Former Bank of Hawaii CEO Helps Launch Community Bank Fund
December 4, 2012
SNL Financial: Kevin Dobbs
Former Bank of Hawaii Corp. CEO Allan Landon nixed his banking retirement this year in favor of a new fund focused on investing in community bank debt at companies that might otherwise struggle to raise capital without onerously diluting existing shareholders.
Landon, who now lives in Park City, Utah, partnered with veteran investment pro Frank Reppenhagen to run Community BanCapital, a new investment firm that aims to infuse capital into community banks primarily through a combination of warrants and subordinated debt that is structured to qualify as Tier 2 capital. With other sources of capital, such as trust preferred securities, "drying up" for smaller banks and with equity options in general often costly, Landon said subordinated debt is making a return.
Decades ago, he said, such debt was more common — until trust preferred securities in more recent years took its place. But as that option fades amid a challenging market, banks that are looking to fund growth — including those looking at mergers and acquisitions — are hunting for alternatives. "So subordinated debt returns from history as an attractive alternative for some," Landon, who spent a decade at Bank of Hawaii before retiring in 2010, told SNL in an interview this week.
Reppenhagen, a former principal with Concentric Equity Partners, a private investment subsidiary of Financial Investments Corp., told SNL that Community BanCapital is looking to finance growth at banks with between roughly $500 million and $2 billion. Community BanCapital raised $50 million and is now focused squarely on deploying that money. It recently made its first investment of $2.5 million in a bank that is pursuing an acquisition. The fund has four other investments in the works; one involves an acquisitive bank and two others involve banks looking to pay off TARP to free up growth possibilities.
Community BanCapital invests primarily in subordinated debt issued by community banks in a way that such debt can qualify as Tier 2 capital for the issuer. It is generally structured as a holding company obligation, with some or all funds invested in the bank subsidiary as tangible common equity. Community BanCapital is looking to generally structure deals with eight- or nine-year subordinated notes, a longer time horizon that, so far, regulators have not objected to, Reppenhagen said.
"I failed miserably [at retirement]."
— Allan Landon, former Bank of Hawaii CEO and current partner with Community BanCapital
To be sure, community banks often favor the liquidity that comes from equity, and Reppenhagen concedes that subordinated debt is "not a perfect fit for every situation." But the new fund says the benefits of subordinated debt for banks are that it can be half as expensive as raising equity capital and it still helps to satisfy capital requirements.
Reppenhagen said limited access to capital has held back M&A and organic growth. "We're finding a lack of strategic initiative happening as a result of constrained capital markets," he said. "So we enter the market at this point."
Reppenhagen and Landon say their fund, which they manage along with former Commerce Street Capital Vice President Thomas Back, is unique. Larger banks have more capital options, and some community banks have found local investors to fill a need in ways similar to that of Community BanCapital's approach. But they do not see other firms focused in this way on smaller banks nationwide, as Community BanCapital is.
Reppenhagen and Landon say their early experience shows that more bankers are checking into the merits of debt issuance. Both also say that, while they believe in the community banking model, they expect that many community banks will need to grow substantially and diversify in order to absorb mounting compliance costs and to compete with larger players.
Meanwhile, Landon, who built a strong reputation in banking circles after guiding Bank of Hawaii away from the period of tumult it experienced in the 1990s and through the financial crisis and recession without serious injury, said retirement was not for him.
He's as busy as ever.
Landon, who is in his 60s, teaches courses at the University of Utah and teaches a two-week course during the winter at the University of Hawaii's law school. He serves as a director of the Smithsonian Institution, PBS and MidFirst Bank in Oklahoma City, and he runs marathons, including the recent Marine Corps Marathon in Washington, D.C.
"I failed miserably" at retirement, Landon said.
When Landon joined Bank of Hawaii in 2000, it was still grappling with the fallout of a failed expansion effort in the 1990s. Landon was chief executive for six years, and prior to that he served as chief risk officer and finance chief. Landon helped put and keep the bank on a steady course, one adverse to excessive risk and focused on reliable profitability. Forbes named it "Best Bank in America" in 2009 and 2010.
"I'm fortunate to be able to build on the great, good fortune of being at Bank of Hawaii," Landon said.