Small Bank Credit Woes Begin to Show

The credit crisis and housing downturn that has turned big banks like Washington Mutual(WM Quote) and Citigroup(C Quote) on their ears is beginning to force smaller financial institutions on the capital-raising bandwagon.

In the last week alone, at least three small banks took the initiative to raise capital -- Citizens Republic Bancorp (CRBC Quote),Webster Financial(WBS Quote) and UCBH Holdings(UCBH Quote).

So far this year, more than 50 banks have raised roughly $99 billion in capital through either preferred stock, trust preferred securities, common stock offerings or some combination thereof, according to an analysis by Sandler O'Neill & Partners. Of the list, banks with market capitalizations under $2 billion accounted for less than 3% of the total capital raised this year, Sandler says. The analysis excludes senior and subordinated debt as well as overallotment options.

Analysts agree that more small banks will feel the capital pinch as many start to have increased credit problems over the next few quarters from soured consumer and commercial real estate loans, such as residential construction. Banks are also in for pain because regulators are pushing them to bulk up reserves.

"You're going to see a wave of capital-raising among mid-size and smaller companies," says Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners. "Small banks tend to follow large banks by a couple of quarters. Almost every bank that we talk to -- small or large -- is either contemplating raising capital, has just raised capital, or feels like they're going to need to at some point."