John Russell Thomas said the decision to sell Aliant Bank, his family-owned bank, to an out-of-state buyer was fairly easy given its precarious position.
The Alexander City, Ala., bank in 2009 was reeling from losses tied to land development loans. The Russell family, which founded Aliant more than a century earlier, knew it would have difficulty raising enough capital internally to keep the bank afloat.
So the family sold a 62% stake in Aliant to USAmeriBancorp Inc. in Clearwater, Fla., for $25 million.
"My decision-making process was simple," said Thomas, who remains Aliant's chairman. Recapitalizing the bank "required a lot more money than we could afford to put in."
As the nation suffers from an economic malaise, more family-owned banks are facing a similar dilemma — bring in outside investors or double down in hopes of staying in business.
It can be an anguished decision for some bankers, especially if family members have managed the bank for multiple generations. Some families must be persuaded that financial realities outweigh emotional attachments, industry observers say.
"The mere fact that they say, 'My granddaddy started this bank and I'm not selling anything,' you can't stop the discussion there," said Walter Moeling 4th, a banking lawyer at Bryan Cave.
Moeling said it is often his job to convey the painful truth that outside investors are necessary to save a bank. "So far, we haven't heard anybody who has brought in new capital and then said, 'Gee, we didn't need that money.'"
There has been a lot of turmoil with family-owned banks in recent weeks.
On Wednesday, First Guaranty Bank Corp. in Jacksonville, Fla., agreed to sell most of its bank to CertusBank in Greenville, S.C. The Fant family founded the $378 million-asset First Guaranty 60 years ago, and members of three generations have run it.
The Johnson family in Wisconsin, which controls consumer-products maker S.C. Johnson & Son Inc., this month invested $235 million in Johnson Financial Group Inc., following months of losses.
A family-funded recapitalization is a rare feat, and observers said that level of largesse is not a realistic option for some families.
Kanza Financial Corp., a Kingman, Kan., company that has been run by the Boyer family for several generations, has fared relatively well and has good credit quality. Two family members still work at the bank.
John E. Boyer 4th, Kanza's chairman and chief executive, is quick to acknowledge that, if the $193 million-asset bank ever fell on challenging times, "the rest of the family wouldn't be as motivated to capitalize" the bank.
"Most family owners, unless they've got a very diversified portfolio of other business interests, aren't going to have the ability to keep coming back" with more capital, Boyer added.
Moeling said he advises clients most of the time to swallow their pride and at least talk with outside investors. "It's better to take dilution on the front end, but lower the risk in the long term," he said.
In many instances, regulators want a struggling bank to find new capital from "around the table," from directors and existing investors, said Paul Aguggia, a banking lawyer at Kilpatrick Townsend & Stockton. "But in a lot of situations, these folks already have a lot in the bank and they're tapped out," he said.
There are a number of family-owned banks that seem to be doing well, including the nation's two largest family banks:
When the financial crisis began, there were plenty of bankers who were willing to wait "one more quarter" for improvement, Moeling said. That line of thinking has all but vanished.
"You may think the market is coming back in six months, but if you bet wrong, you've literally bet the bank," Moeling said. "The denial has greatly decreased after four years."
Aliant is one of the lucky family-owned banks, Thomas said. Plagued by bad real-estate loans, the $961 million-asset bank turned to the $2.03 billion-asset USAmeriBancorp for help.
(Aliant's original owners, the Russell family, also disposed of the sports-apparel company it founded in 1902, selling the Russell Athletic brand to Warren Buffett's Berkshire Hathaway Inc. for $600 million in 2006.)
The banks expect to complete the new investment and bank merger next month. The investment will also allow Aliant to pursue growth plans, including construction of branches near Auburn University, Thomas said.
"We've been very fortunate to find somebody in this environment. I really can't emphasize that enough," said Thomas, who will become a director at USAmeriBancorp, also a family-owned bank, controlled by the Steans family.
"You need to be larger just to handle the compliance issues in today's world," Thomas said.
