Pub. 8 2019 Issue 3

11 F A L L | 2019 F E A T U R E will restore the bank to a satisfactory regulatory condition. During the restoration period, all alter- native business pursuits to enhance shareholder value are essentially placed on hold and can hap- pen only following the restoration of satisfactory regulatory relations. The business activities of a bank that has chosen to remain independent are generally not as defined as the business activities for a bank that has chosen to be a buyer or a seller. Generally speaking, community banks that have chosen to remain independent can pursue any strategic or business activity, provided it serves to facilitate the accomplishment of the above described goals. Community banks that have determined to be a buyer are generally in a capital conservation mode. This is intended to increase the bank and holding company’s capital as much as possible, so that the capital can be deployed at the appropri- ate time to acquire another institution. The following is a summary of the characteristics of a community bank that has chosen to be an acquirer: • Maximize earnings through the reduction of ex- penses to the extent possible. • No pursuit of additional branches or other business activities, as the bank generally believes its financial and managerial capital is best served by pursuing acquisitions. • Active search of potential target banks. • No or minimal payment of holding company divi- dends in order to increase capital as much as possible. • Resolution of any regulatory issues that may cause problems in receiving regulatory approval for the transaction, such as the resolution of any compliance or similar regulatory problems. • Minimal changes in bank management, as significant changes to bank management will make regulatory approval more difficult. In summary, banks that have chosen to be an acquirer are looking to increase their capital as much as possible, or to increase the value of their common stock so less shares have to be issued in an acquisition, and are also looking to make sure there are no smoking guns the regulators can use to deny an application seeking approval of an acquisition. The characteristics of a community bank that have chosen to be a seller are summarized as follows: • Maximize earnings, as earnings drive value. Many acquisitions are talked about in terms of book value. However, the reality is that the value of the organi- zation is determined by the amount of earnings the organization can provide to an acquirer. • Clean up any asset quality, regulatory, compliance or similar type issues. Acquirers will not pay a pre- mium for a bank with problems. Acquirers do not want to spend their time following an acquisition on fixing issues. Instead, they want to spend their time growing the loan portfolio and adding net income to their bottom line. Accordingly, the cleaner the bank, the more attractive it is to the market. • Avoid long-term contracts that have massive contract termination fees, such as data processor contracts. Many sellers do not properly take this into consider- ation. If the bank has chosen to be a seller, the bank should not sign long-term contracts that have large termination fees. This may save money on the front end by reducing monthly expenses, but is significant - ly more expensive on the back end, as an acquirer will either require the seller to pay the termination fee or will price it into the deal. If a bank is considering a sale, contracts should be kept short such that they can be terminated without significant expense. • Lock-up key individuals. The value in a community bank is from its earnings stream, which comes from its employees. Acquirers are going to want that value to be preserved. If a selling bank has one or a small number of key individuals in the organization that derive a significant part of its income, those individu - als need to be “locked-up” to be certain the acquirer will get the benefit of their hard work. This typically happens through the individuals’ retention bonus agreements and employment agreements with the acquiring institution. In summary, banks that are looking to be sellers should seek to maximize earnings and make an acquisition of their institution as painless as possible for an acquirer. This will include cleaning up any problems such that the acquirer does not have to deal with them post-closing, and avoiding long- term contracts or other type issues that may result in signifi - cant expenses or difficulty related to the transaction. There is no “one size fits all” strategy for community banks. Instead, each community bank should identify and pursue the strategy that makes the most sense for its organi- zation and shareholder base. It is important to understand the various aspects of the available strategies and what they mean for day-to-day business operations. By Greyson E. Tuck, a community bank consultant and attorney with Gerrish Smith Tuck in Memphis, Tennessee. Mr. Tuck’s legal and con- sulting practice places special emphasis on community bank strategic planning and community bank mergers and acquisitions. Mr. Tuck can be reached at (901) 684-2311 or gtuck@gerrish.com . The business activities of a bank that has chosen to remain independent are generally not as defined as the business activities for a bank that has chosen to be a buyer or a seller. Generally speaking, community banks that have chosen to remain independent can pursue any strategic or business activity, provided it serves to facilitate the accomplishment of the above described goals.