Pub. 5 2014 Issue 1

spring 2014 11 West Virginia Banker Hugh Wellons is a Member attorney at Spilman Thomas & Battle. His primary areas of practice are banking and finance, corporate law and securities law. He also co-chairs the firm’s community banking practice group. He can be reached at 540.512.1809 or hwellons@spilmanlaw.com . transaction, which now is higher. It even makes it more difficult to find additional investment. Many banks are looking to find more equity to improve their health. Some banks want to expand into nearby markets. Anything that makes an eventual sale of the bank look more difficult, also makes an exit look less likely to large investors. The stock will be harder to sell. That’s okay for many community banks with little liquidity, but even small banks in large markets often rely, in part, on sophisticated investors. Regulatory uncertainty tends to reduce possible deal price, which reduces prices for banks across the board. Another problem is that once the bank is put up for sale, that is a clock that is hard to unwind. When a bank has a deal to sell, and that deal is delayed or denied by regulators, that leaves the bank in a weakened position, with fewer options. This is a very expensive process. Legal and accounting costs are high. Failure stings in two ways, because it draws significant money from the bank’s capital, and it puts the bank’s future strategy into question. Shareholders will lament, “Why did management put us through this for a failed deal?” Future merger partners will worry that there is something they missed that is wrong with the bank, or that regulators will deny or delay a second deal also. This stigma can follow sellers and buyers. How do you convince a potential partner that a second deal will work? If you don’t want a second deal, how do you convince the market that you are not going to buy or sell again shortly? That brings up the third, “hidden” risk. How does a community bank build its business when everyone believes that it is trying to sell? Competitors will use that as a reason for new customers to avoid the bank. You can almost hear those competitors say, “This is not really a community bank. You don’t know who you’ll be dealing with in a year.” It used to be that you did know. You would be dealing with the buyer. Once you announced the merg- er, you began selling the buyer. Now, unfortunately, you cannot be as certain. Uncertainty scares customers, and you may find growth, even in your established market, more difficult. You can reduce these risks. First, develop a strategic plan with your board that explores all your options and opportunities. Don’t be surprised by an offer or a request to buy, know in advance who the possible partners are and what you want. Second, do not talk with someone you know you don’t want to deal with. Don’t talk with someone you are pretty sure that the regulators would not approve. A part of this requires talking with a legal advisor during the planning process. They can help you understand the corporate and regulatory process and also help analyze what partners are possible in terms of anti-trust consideration. They also can advise how you approach a possible partner to avoid future problems. Finally, communicate with your shareholders and your market consistently, intentionally. If you know your strategy, you will avoid saying things that harm credibility. I had a client who swore for many years that the bank would “never sell.” Then it entered into a contract to sell. The deal failed. How much credibility do you think management had after that? Circumstanc- es change, but understanding your strategy and your options, and ensuring that your shareholder communications and marketing are consistent, will help to keep you in the good graces of your owners and customers. n Convert Fixed Rate Loans to Floating — Using Our Balance Sheet CenterState’s Assumable Rate Conversion (ARC) Program allows your bank to utilize our expertise and balance sheet in order to offer long-term fixed rate loans to your customer while your bank enjoys a floating rate – all without hedge accounting and hedge management. How is that for an idea? 120 Club Oaks Court, Suite 150 Winston-Salem, North Carolina 27104 336.659.7100 877.604.8282 www. csbcor respondent . com