ABA Banking Journal - September 2008 - (Page 26)
COVER STORY: RAISING CAPITAL IN CHALLENGING TIMES : PART ONE Stack W that capital Period of turmoil has banks looking for capital where and how they can find it hen a community bank, or even a somewhat larger institution, requires added capital, it isn’t unusual for the board chairman to ask directors how much they can manage to cough up to help the bank with expansion plans, or to help bolster its capital ratios. But before one can add something to the hat, there’s got to be something in the pocket. And banking attorney Walter Moeling IV notes that in many boardrooms around the country, pockets aren’t quite as deep or full as they once were. “The first place community banks usually start for more capital is passing the hat around the board table,” says Moeling. Many local directors, from real estate brokers to builders to suppliers to plumbers, have direct or indirect ties to the real estate industry, says Moeling, and many therefore lack liquidity today. The larger the institution, the less the proverbial hat looks like an investment bank, in any event, with some exceptions. (See the box, “Missouri’s First Banks forms ‘bad bank’ to aid asset cleanup effort,” p. 28.) “There’s a big need for capital in the banking sector today, not only in the big banks, but also in the small and mid-sized banks as well,” says Rick Maples, co-head for investment banking and head of the Financial Institutions Group at the investment bank Stifel Nicolaus, St. Louis. “The largest number of community banks will be seeking new capital than I have ever seen at any one time, and that’s over a 40year career,” says Moeling. Sources of capital hunger Driving the appetite for more capital are several factors. Clearly, troubled institutions want more capital. Many are laboring under regulatory orders to find it. “You can argue solvency forever,” says Moeling, co-chair of the Financial Institutions Practice Group at Powell Goldstein LLP, Atlanta, “but you need liquidity to keep the bank’s doors open. And to get liquidity, you need the capital.” Some can still find it, though at a price, while others the market has already By Steve Cocheo, executive editor 10 outside-the-box strategies for when capital needs a boost n old saying runs, “Don’t raise the bridge, lower the river.” That may be extreme in this context, but there are alternatives to raising new capital, or doing so in obvious ways and traditional channels. A 1. De-leverage the balance sheet. Think “financial liposuction” or “accounting analgesic.” Consultant Michelle Gula of M.Rae Resources, Inc., suggests selling off loans and investments; dropping deposit rates to run off hotter money; and in general finding ways to reduce the need for capital. De-leveraging makes existing capital go further. For instance, Gula says, “some banks have assets on the books that they are carrying at a negative spread, and they could de-leverage such things.” 2. Combine shrinkage with strategic redirection. Building on Gula’s tactic, investment banker Tom Killian of Sandler O’Neill suggests using de-leveraging as an opportunity to change the bank’s risk profile and to reduce concentrations in the loan portfolio. For instance, this is a good time to sell off nonperforming assets and other real estate owned, rather than carrying it with 10 STRATEGIES continued on page 34 26 SEPTEMBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com
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