Smaller L.A. banks tap stock market for capital: Mechanics National files for 100,000 common shares.

Smaller L.A. banks tap stock market for capital

Mechanics National files for 100,000 common shares

Despite the soft market for bank stocks, smaller community banks are turning to the stock market to raise capital.

"These banks have experienced enormous profitable growth and they realize they need to augment their capital to continue the growth," said Mike Conover, president of Ryan Beck & Co., an investment bank with an office in Westwood.

Paramount-based Mechanics National Bank, for instance, earlier this month filed a preliminary offering circular with the Office of the Comptroller of the Currency for 100,000 shares of common and $3 million of convertible subordinated debentures.

Downtown-L.A.-based Guardian Bancorp recently completed a public offering in which it issued its new stock at $16.50 a share when the book value was only $9 a share, suggesting these banks may not be suffering from the malaise afflicting most bank stocks.

Guardian is also not a fluke. "Our stock is trading about average for our peer group, which is banks under $1 billion in Southern California," said Paul Harris, Guardian's chairman and president.

These banks' potential as takeover targets may have boosted their stock price and facilitated their raising money in the public market, said Doug McEachern, a partner at Deloitte & Touche in their downtown office.

If the track record of recent acquisitions is a guide, small banks can command hefty multiples on their book value. For example, $460 million (assets) First Business Bank, based in Los Angeles, went for 3.23 times book value last July.

But takeover fever tells only part of the story. "They have had an exceedingly good return on capital investment," McEachern indicated.

That is a fact not lost on institutional investors, burned by big banks, who have joined the traditional base of individual investors in buying these stocks. "The institutional investor is tired of hearing surprises from the larger banks, such as the big Arizona and Texas problems at First Interstate," Conover said.

Some institutional investors also believe these small banks remain undervalued, even though the market appears to differentiate them to some degree from the majors. "Many investors do not do a good job distinguishing the good banks from the bad, and for some reason assume that just because their products are homogeneous, the banks are -- when in fact they are not," said Robert Schwarzkopf, fund manager for Pilgrim Regional Bank Shares, a bank fund of Century City-based Pilgrim Group.

While the smaller size of these issues might make seem prime candidates for private placements, the typical retail customer and institutional investor looks for liquidity unavailable in a private offering, Conover said.

McEachern added, "Some of these companies may want a wider shareholder base."

Those that have not recently issued stock may well be contemplating it. "We have received a lot of inquiries about raising capital for small community banks," Conover said.

Feeding the increased appetite for capital, besides growth, is toughening regulatory standards. "Banking has become a riskier business, with high quality loans to companies like IBM a thing of the past, so regulators are right in seeking more capital," Schwarzkopf said.