Capital raises supplement more US bank M&A deals

Capital raises are helping fuel some of the biggest US bank deals of the year.

Of the five largest deals announced so far in 2024, three were accompanied by capital raises, according to S&P Global Market Intelligence data. UMB Financial Corp., Renasant Corp. and WesBanco Inc. all disclosed capital raises on the same day they announced agreements to acquire Heartland Financial USA Inc., The First Bancshares Inc. and Premier Financial Corp., respectively.

Capital raises accompanying deal announcements have become a tool in the banking sector as regulators place higher expectations on capital levels. Among the companies that announced deals in late July, Renasant completed a $230.0 million common stock offering, WesBanco sold $200.0 million of common stock in a private placement, and ChoiceOne Financial Services Inc. closed a $34.5 million common stock offering.

As of Aug. 12, six deals in 2024 included capital raises, compared to five deals that included raises in all of 2023. The majority of the capital raises in 2024 have been between $200 million and $300 million.

Banks are using capital raises to supplement their capital and common equity to offset capital dilution from the M&A transactions — and to tell regulators that if capital is needed, the bank has the ability to raise it efficiently, Kevin Stein, managing director at Klaros Capital, which participated in the WesBanco capital raise, said in an interview.

Years ago, banks did not generally have to replace dilution resulting from deals immediately but would show how they could replace capital in ensuing years, Stein said. In recent years, however, regulators seem to have changed their stance on dilution caused by transactions, possibly in response to the 2023 liquidity crisis, he said.

Finding a price

When deciding how much capital to raise, executives have to choose to offer enough shares to supplement capital ratios adequately without over-diluting their company's share price.

It was once common for a buyer's stock price to decline sharply after a deal announcement because of doubts about the buyer's ability to reach the proposed deal metrics, Stein said. Now, buyers are proposing more conservative metrics in deal accounting, so their stock prices after deal announcements are more often either flat or slightly down.

ChoiceOne issued a public offering of 1.2 million shares of its common stock at $25 per share, for aggregate gross proceeds of $34.5 million.

ChoiceOne CEO Kelly Potes said in an interview that his team wanted to supplement the company's available capital even though both ChoiceOne and the company it plans to acquire, Fentura Financial Inc., have satisfactory regulatory capital ratios. The deal is accretive on its own, Potes said, so they agreed on a $30 million raise with 15% allowance for overallotment.

The day of the deal announcement, ChoiceOne's stock price fell about 9%, but flattened over the following weeks as of Aug. 14. The market's reaction was roughly what the ChoiceOne executives expected, but "you never know how the Street is going to react," Potes added.

The $30 million target gave the bank capital optionality, ChoiceOne President Michael Burke Jr. said. Executives also wanted to balance Fentura's commercial real estate (CRE) concentration to ensure their CRE to risk-based capital ratios would be under regulators' requirements once combined, Burke said.

Renasant's stock price began to dip before the company announced its acquisition of First Bancshares Inc., and fell 14% in the weeks following the announcement, as of market close Aug. 14. Renasant President and COO Kevin Chapman said in a call with investors that the company received guidance from regulators throughout the dealmaking process.

Such communication has become more of a necessity to confirm that deals do not raise any red flags, Stein said.

WesBanco entered a securities purchase agreement with several accredited institutional investors, issuing and selling an aggregate of 7,272,728 common shares for $27.50 per share. The company wants to maintain a leverage ratio above 8.5% on a consolidated basis and a common equity Tier 1 ratio of above 9.5%, said CFO Daniel Weiss Jr. in an earnings call in regard to WesBanco's acquisition of Premier Financial.

WesBanco's raise was led by a $125 million investment from Wellington Management Group LLP. Other investors included Glendon Capital Management LP and Klaros Capital.

Stein declined to comment on his firm's involvement in WesBanco's capital raise, but said investors want to be involved in deals that create more value for both companies. Investors can invest at a slight discount but will also share some of the risk associated with the transaction.

"As an investor," Stein said, "if you can come into that transaction as part of the announcement, that can be a pretty attractive investment."