chism, a partner in the Grand Rapids office of Plante & Moran, PLLC.
“Where banks and businesses have a good story,” he said, “they can go directly to existing shareholders, as well as to prospective investors in the community, to raise capital. We’ve already seen several of them do that, including Macatawa Bank.”
Last November, Macatawa Bank of Holland got an infusion of cash from White Bay Capital LLC, an organization in which David Van Andel plays a key management role.
In May, Macatawa Bank announced it had withdrawn its application to participate in the U.S. Treasury Department’s TARP Capital Purchase Program.
“Since the submission of the Company’s application, TARP has evolved and changed significantly. In light of these changes and the Company’s demonstrated ability to raise private capital, the Board of Directors and senior management team have determined that it would not be in the best interest of the Company’s shareholders to participate in the TARP program,” stated a document Macatawa Bank filed with the Securities and Exchange Commission.
Low interest rates are also inducing private investors to seek opportunities in local businesses. Chism said he is working with a company that has a “green” product line, which has turned to private markets to raise capital.
Brian Pollice, Plante & Moran’s Financial Institutions Industry group leader, said some banks are continuing “to lose a significant amount of money due to bad or sour loans.” That predicament has clearly scared many investors away from the banking industry in general, judging from some share prices these days, especially those of the smaller community banks.
That undervalued stock is where the opportunity lies — both for the investor and for those banks themselves when they need to raise capital.
“For the right investor and the right institution, there is an opportunity” in a rights offering from a small bank, said Pollice. That’s when existing shareholders are offered a special discount to buy more shares.
At some small banks, the share price is trading at “10 to 30 percent of tangible net value — a deep discount,” said Pollice. That looks like a nice return on investment in the future — if the economic troubles are really behind us.
Share prices for some local community banks earlier in September were a fraction of their value 18 months ago. Community Shores Bank in Muskegon was trading at $1.49 on Sept. 10; in January 2008, it was more than $7. Macatawa was at $2.21, versus $10.18 in January 2008. Independent Bank in Ionia was just less than $2, versus $13-plus in January 2008.
At the big financial institutions, it is probably too late to catch a lucrative ride on undervalued stock, said Pollice. Bank of America, which was at $45 in January of 2008, hit a low of $3.14 in March. Now it is trading at more than $17.
“The devil is in the details,” however. Pollice said a wise investor must look into the asset quality of that community bank’s loan portfolio.
“How well is that performing? And are they, one, adequately reserved? And two, is there another wave of bad loans coming?
“That is the million dollar question,” he said.
Pollice said there are “a lot of economists out there saying we’re coming out of the recession, or (are) out of it.” He quickly adds that in Michigan, however, “things are still tough out there.”
The FDIC is “taking a hard stance” nowadays, forcing some banks to “aggressively charge off loans” that are shaky, where in the past, a bank might have given those borrowers a little more time to make good.
The regulators, said Pollice, “don’t want to get caught with their pants down and miss the failure of a weak bank.”
A potential investor in a bank must also have a good understanding of that bank’s capital requirements as established by the regulators.
“If they fall below a certain level, then the bank is subject to seizure” by the fed, said Pollice.
“The knowledgeable guy and the risk taker — assuming he does his homework right — is going to be rewarded.”
When pressed for his personal opinion, Pollice said he thinks “we’re near the bottom of the trough. If you look at automotive production, and if you look at foreclosures subsiding a bit, I think the economy outside of Michigan is clearly coming back. I think we’re on the start of an uptick.”