Santa Rosa's Summit State Bank sells $6M in subordinate notes

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Santa Rosa-based Summit State Bank on Tuesday announced a private sale to investors of subordinate notes worth $6 million.

President and CEO Jim Brush said the move is to keep the bank within acceptable capital ratios in the eyes of banking regulators.

“The important thing is you always have adequate capital to fund your operations,” Brush said. “As operations grow you add to that capital if the operating income doesn’t provide enough … and we’ve been growing fast.”

Brush said the bank’s rapid recent growth had made it necessary to sell the notes, and it was a significantly less expensive way to raise the money compared “to going out and raising common equity.”

He said this was the first time Summit State used this strategy, but it is a common practice for banks, estimating 20% of banks sell this kind of subordinated debt. Subordinated debt is ranked after other debts if a company falls into liquidation or bankruptcy.

“It’s really like a loan; you just pay interest on it,” Brush said.

Summit State Bank and other institutions do not publish capital ratios, but Brush offered a common target.

“You want somewhere around 10% or more of your balance sheet to be capital,” he said. So, a bank with $600 million in assets would want $60 million or more to be capital.

Summit State had total assets of $626 million and total equity of $63 million, as of March 31, according to the press release announcing the sale.

That's up 9% from $577.0 million a year before, the bank reported for the first quarter of this year. During the same period, net loans jumped 12% to $510.0 million, and total deposits 10% to $555.3 million.

The notes qualify as tier 2, or supplementary, capital for Summit State for regulatory purposes and have a fixed interest rate of 6% annually until June 30, 2024. The notes will mature on June 30, 2029, and will bear an interest rate equal to the three-month London Inter-bank Offered Rate (LIBOR) plus 362 basis points.

Raymond James & Associates was the sole placement agent for the offering, counseled by law firm Holland & Knight. Sheppard, Mullin, Richter & Hampton was legal counsel to Summit State Bank.

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