CBAI members, Ohio company partner in capital fund

Northwestern Financial Review, Jan 1, 2001 by Schroeder, Margaret

Community banks faced with the prospect of being swallowed up by bigger financial institutions will soon have another place to turn in their effort to stay afloat. The Community Bankers Association of Illinois in Springfield will launch a program linking investors with independent banks in need of capital, either to start de novo banks or shore up existing operations.

The Community Bank Capital Investment Program, set to begin in January, is a plan to pool at least $2.5 million from CBAI member holding companies willing to invest in small local banks. CBAI president Mark Field described the endeavor as a revolving loan fund that takes an equity position, as opposed to debt. Field, president of The Farmers Bank of Liberty, said the new program will provide alternatives to "cashing out," when those who hold controlling interests in community banks consider selling to larger competitors.

"We would prefer to see management or other local folks work to keep the bank local. As for de novos, when the big guys gobble up the community banks in a given area, it usually creates a void for customers who value personal service and local decision-making, so that area becomes ripe for a de novo. Our group wants to be the last piece of the puzzle in making those things possible," Field said.

The idea began in 1994 when a community banker faced with closing reached out to CBAI colleagues. The banker wanted to raise enough capital to stay afloat, with the plan to buy back the stock in a few years. The idea worked, and soon CBAI's Bank Equity Funding Program was born. A forerunner of the current program, it was a committee managed by a group of CEOs who linked prospective investors to bankers in need of capital.

James Shafer, president of The First National Bank in Tremont, Ill., and a founder of the Bank Equity Funding Program, said issuers would apply, pay a fee, and receive the investor list. The rest was up to them.

"A few deals were done over the next couple of years," he said, "but all too often, for various reasons, the issuers could not market enough of their stock to finalize their issues."

The CBAI's Mike Kelley said the committee soon discovered that the "listing service" model could not meet the demand for capital from community banking groups. So they met with several securities firms to find a more comprehensive solution.

That solution blossomed into a plan for the new program with the help of The Banc Stock Group Inc. of Columbus, Ohio. The 23-year old company serves as a community bank advocate and manages a community and regional bank stock mutual fund known as The Banc Stock Group Fund. The Ohio-based company will manage the pool of funds, which will be made up of minimum $50,000 investments from CBAI member holding companies.

"The program intends to provide liquidity, retention of principal, and return on investment for participating bank holding companies," said Harry Ryan, director of marketing for The Banc Stock Group.

Ryan said his company agreed to become a team member with CBAI because The Banc Stock Group believes it will serve a "socially good" purpose for the community banking industry. "The future of community banking depends, in part, upon lending a helping hand to community banks as they seek to compete, and to support local banking enterprises through a funding opportunity."

Ryan added that the program may be the first of its kind. "We feel that its success may foster interest elsewhere, but our primary commitment is to the CBAI and their program in Illinois," he said.

Kelley explained that smaller banks are more in need of the program because they raise money differently. "When it comes to raising capital, most large regional and money-center banks have sufficient size to access the efficiencies of the capital markets. In contrast, most community banks raise capital by selling their stock directly to the citizens of their communities. Usually the stock is sold by the CEO and in small amounts, which can be a long and time-consuming process. Unfortunately, after the CEO has contacted every potential prospect, the CEO is still sometimes short of the goal."

The program is already nearly halfway to its goal. Kelley said they have received commitments of $1 million from 20 board members. The criteria for participation is still being determined, but several rules are in place. They include "seasoned management," in addition to meeting all legal and regulatory requirements. For banks in formation, criteria include a commitment to the community, minimum investment participation by the board of 15 percent to 20 percent, and an exit strategy for shareholders. For existing banks, the criteria include a history of profitability, a low loan/loss history, and specific return on equity and return on asset requirements.

Field sees the program as a last line of help for banks struggling for capital. "If a local group can put together the lion's share of capital needed to complete the purchase or start-up, but just can't get that last round of funding needed to proceed, that's where this fund can come in," Field said.