challenge facing many community banks this new decade has nothing to do with public
policy, the yield curve, regulation or technology.

growing number of banks face an aging shareholder base, concentrated ownership and
limited liquidity. This can lead to shareholder succession impositions when
large shareholders want to exit their ownership position or an estate
settlement creates a liquidity need.

Community banks have always been owned by local centers of influence, passed down through generations and thought of as both a financial investment and philanthropic participation in the community. But the societal aspect of bank ownership is not the same as the current ownership cedes to the younger generation, many of whom have moved away from home and see banking as an increasingly more digital experience.

and securities regulations do not make the situation easier. There are
parameters around a bank’s ability to issue stock in the local community to
attract new shareholders. Banks are cautious of giving unknown investors a seat
at the table, particularly institutional or activist owners, as they may only
hold the stock for a defined, shorter period before seeking liquidity
themselves. The bank itself can sometimes be a source of liquidity to repurchase
stock from shareholders, but regulatory capital ratios may limit that capacity.
Some advice for banks struggling with these issues includes the following:

Treat shareholder succession as a business initiative: Identifying
issues before they occur, or a capital need before it becomes urgent, increases
a bank’s flexibility. Boards should discuss shareholder liquidity issues, as some
large owners may be sitting around the board table.

Investor relations is not just for large and liquid banks: Local
banks are often owned by members of the local community. The legacy of family ownership
is emotional, and large owners often do not want to “upset the apple cart” and force
the bank to sell. Many may not realize that how they treat their position could
impact the bank’s future. Some may not be open to discussing the issue, but
others might appreciate the opportunity.

Address long-term liquidity in strategic planning: Under what
conditions would the bank consider listing on a more liquid exchange, commencing
a traditional public offering, or raising subordinated debt as a way to address
shareholder succession? The owners of many closely held banks are wary of
incurring dilution to their ownership stake but want to remain independent, which
limits their options. For smaller banks, even upgrading to a slightly more
liquid trading medium such as OTC Market Group’s OTCQX Banks market, may open the
doors to investors that understand smaller, less-liquid situations and have capital
to put to work.

Plan for shareholder liquidity as you would for balance
sheet liquidity:
It is helpful that directors and executives understand the
bank’s capacity to repurchase shares, as the bank itself is often the first
line of defense for an immediate liquidity need. Small bank holding company
regulation gives community banks flexibility to leverage their capital
structure by issuing debt at the holding company, which can be injected into
the bank subsidiary as common equity. Creating an employee stock ownership plan
or dividend reinvestment plan may help to manage and retain capital and
dividend policy can also be critical.

The right answer is usually a combination of all of the
There is no silver bullet for addressing shareholder liquidity in a smaller,
more closely held bank; all of the discussed initiatives will play a part. Many
banks get caught flat-footed after the fact, either faced with an estate
settlement or a family with a large position seeking liquidity. Dealing with an
urgent liquidity need, often in tight timing, limits the bank’s flexibility and

If a merger or sale is the right alternative, control that
Some shareholders looking to exit may find the premium in a sale attractive
relative to the desire of others for independence. It’s a worthwhile exercise
for boards and executives to understand the bank’s value in a sale, as well as likely
partners, even if a sale is only a remote possibility. This allows your bank to
identify preferred partners and ascertain their ability to pay a competitive
valuation independent of any urging from shareholders. Highlight those strategic
alternatives to the board on a regular basis. If an urgent shareholder need forces
the bank to seek a partner, your bank has already begun addressing these issues
and building those relationships.

succession issues can drive change and create uncertainty, risk and opportunity
at community banks. Careful analysis and planning can help lead to a desired
outcome for all involved.


Rich Quad