When raising capital, community banks are typically at a disadvantage compared to their larger competitors. Community banks that are privately held must plan in advance for a capital event. Based on their corporate structure (C v. S), options for capital may be limited. There are good arguments to be made for when to raise capital. My partner believes in a just-in-time strategy whereas I am in the camp of raise it before it’s needed. Here are the differing viewpoints:
- Just in time: Raise capital, especially common stock, only when you need it. Common is the most costly to your shareholders as it typically is dilutive. If you do not hit your growth plans, however, this capital will go unused; the cost to the shareholders of a failed strategy is too high.
- Raise before needed: Raising capital before it’s needed may be a better strategy. Why? First, if you are funding an acquisition there undoubtedly will be a financial advisor representing the seller who, like me, would caution against accepting a bid from you if there is a funding contingency, especially if there is another buyer with a competitive bid. Therefore, this makes your bid significantly weaker. Second, raising capital for a private bank is less efficient compared to a public bank. Typically the timing is longer and market conditions may adversely affect the offering. So, if it’s a good market, raise the capital and include a “war chest.”
How should you raise capital? Generally, a private offering can be done in two ways:
- Local offering: We have had great success in this method. We work with the board and management to obtain a strong list of local prospective buyers. This may be current or potential customers the bank may want to retain or gain; selling to them helps ensure that strategy.
- Augmented offering: Oak Ridge has 50 retail representatives who can sell the offering to many of their accredited clients. Oak Ridge can, on a best-efforts basis, sell a portion or the whole offering. The bank can decide on the mix.
Capital planning needs to be looked at annually and assessed based on future needs. Use a financial advisor who is in the market daily so your plan is “real life.”
Craig Mueller is senior vice president of Oak Ridge Financial Services. Contact him at 763-923-2205 or [email protected]