Most M&A transactions include stock, which provides a liquid currency for the selling bank while helping the acquirer manage its capital levels. What does this mean for privately held acquirers? In this video, Jeff Jones, managing director at Stephens Inc., explains the challenges private banks face, and when deals between two private banks make sense.
What is the value of a public currency vs. privately held shares in an acquisition?
Is there a time when a buyer might sacrifice liquidity?
How should buyers and sellers determine valuation when both parties are private?
Selecting a chief executive to lead your institution is a bank board’s single most important responsibility. Everything flows from this decision, including the bank’s strategy, reputation, the ability to attract critical talent, investor and employee confidence and the credibility of the board itself. Selecting an underprepared or inadequate leader—no matter how well liked or how long employed—can quickly send a bank in the wrong direction.
The list of optimal skills required in a bank CEO today could easily include dozens of items. Here we will highlight ten technical skills that we see as “must haves.” Next month, we will highlight ten leadership competencies and attributes which will complement the qualifications below.
Experience Working with Regulators Regulatory relations were barely on the radar screen for bank leaders a decade ago, unless the bank was in trouble. However, in today’s altered regulatory climate, the ability to forge a positive working relationship with a bank’s varied regulators has become a critical element of success.
Balance Sheet Management Experience The extended low interest rate environment has put pressure on bank spreads like never before. With interest rate risk and margin pressures on the front burner, CEOs need to understand the construction of their balance sheet, including capital strategy, more deeply than before.
Commercial Credit Skills You can never have too much credit skill in a bank, in our opinion. Credit quality issues will quickly turn a good bank into an underperformer. The path to the CEO’s desk still goes through the commercial lending area more often than any other area.
Experience with Corporate Governance Boards are under increased scrutiny from investors, customers, regulators, communities and even employees. CEOs need to appreciate the pressures facing directors (even for privately held and mutual institutions), and respect the ongoing challenges facing the board.
Technology Savvy, Including Evolving Channels Technology in banking has moved from the back office to the front lines. Understanding how the rapidly shifting technological landscape is impacting the industry—and how to respond in real time—has become a vital ingredient for ongoing success.
A New Perspective on Risk Management In the good old days, risk meant credit, fraud or simple liability for slip-and-fall accidents. Nowadays, this category has broadened to include cybersecurity, counterparty risk, compliance issues, legal challenges and more. Being able to identify and triage the bank’s risk factors is more important than ever.
Marketing and Social Media Knowledge As mentioned, technology has become a front-line channel for growth. The integration of social media with technology has changed how many banks must go to market, build brand awareness, drive engagement and respond to customer needs. CEOs need to be plugged into these shifts, even if they are not active themselves on social media.
Exposure to Fee-Based Lines of Business Given the decline in interest margins, boosting fee revenue appears to be on almost every bank’s strategic planning agenda. Even for banks with a low percentage of fee-driven revenue, CEOs need to explore alternative ways to grow the top line.
Transaction and Integration Experience Many banks that never previously considered a transaction are now exploring all options, including acquisitions, mergers of equals, branch sales and purchases and fee business acquisitions. Exposure to the transactional arena has become more critical, as has the ability to successfully integrate post-transaction. Otherwise, the value derived from “doing a deal” may not be achieved.
Strategic Planning Skills Everyone seems to have a plan, but how real and achievable is it? A CEO’s ability to craft a meaningful path forward and drive the plan’s execution has become a differentiator for successful banks.
There is no perfect template of skills which will guarantee success, particularly in the pressure-filled and constantly evolving banking industry. However, finding a CEO with a foundation grounded in these ten industry skills will increase your bank’s odds of surviving and thriving.
The absence of market liquidity is a common source of frustration for privately held community bank shareholders. In response, banks may be tempted to facilitate or otherwise become more directly involved in shareholder trading. Such involvement may benefit shareholder relations, but it also involves risk. Banks should be aware of those risks and structure liquidity programs to comply with applicable securities laws.
The Risk of Direct Involvement in Shareholder Trading As a general rule, the more direct involvement a bank or bank holding company has in its own shareholder liquidity program, the higher the risk that (1) the institution could be subject the broker-dealer registration requirements under the Securities Exchange Act of 1934, (2) trades of the institution’s stock under the liquidity program could require registration under the Securities Act of 1933 and (3) the liquidity program could subject the institution to liability under the Exchange Act’s anti-fraud provisions.
Liquidity Program Alternatives In light of these risks, banks desiring to implement shareholder liquidity programs should minimize exposure by limiting direct involvement. To avoid broker-dealer and Securities Act registration, banks should ensure that they do not (1) directly handle shareholder funds or securities during the course of a trade (except through an escrow account as discussed below); (2) make any recommendations to shareholders regarding trades; (3) participate in price negotiations among shareholders; or (4) accept any compensation for services provided in connection with the liquidity program. In addition, banks should limit their involvement in liquidity programs to ministerial activities, such as communicating the availability of the program and possibly holding related shareholder funds in escrow. Alternatives for programs that incorporate these recommendations are discussed in more detail below.
Limited Involvement Shareholder Matching Service One low-risk alternative for a liquidity program is a shareholder matching service in which the bank has limited direct involvement. Under this alternative, an institution could maintain a list of shareholders that have expressed an interest in purchasing additional shares of its stock. When approached by shareholders desiring to sell, it could direct the selling shareholders to the persons included on the prospective purchaser list. Shareholders would then negotiate directly with each other regarding the possible trade. Upon consummation, the institution should record the trades in its stock records as a direct trade between the buying and selling shareholders. The bank should not handle the related funds or securities, except possibly to hold them in escrow on behalf of the selling shareholder pending final closing of the transaction.
Stock Repurchase Program and Re-Offering of Securities Another alternative for providing shareholder liquidity is to implement a periodic stock repurchase program. Under this type of program, the board of directors will adopt a standing resolution authorizing the institution to repurchase shares of its common stock from shareholders over a specified period of time and for a specified price. The repurchase program should be subject to limitations, including limitations based upon available funding, insider blackout periods and compliance with applicable laws and regulations. In addition, the bank should not make any representations regarding the value of its stock to a selling shareholder. After shares of an institution’s stock have been purchased in a repurchase program, the institution could make those shares available for purchase by its shareholders or others through periodic offerings. Those offerings would have to be conducted under an available exemption from registration under the Securities Act.
Over-the-Counter Listing Another alternative for enhancing shareholder liquidity is for the bank to have its stock quoted on an over-the-counter market, such as the OTCQX for Banks (OTCQX). The OTCQX is a quotation service that facilitates trading in securities that are not listed or traded on the NASDAQ, NYSE or any other national securities exchange. By having its stock quoted over-the-counter, a bank could provide more liquidity for its shareholders while avoiding risks arising out of its direct involvement in such trades. Those benefits, however, must be weighed against the costs. To have its stock quoted over-the-counter, the bank generally would be required to engage a corporate broker, satisfy certain eligibility requirements and provide certain financial and other disclosures on an ongoing basis.
Conclusion Privately held community banks are increasingly confronted with shareholder demands for liquidity. A bank may respond to such demands, but in doing so, its board of directors should be mindful of the risks and consider all available alternatives. Shareholder liquidity programs should be carefully structured to fit within the institution’s overall capital strategy and to comply with federal and state securities laws.