Published in Small Business

Michigan community banks leverage tens of millions in capital raises

BY Sunday, January 16, 2022 06:19pm

The $20 million in capital that West Shore Bank Corp. raised toward the end of 2021 will go to support further commercial loan growth.

In closing the subordinated debt placement in mid-November, the Ludington-based West Shore Bank joined a number of community banks across Michigan that raised additional capital in the last year amid low interest rates to maintain regulatory capital ratios as loan volumes grew.

Chuck Christmas, Bradley Howes, Bill Hufnagel, Eric Seifert COURTESY PHOTOS

“It was just taking advantage of the market opportunity. We have a good loan growth outlook,” said West Shore Bank Chief Financial Officer Bradley Howes.

The bank presently has a “strong” commercial loan pipeline and “a sizable opportunity” in the Traverse City market where it recently built a new downtown office, Howes said.

“Having some capital at an attractive price to boost our capital ratios and support growth over the outlook for the next three to five years — it was never a better time to do it than now,” he said.

West Shore Bank — which has nine banking offices in Mason, Oceana, Manistee and Grand Traverse counties, a loan office in Muskegon, and $702.1 million in total assets — was among several community banks in Michigan with recent capital raises.

Grand Rapids-based Mercantile Bank Corp. closed in mid-December on a $75 million debt placement that involved 36 investors, according to a filing with the U.S. Securities and Exchange Commission.

“As we worked our way through the first three quarters, we saw what was happening in the fourth quarter and we looked at our pipelines, which gives us a good forecast for at least the first half of 2022. We’ve just had tremendous commercial loan growth, so we needed to raise additional capital,” said Mercantile Chief Financial Officer Chuck Christmas. “We’ve just seen some really solid growth, and we think that’s going to continue.”

In reporting third quarter results back in October, Mercantile Bank said core commercial loans grew by $162 million in the July-to-September period for an annualized rate of 25 percent. Through the first nine months of 2021, the bank’s commercial loans grew $298 million, or at an annualized rate of about 16 percent.

Every dollar raised in additional capital can support $10 in asset growth, or $750 million for Mercantile Bank, Christmas said.

“The key to capital is leveraging it, and for a bank that means growing the balance sheet, which for us means growing our commercial loans. That’s where we’ve had great success,” he said. “Throughout 2021, our pipelines were very strong and they remain very strong. We have a solid economic environment.”

Strong lending environment

The need for banks to raise capital to maintain regulatory ratios and support their growth reflects a strong lending environment and a “fairly robust” demand for credit, said Eric Seifert, principal of Muskegon-based Left Coast Capital Resources LLC.

That bodes well for small businesses with upcoming credit needs, Seifert said. He sees the strong commercial loan demand continuing through 2022, even with the expected increases in interest rates this year.

“Banks are still pretty aggressively lending, although they’re being careful to look at the industry and see how it was impacted and continues to be impacted by COVID and trying to look at the crystal ball to see what their next churn might be,” said Seifert, who works with small businesses seeking credit and capital.

At Dart Financial Corp., the parent company of Dart Bank based in Mason, the need to raise additional capital comes from both loan and deposit growth. Many banks have seen growth in deposits resulting from small businesses that received federal Paycheck Protection Program loans in 2020 and 2021, CEO Bill Hufnagel said.

Like many community banks, Dart picked up and retained new clients out of the PPP, Hufnagel said. Mergers and acquisitions in the Michigan market also have generated new business, Hufnagel said.

“If you want to grow, you have to make sure you’re well capitalized to take advantage of the opportunities that present themselves,” he said. “In today’s market, there’s some different opportunities to grow, and we’ve also seen our balance sheet grow through the pandemic in the form of deposits that have come into the marketplace.”

Earlier this month, Dart Financial closed on a $15 million debt placement with 13 investors. Dart Bank, with $702.1 million in total assets as of the third quarter of 2021, has four branches in Eaton and Ingham counties, plus seven loan production offices, including in Ada.

The additional capital will support “growth that we’ve already experienced and growth that we’ll continue to see and, hopefully, have an opportunity to take advantage of as we continue to move forward,” Hufnagel said.

Recent capital raises by other banks based in West Michigan totaled $114.6 million. These include:

  • Sparta-based ChoiceOne Financial Services Inc. — the parent company of ChoiceOne Bank that has 34 offices in western and eastern Michigan and $2.27 billion in total assets as of Sept. 30 — raised $32.5 million through a private debt placement that closed in September.
  • Union Financial Corp., which is based in Lake Odessa and is building a new headquarters in Grand Rapids, closed this month on a $6 million debt placement with 12 investors.
  • Lake Financial Corp., the parent company of Baldwin-based Lake-Osceola State Bank, raised $15 million at midyear in a debt offering that involved 25 investors.
  • Mount Pleasant-based Isabella Bank Corp., with $2 billion in assets and 31 offices in the central Lower Peninsula, closed in early June on a $30 million debt offering.
  • In Coldwater, Southern Michigan Bancorp Inc., the parent company of Southern Michigan Bank & Trust, completed a private placement of subordinate notes in April that raised $30 million to support organic growth.
  • Honor Bancorp Inc., based near Frankfort, raised nearly $1.1 million in March through an equity offering.

Capital raises last year by banks in Southeast Michigan include a $75 million debt placement in December by Arbor Bancorp Inc. in Ann Arbor, Oxford Bank Corp.’s $16 million equity offering in October, and Detroit-based First Independence Corp.’s $4.5 million in equity issued in December.

Subordinated debt placement with today’s low interest rates is the cheapest way to raise capital, Christmas said. As well, the investor market for subordinated notes remains strong, he said.

“There’s a huge appetite for bank subordinated debt,” Christmas said. “So there really hasn’t been any issue in regards to selling it and finding investors out there.” 

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