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There is a great deal of discussion within the banking industry today with respect to building shareholder value. This is understandable in light of the importance placed upon a bank's capital position. Capital has been called, with good reason, the Mother's Milk of commercial banking. Because, when available in the proper amount, it perpetuates growth and strength; when absent, we risk stagnation and eventually, atrophy.
Having taken great liberty with the application of this analogy, let's examine, by way of review, whether there is evidence to support such a comparison.
To satisfy regulatory requirements. This issue has two faces. One side represents, at times, an annoying mandate that must be met in order to be in compliance. The other, makes it very clear where the boundaries are and thus makes it easy to know the acceptable limits and the consequences for non-compliance.
As an essential mechanism to respond to business cycles: Since business is never totally predicable, we need capital as insurance during down-cycles and as a tool to maximize opportunities during up-cycles.
To support growth. A bank, no more than any other business, cannot expect to grow in a stable manner without a solid base.
To maintain flexibility. Successful banks (businesses) need to maintain an adequate capital position in order to adjust and respond to the ever-changing competitive environment.
To fulfil the Board's responsibilities. Any board would be hard pressed to meet the tenants of "Safety and Soundness" as defined by the regulators and increase shareholder value without a strong capital base in place at all times.
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When you have a good story to tell. Always attempt to time your offering when you have some victories to share. Good news influences good outcomes.
To fund anticipated growth. Be sure that you can finance the level of anticipated growth beforehand. It is a sad day when we have to turn away business (growth) because the foundation (capital position) is not strong enough to support it.
During good economic times. Most existing and potential shareholders of community bank stock are directly impacted by the local economy. Their tolerance level is low and their self-preservation level is high during tight economic times. Therefore timing is critical if you hope to attract their discretionary investment dollar.
BEFORE YOU NEED IT! As the old proverb advises," In time of peace, prepare for war". That is to say, look ahead and be in position to attract capital on your terms and not when under pressure to do so. Always try to stay ahead of the power curve.
Fear that the existing shareholder's position will become diluted. While arithmetically, that may be the case (depending on the price of the new issue) that concern pales by comparison to the loss of market opportunity and/or the ramifications of regulatory mandates when a bank becomes "capital challenged".
Concern over having too much capital. The concern over the inability to effectively employ more capital, and the impact on ROE, has almost reached the level of an "Urban Myth". Historically speaking, the number of banks that have been burdened by too much capital as opposed to those who have suffered from the lack of capital comprise only a small blip on the capital radar screen.
Lack of faith on the part of the Board itself. While this is a sad commentary, this is the case with some banks today. Some boards either with good cause, or a lack of sophistication and foresight, lack the confidence necessary to take the offering to the market.
Fear of losing control. In some cases, directors will not place the good of the organization and that of the shareholders ahead of their own insecurities. The board must always "do the right thing".
Not having the skill or experience to craft a viable program. Managing a capital acquisition program today takes a high level of expertise. In order to maximize their return on investment, many banks out-source that competency.
In order for a capital program to be viable, successful and have longevity, it must have as essential elements in its structure the following:
Effective Planning
Effective Allocation of Resources
Effective Timing
Effective Pricing
Effective Placing
Effective Execution, and most importantly,
Board Commitment
Whether or not to attract and effectively employ needed capital is not an option in today's competitive financial service industry. It comes down to the inescapable fact that only the strong will survive and prosper in the future, and to be strong you must have adequate capital.
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