A short-lived legal dispute in Virginia is serving as a reminder that expansion-minded banks must watch for branding challenges when they enter new markets.

HomeTown Bankshares in Roanoke, Va., and HomeTrust Bancshares in Asheville, N.C., resorted to litigation this summer as part of a branding battle. HomeTown filed a lawsuit, claiming that the similarly sounding names had confused customers. HomeTrust, in return, wanted a court to affirm its naming rights.

The banks reached a compromise on Tuesday, ending the three-month battle, with HomeTrust agreeing to attach the phrase "Roanoke Division" to all its signage and advertising in Virginia for the next five years. The banks will also avoid using certain colors and images in marketing materials.

Banks have long struggled with branding, often resorting to frequently used names such as "Peoples," "Independence" and "Heritage." For instance, more than 80 bank names include the word "Home," according to the Federal Deposit Insurance Corp. The lack of originality frequently leads to confusion among customers and investors.

"Banking hasn't been known for risk taking with branding," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "A big problem in banking, historically, has been that the names are really similar to one another. It makes it hard for consumers to differentiate based on brand."

The dispute in southwestern Virginia began earlier this year, when the $1.6 billion-asset HomeTrust entered the market by opening a commercial lending office and agreeing to buy 10 area branches from Bank of America.

HomeTown, which has five branches around Roanoke, viewed the expansion as an attempt to undercut its local business.

"We are concerned that your business' use of the name 'HomeTrust Bank' will cause confusion among banking customers and the general public," Susan Still, HomeTown's president and chief executive, wrote in a May 16 letter to HomeTrust. Still also wrote that her bank would consider legal action, if necessary.

"We do not see the two marks as being so similar to cause confusion among banking customers and the general public," Dana Stonestreet, HomeTrust's chief executive, wrote in a June 3 response, adding that his bank registered its trademark in 2003. HomeTown was formed in 2005.

Stonestreet's letter also noted that HomeTrust once operated as Hometown Bank, but scrapped the brand after deciding that Hometown Bank "is not at all unique and distinctive." HomeTrust, as part of the settlement, will transfer ownership of the registered the internet domain name www.hometownbank.com to HomeTown.

The brouhaha is the latest in a long history of banks tussling over similar names.

Commerce Bank and Trust in Worcester, Mass., filed a lawsuit in federal court against Canada's Toronto-Dominion Bank in 2008. As a result, a judge in Massachusetts blocked the Toronto bank from operating in certain markets as TD Commerce Bank. (Toronto-Dominion had bought Commerce Bancorp in Cherry Hill, N.J., earlier that year.)

Toronto-Dominion now operates in the United States as TD Bank.

Michigan First Credit Union in Lathrup Village filed a lawsuit in 2011 against First Michigan Bank in Troy, claiming claimed that having similar brands in the same market created "a likelihood of public confusion."

A settlement between the bank and the credit union coincided with First Michigan's planned name change to Talmer Bancorp, said Shellie Maitre, Talmer's chief marketing officer. She said First Michigan was already planning to rebrand as it expanded into other Midwestern markets.

Choosing a distinctive name proved challenging, Maitre said. "We had a tough time finding a name that didn't overlap," she said, noting that management considered more than 300 names before decided to rebrand by using the names of the founders' grandfathers.

Personal feelings often get wrapped up in branding issues for regional banks, Maitre said. "It's not scientific, it's emotional," she added.

There is also a reputation risk associated with a name change, said Kevin Jacques, a finance professor at Baldwin Wallace University and a former regulator with the Office of the Comptroller of the Currency and Treasury Department. "If you're not careful, you can negatively alter perceptions of the bank," he said.

"A lot of community banking is relationship-based," Jacques added. By changing names a bank "creates a perception that the relationship is different. That can lead to a reduction in lending, both personal and commercial."

HomeTrust and HomeTown on Tuesday attempted to portray their settlement as a harmonious resolution.

"We are pleased to have reached an amicable settlement," Stonestreet said in a press release, referring to his Roanoke competitor an "impressive community bank."

"There will continue to be some confusion because of the similarity of the two bank's names," Susan Still, president and CEO of the $411 million-asset HomeTown, said in a separate release. She added that HomeTown plans to distinguish itself by advertising its local roots.

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