Independent Banker - August 2018 - 66

performance record and the continued involvement of two
founding members of the management team, including the
chief executive officer and chief lending officer, appealing.
The board and management team owned 45 percent of
Level One before the IPO, and 37 percent after the deal.
After a one-week roadshow, Level One had many more
orders than shares to sell, says Walker. The bank ended up
upsizing the deal about 20 percent at an offering price of
$28 per share. The $28.9 million in capital raised will be
used to add two new retail locations and make additional
acquisitions, Walker says.
The particulars
Roadshows like the one Level One undertook are an
opportunity for the investment community to get to see
and talk to the bankers involved in a deal. It's important
to get in front of the right kinds of investors, which makes
the decision of which investment bank to choose a very
important one, says Teagno.
It's also important to come up with the right size of IPO,
raising enough capital to support growth without taking on
too much and lowering return on equity, says Killian.
One of the biggest opportunities for public community
banks is mergers and acquisitions. Buyers have been
paying in the range of 130 percent to 150 percent of book
value. Private banks can either pay cash or issue stock, but
if that stock isn't traded, says Killian, it will be assumed to
be at book value instead of the premium of a stock traded
on an exchange, giving publicly traded banks an advantage.
For example, Royal Business Bank is in a crowded
market with about 25 Chinese-American and KoreanAmerican
banks. Its best opportunity to grow market
share is through consolidation, which was difficult as a
cash buyer, says Morris. Since becoming public, RBB has
announced a stock and cash transaction to merge with
$873 million-asset First American International Bank in
New York, which serves the Chinese-American market.
When the deal closes, the combined bank will have
$2.5 billion in assets.
But to reach that point, and to see the magical moment
when your community bank rings the opening and closing
bell on the exchange, understanding your community
bank's mission, vision and value-and being able to explain
them to others-is essential. Put the legwork in early, so
when a market opportunity strikes, your bank is ready to
take advantage.
" Have a good story and understand what made you
successful to this point, " suggests Walker. " Explain what
you're going to do with the new capital going forward and
why you're a good alternative. "
Kelly Pike is a writer in Virginia.
Primary vs. secondary shares
When making an offering, a community bank must
weigh how much capital it needs to support growth
and realize a good return on equity with how much
the current owners are willing to sell to get that
liquidity. That's why it's important to balance primary
and secondary shares, says Tom Killian with Sandler
O'Neill + Partners, L.P.
Primary shares, or the newly generated shares
sold during the offering, create revenue that goes
directly to the bank capital raised and typically make
up at least two-thirds of shares. Secondary shares
are preexisting shares. Revenue from their sale goes
directly to the share's owner. Secondary shares can
be a good way to increase the size of a relatively
small offering, though they rarely make up more than
a third of shares in an IPO.
In some cases, shareholders who haven't had
liquidity for five or 10 years may be
very happy to sell. That was often
the case in 2014, when primary
shares made up just 54 percent
of community bank IPOs as investors sought to
recoup cash infusions made during the financial
crisis. (Between 2014 and mid-2017, secondary
shares averaged around 25 percent, with a median of
around 11 percent, says Killian.)
Other times, it's more of a struggle to get
shareholders to sell. At Royal Business Bank,
directors were each required to put in 80,000 shares
so the bank could get the liquidity it needed, says
David R. Morris, executive vice president and chief
financial officer.
In the end, the bank raised $61 million in capital out
of the $86 million raised in total.
66 Q ICBA Independent Banker Q August 2018
Independent Banker - August 2018

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