Broker-Dealers, Aliens, Quick Fixes or Perceptions of EZ-Money Will Not Produce Desired Results

It seems that everyone today is searching for an instant fix. We all have the best intentions, but down deep, we hold out the hope that someone will come up with a quick solution for our most complex problems. Well, it just doesn't seem to work that way. It takes commitment, time, and most of all, a great deal of old-fashioned hard work to successfully raise additional bank capital in today's market.

Here is the tale of two banks, both of which built their franchises during the speculative '80s. Both banks re-evaluated their positions within their respective communities. Both needed to shore up their capital base. They both suffered the same capital erosion that took its toll on many community banks in Southern California during the early to mid-'90s. One bank tried what appeared to be the "easy" way, and the other took the more demanding but effective path.

The real story lies not only in the need for capital itself, but in the manner in which each bank approached the subject and, of course, the ultimate outcome. We have presented a review of the banks in question from two different perspectives. The first is how Bankmark views the individual banks' strategies from an editorial perspective. This is followed by an analysis of both banks in a case-study fashion by James R. Miller, a respected securities analyst/appraiser for the community bank industry. Mr. Miller has intimate knowledge of both banks' capital positions and their capital-raising methodologies. Mr. Miller's analysis is highlighted in Case Studies 1 and 2 below.

Monarch Bancorp

The Overview: In examining the history of Monarch's attempt to raise additional capital, we notice two key issues that contributed to their lack of success: Issue #1) Their hope that the stock could be sold quickly by dealers out of the area on a "best effort" basis to buyers who had little connection with, or understanding of, the Southern California market (other than what they might learn from the abundance of negative press). Issue #2) The way in which the investment instrument was structured. We believe the pricing strategy was flawed.

Issue #1: Monarch elected to pursue the broker-dealer network strategy. The central elements in this pitch are: a) the "Advisor," who is supposedly connected with a dealer network consisting of "hundreds" (by his count) of securities salespeople, who in turn: b) supposedly have access to a "large inventory" of names of sophisticated, eager, buyers (generally in the Midwest and East) of bank stock. The most appealing aspect of this theme is simply that the Board and Senior Management will not be directly involved in the process. They merely sit back, let the "Advisor" and the dealers go to work, pay a commission of 15%-18% and watch the stock subscriptions roll through the front door. One might reasonably ask the question: How much California community bank stock is likely to be sold in the East, over the telephone, by telemarketers to individuals who are strangers to them?

However, there is also a more subtle rationale for having someone else other than the bank staff handle the stock sale. The '90s were not kind to community banks in Southern California, and the thought of facing members of the local community may not be comfortable for the Board and Management of any bank. Given this less often discussed, but powerful issue, it is understandable that a "remote controlled" stock sale may have some appeal. Yet as Bankmark points out, facing the community is an advantage if managed properly.

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