Strategic Ownership Planning
Be Proactive — Not Reactive!
Strategic ownership planning is not the normal bank strategic planning that you typically do on an annual basis. Strategic ownership planning is a focused discussion with ownership on the future of the organization.
Many community banks want to remain independent long term. We believe that this is a terrific goal and necessary to retain viable communities in the future. Unfortunately, the failure to develop an ownership plan can force banks to consider a sale. As the saying goes – A goal without a plan is just a wish.
Strategic ownership planning is a formalized process that allows the existing ownership of a bank or bank holding company the opportunity to review the ownership structure and develop a plan for any desired or required changes in such structure for the near term and the long term. The process should allow the personal goals and objectives of the ownership group to be met.
We believe that planning for strategic ownership succession is very important for owners to protect the value of their investment. It is also important to boards and management to provide for an organized transition of ownership without negatively impacting the operation of the institution.
Why is strategic ownership planning important?
Many bank holding companies have an aging shareholder base, and unfortunately, too many banks don’t have a plan in place to address this very issue. As shareholders’ needs change their interest in owning stock in a bank (or holding company) can also change.
Shareholders may need to liquidate their investment to fund retirement. They may pass away, and their children may not have an interest in owning stock in a bank. While this may not sound like a large issue, you will have some unhappy shareholders if the bank does not have thecapability to buy back these shares, and/or can’t facilitate another buyer.
Again, it is not necessarily a significant issue when it only involves a small number of shareholders. However, we have sold many banks because over time the number of shareholders that wanted liquidity increased to a point where there were more shareholders that wanted liquidity than those that wanted to continue to own the bank.
There are a lot of reasons that banks sell, but it is disappointing when a bank is forced to sell because they did not address an issue that may have been preventable. Oftentimes, the need for a sale arises at a time that may not be ideal – market conditions, long-term contracts, etc.
We believe that all community banks and bank holding companies should have and follow a current strategic ownership plan. Similar to your bank’s strategic plan, it should be reviewed on a regular basis and updated as needed. The ultimate direction of the organization needs to flow from the top.
As mentioned above, strategic ownership planning is different from your normal bank strategic planning and should be done separately from your bank planning session. We believe it needs to be done first and limited to either the ownership group, or in the case of a widely held organization, the board of directors and key ownership constituents.
Done properly, strategic ownership planning drives the direction of the bank’s strategic planning session. Access to capital, liquidity needs, and ownership succession are a key component in determining the future of the bank. Ownership’s short and long-term desires should be ingrained in the bank’s strategic plan, its culture and its business plan.
If ownership wants to utilize earnings to provide for shareholder liquidity, then the bank may not want to have an aggressive growth or acquisition plan. We know banks that allocate a portion of capital and/or earnings each year to redeem shareholders whose needs have changed. Doing this on a consistent basis minimizes the risk that someday the majority of the shareholders will want or need liquidity that forces the bank in a different direction.
Alternatively, if ownership believes that the bank needs to double its asset size in five years to remain economically viable, then management needs to build a plan to achieve that goal. Retention of earnings for capital, acquisition opportunities, branching and personnel all become important pieces in a growth plan.
Knowing and understanding where the bank’s ownership wants to be in the future should drive many of the bank’s significant decisions. The type of people you hire (we have all heard the regulators talk about succession management), investments in technology, branches and maybe even how you market to your customers should all be done with the long-term goals in mind.
What should Strategic Ownership Planning include?
The strategic ownership planning process should include, but not be limited to, the following:
1. An analysis of the ownership as it is today.
2. An identification of what the future ownership will look like.
3. An analysis of alternatives available to accomplish the desired ownership.
4. Selection of the best alternatives to accomplish the desired ownership.
5. Implementation of timeframes with accountability for the alternatives selected.
6. Ongoing review and evaluation of the plan in order to achieve the desired ownership structure.
We are not trying to push any particular direction. Strategic ownership planning can go in several different directions, but it is important to be proactive and have a direction. Failure to properly plan can be very expensive and result in unintended consequences.
We are firm believers in the community bank system because of its impact on the economy and the benefits that community banks bring to their local markets. Everyone recognizes that the bank environment can be challenging, but it also creates great opportunities for strong organizations executing on their plan.
We often work with bank ownership groups to provide liquidity for estate planning purposes, to buy out minority shareholders, and for generational transfers of ownership. No matter where you are in the spectrum, you must have a plan to move forward and devote the time, energy and thought to the execution of that plan.
If you have any questions or comments, please feel free to give us a call. We would be happy to discuss any of these issues with you.