Private banks look for capital in tough economic times

With the federal government's Capital Purchase Program giving publicly traded banks the ability to ask for federal money, banks and their relative asset health are in the spotlight.

The quest for capital, however, isn't stopping with public institutions. Some privately owned banks are in the process of looking for additional backing, though their methods are decidedly different from their public counterparts.

"Owner equity capital is always important, but as the economy has worsened and there have been some loan losses, it's more important than ever," said Frank Hilton, chairman and CEO of Springfield-based Citizens National Bank, a privately held institution. "The regulators in general around the country are requiring all banks to have adequate capital, and in many cases, that means requiring more capital."

Finding new funds

OakStar Bank, which opened its doors in 2005, is on the hunt for additional investors.

The bank started with $10 million in capital investment, according to President and Chief Operating Officer Mark McFatridge.

To keep its "well-capitalized" status from the National Office of the Comptroller of the Currency, OakStar's capital-to-asset ratio can't drop below 10 percent - meaning assets can't exceed the $100 million mark, which the bank has reached.

In other words, to add more assets, the bank needs to add more capital.

OakStar's board of directors gave the go-ahead in October to begin soliciting investors, and McFatridge said the bank put together a private offering memorandum, spelling out information on the bank's history, management and financial status.

"First and foremost, what we're doing is supporting our growth," McFatridge said. "That's where the capital fundraising is coming from - we see an opportunity with the chaos in the market to capitalize and substantiate our growth."

The next step, according to McFatridge, is putting together a list of "accredited investors" - people who hit certain benchmarks, such as net worth of more than $1 million or annual household income of more than $300,000, and understand what goes into a private bank.

"That list is a compilation of recommendations from our current investors, recommendations of our board of directors and management team," McFatridge said. "We want people that don't necessarily need dividends every year - educated investors who know the risk inherent in making an investment in a nonpublicly traded bank."

McFatridge declined to name any of the potential investors the bank has contacted or disclose how much money the bank is seeking.

Hilton said Citizens National Bank also is raising an undisclosed amount of additional money through a combination of additional stock sales to existing shareholders and sales to outside investors for the first time in the bank's 20-year history.

"We had always kept our stock pretty closely held just within the original shareholder group, and over time, we've allowed our employees to buy stock as well," Hilton said. "But now ... we're raising capital internally from our shareholders and preparing to offer stock to outside investors."

Hilton said Citizens National Bank isn't putting out a call for a specific investor demographic but will consider referrals from existing shareholders. Any new investors, he noted, would be subject to approval by the bank's board of directors.

Government aid

Aside from individual investment, private banks also can ask Uncle Sam for capital aid. The federal government is reviewing applications from private banks for funding as part of the Troubled Asset Repurchase Program.

The U.S. Treasury Department is expected to make decisions on which private banks will receive capital injections later this month.

McFatridge said OakStar has filled out an application for the funding, though he's not sure if the bank would utilize the funds, namely because program details for private institutions aren't yet clear.

"If we're offered the opportunity to participate, then we'll get the fine print to see if it still makes sense for us," he said. "If the rules are exactly the same as for the public entities, we'd be excited to participate. But those haven't been decided yet."

He also noted that the program is not really intended to shore up banks on shaky ground, but rather to encourage banks with solid footing to increase liquidity.

CNB's Hilton, however, said that his bank is not applying for federal help, though he described the program as a "necessary evil" in the current economy.

Not on the hunt

Not all private banks are looking for additional money.

Springfield First Community Bank is content with the $20 million it raised from about 60 investors to fund its October opening, according to President and CEO Brian Straughan.

"Since we're so new, the capital that we have in the bank today is the capital that we put in on opening day," he said, noting that Springfield First has not applied for federal assistance. "We're not, due to our newness and the amount of capital we put in on the front end, experiencing deterioration of that capital, nor are we looking to increase it right now by adding additional shareholders."

Straughan added that his bank was formed as an S-corporation, a structure that limits the company to 100 investors, and the bank already has 60 on board.

Straughan added that a bank making "capital calls" to current investors is not necessarily showing signs of financial weakness or instability.

"It could mean the growth is there and additional capital is needed to maintain the needed capital-to-asset ratios," he said. "I don't think that should automatically be a perceived weakness, because there are situations where it could mean a good problem."