The directors of South Central Bankshares of Flatonia, Texas, face a simple choice: make their shareholders demonstrably richer or sell out.
Out-of-state holding companies continue to snap up Texas banks, and South Central knows it could be next unless it can justify its existence to its 150-plus shareholders.
Edwin Zapalac, president of the $80 million-asset banking company, acknowledged he has received indirect inquiries about a possible sale. "We can't stay the size we are, or else we'll be bought out," Mr. Zapalac said. "Norwest is all around us."
South Central is hardly alone. As a growing number of community banks receive unsolicited buyout bids, independence-minded directors increasingly are recognizing the importance of keeping shareholders happy by increasing the value of their companies.
That message was hammered into bank directors' brains this week; on Wednesday about 200 of them packed a session devoted to the issue at the Independent Bankers Association of America annual convention here.
Speakers and community bank directors offered a host of ways to increase the shareholder value of their banks. If directors aren't trying to increase shareholder value, "you're not doing your job," said Jim Bexley, a consultant and former bank executive who spoke at the conference.
Speakers said one of the most surefire ways to have an impact on stock value is to focus on community banks' traditional claim to fame: customer service.
Directors said community banks must capitalize on the reputation big banks have for sticking consumers with outrageous fees. More than one director cited the decision by First Chicago Corp. to charge certain account holders $3 for speaking to a teller.
"We're focusing on how the bank can ... provide more value-added to the customers in an era where banks are getting the negative publicity for a lack of personal service," said Mike Colby, an outside director at the First National Bank of Brookfield, Wis.
But directors weren't necessarily saying small is beautiful. Growth- either internal or by acquiring banks or branches-can add value to a franchise.
That drove South Central's decision to acquire another bank two years ago, Mr. Zapalac said.
Stock repurchases and ownership restructuring, such as employee stock ownership plans, boost shareholder value by making the stock more liquid, said Jerry C. Gerrish, a Memphis banking lawyer who spoke at the conference.
Moreover, such moves can keep the company's stock in friendly hands, Mr. Gerrish said.
Bud English, a director of $65 million-asset State Bank of Arcadia, Wis., said it created an ESOP to keep shareholders happy and wolves at bay. Indeed, within the past five years the bank has received and passed on three unsolicited bids. "Community bankers are interested in maintaining their situation without being acquired by a large bank," he said.
Raymond Neu, a director at Plains (Kan.) State Bank, is creating an ESOP for the $37 million-asset family-owned bank. Plains State is also working on another way to increase shareholder value: switching to an S-corporation tax structure to reduce shareholder taxes. "We're trying to avoid the double taxation of the bank," he said.
The strategies directors employ to boost shareholder value will vary according to the needs and abilities of the bank, Mr. Gerrish said. But to do nothing is to court obsolescence.
"If you don't do something for these folks, they're going to force us to do something themselves," he said.