Pub. 8 2019 Issue 3

The CommunityBanker 10 F E A T U R E Key Considerations to Establishing Your Strategic Direction By Greyson E. Tuck I n the current active community bank M&A market, the strategic direction of any community bank holding com- pany can generally be summed up as being a potential acquirer, potential seller or simply remaining indepen- dent without any view towards mergers and acquisitions. Whatever the chosen strategy, it is important the strategy be fully vetted, adopted and then actively pursued. In de- termining which strategy is appropriate, keep in mind that, regardless of the chosen strategy pursued, the ultimate re- sponsibility of the holding company’s directors and officers is to “enhance shareholder value.” Although this sounds somewhat like consulting lingo, the five central tenets of enhancing shareholder value are: 1. Earnings per share growth, ideally of at least 10% to 12% annually. Earnings are the most important component of the company, as earnings drive value. If the company is growing its earnings per share, the ownership of the stock is more and more attractive. If ownership of the stock is attractive, the organization will be able to remain independent if it chooses to do so. If ownership of the common stock is not attractive, the stockholders may force a sale of the institution. 2. Return on equity of at least 10% to 12% annually. Bank holding companies should ensure that they have an appropriate return on equity. This is part and par- cel with earnings per share growth. If the stockhold- ers believe they are getting an appropriate return on equity, they will remain in the investment. If they do not, they may force a sale of the institution. 3. Liquidity in the common stock, which is the ability of the stockholders to convert their shares to cash at a fair price in a timely manner. Holding companies that do not offer liquidity in the common stock are not providing much benefit to the stockholders, as it does not allow a stockholder to get out of the investment if they need to do so. A small number of community bank holding companies provide liquidity in the com- mon stock by having an actual trading market. Most provide liquidity in their common stock through the bank holding company by either walk-in or voluntary stock repurchase programs. 4. Cash flow off the common stock in the form of divi - dends. The stockholders should receive dividends as a return of corporate profits. The level of dividends is dependent on a number of factors. However, com- munity banks should seek to pay dividends to their stockholders in order to provide their stockholders some cash flow off the investment. For S corporations, the cash flow should include both “tax equivalent” distributions, to provide shareholders cash to pay tax on their pro rata portion of corporate income, and “dividend equivalent” distributions, to provide a return of corporate profits. 5. Maintenance of satisfactory regulatory relations. Banks that fail to appropriately maintain regulatory relations will work their way into the regulatory penalty box. This typically comes in the form of a Board Resolution, Memorandum of Understanding or Consent Order. Any of these regulatory enforce- ment actions will restrict the bank’s business activi- ties to those that, in the opinion of the regulators,