Pub. 1 2010 Issue 4

www.wvbankers.org 12 Q Bearing Gifts — continued from page 11 For instance, a board was recently given a presentation of acquiring another bank. One of the attributes of acquiring the target bank was that the combined institution would have over a billion dollars in assets. The presentation presented the SNL $500 million and below index, and the SNL $1 billion to $5 bil- lion index. The $1 billion to $5 billion index has always traded a higher multiple to book than the smaller bank index. Part of the pitch was that the combined bank would enjoy a much higher multiplier. In fact, when you plot the acquiring bank’s stock price perfor- mance, the board would see that its price has been trading at or above the larger bank index. It could be argued that the stock will not trade at higher multiples. It might be argued that after the merger, the markets may actually punish the bank because it would look rich to the larger bank index. What should community bank boards and senior manage- ment teams do to act strategically? S&B recommends the following strategy. Now is the time to lay out a new strategic plan. The planning process should explore all threats, risks, and opportunities of the post-financial crisis world. In the Art of Strategic Plan- ning: Volume Two, the dynamic strategic planning process is explained and illustrated. The strategic planning process should model the bank’s bal- ance sheet and income statement five years and longer. If the bank considers buying or selling, the financial impact should be included within the bank’s strategic planning model inde- pendent of investment banking models. The strategic planning process should produce a capital plan. The capital plan can be a useful tool to explore not only com- ing regulatory change, but to educate the board on the capital ramifications of buying or selling. In the Art of Capital Plan- ning, S&B provides education regarding what determines an effective capital plan versus a ratio driven plan. Finally, community bank boards need an independent source for opinions and advice in connection with the merger that does not have conflicts of interest. The third party can review the quantitative and qualitative aspects of a merger and assess the advantages and disadvantages. Q