By Cliston V. “Doc” Bodine, III, Managing Director, Gerrish Smith Tuck, PC
One of the more common questions we hear from community bankers is how can they ensure their community bank continues to operate as an independent, locally-owned, and locally-managed institution serving the communities they know and love so well. While a lot of current discussion in the industry focuses on mergers and acquisitions and industry consolidation, the reality is that many more community banks are looking to ensure their independence. Below are a few of the approaches and strategies community banks can utilize to ensure their bank is not sold.
Enhance Shareholder Value
It should come as no surprise, but providing your shareholders with a solid return on investment by achieving strong earnings, cash flow (in the form of dividends or distributions) and share liquidity (an opportunity to sell stock at a fair price when desired) will generally result in your shareholders wanting to maintain their investment and supporting your community bank operating as an independent institution.
One of the largest threats facing community banks at this time is succession as to its Board of Directors, executive management, and ownership. Too many community banks end up selling because their directors and executive officers reach retirement and they have not taken steps to ensure the next generation is ready to lead the institution into the future. Proper succession planning requires a great amount of time and energy to identify, attract, retain and train the next generation to takeover. Nevertheless, when properly carried out, this planning can be one of the most important keys to ensuring your community bank does not need to find an acquiror.
Change with the Times
It was not long ago that many community bank boards were asking if they really needed to make mobile banking available to their customers. They genuinely had no expectation of their customers desiring to handle their banking through a phone or tablet. As more than one director commented, “that phone can provide fresh popcorn!” Time has shown that more and more customers are conducting their banking business remotely—a transition that has been significantly expedited by difficult circumstances stemming from COVID-19. Technology once thought to be the potential downfall of community banks has now proven to be more of an equalizer. Proper implementation and utilization of technology can allow community banks to better communicate with customers and expand their reach to customers and markets that may previously been beyond their footprint. Maintaining independence will require community banks to be knowledgeable regarding available technology and determining where and how best to utilize the bank’s available resources to meet the needs of its customers in a world that is constantly becoming more and more reliant on technology.
Corporate Governing Procedures
Ensuring that your corporate governing procedures (generally your Charter and Bylaws) are structured to protect your institution from a hostile takeover can protect your institution from inadvertently losing its independence. This could include provisions related to a staggered election of directors, requiring a supermajority approval for certain acquisition transactions, or simply requiring non-management director nominations to meet certain requirements, such as living in the bank’s community or conducting business with the bank. Whatever the specific provisions, the intent is to protect long-term independence proactively rather than wait until an unsolicited offer is presented and react from there.
Ignore the Naysayers
The negative prognosticators have been predicting the downfall of community banks for over 30 years. Hard working community bankers have been proving them wrong year after year by working hard, being efficient, forming strong relationships in their markets and providing high quality service and banking products. There is no reason to let these continued predictions that the sky is falling dampen our spirits and impact our decisions. Continue to make the best decisions for your communities, your customers, your shareholders, and your employees, and community banks will continue to thrive and prove those naysayers wrong, just as they have done for decades.
By implementing the above approaches and strategies, a community bank can provide its shareholders with a solid return, satisfy the needs of its customers and communities, maintain a strong, efficient institution, and avoid situations in which its shareholders will determine selling the bank is the best available option.
Cliston V. “Doc” Bodine of Gerrish Smith Tuck—law firm and consulting firm based out of Memphis, Tenn., that assists community banks—will speak at TBA’s Community Banking Conference, held Oct. 27 & 28 at The Westin in Nashville. Click here to register.