Bank CEOs: Planned Exit. Reasons why a good one will unlock your bank's value.

Today, I am going to show you why you should ignore price-to-book multiples.

Multiples lull you into believing the story of your bank is being written by fate. The story sounds something like this, “As soon as multiples get back up, we’ll take a look at selling.” Or “We aren’t going to sell for any less than 2x book.”

Well, fate is a terrible writer.

A different approach is understanding where value is derived, allowing you to confidently map your path to greater value.

You may never choose to sell. But the path you choose will put you in the best shape possible if something were to change.

Multiples are used because they are easy.  It’s a shortcut that requires little thought, just simple math.

They make an otherwise long conversation brief and can provide cover for somebody talking about values, who really knows little about values.

Much like a property appraisal, multiples are the “drive-by” approach to valuation.

For illustration let’s compare the results of the sale of two banks.

They both have $200 million in total assets.

Both banks sold for $30 million.

Bank A has tangible common equity of 8%, or $16 million.

Bank B has tangible common equity of 11%, or $22 million.

Bank A had a return on assets (ROA) of 0.5%, earning a net income of $1 million.

Bank B had an ROA of 1% or earning a net income of $2 million.

Both banks have 100,000 shares of stock outstanding, so both banks realized a value of $300 per share.

Logically, the owners of Bank B would think they should get a higher multiple than Bank A.

In their minds they have more value, are better capitalized, and have higher earnings.

There are two variables to the multiple:

• Price
• Book Value

The only way to get a better multiple is to:

• Raise the price, or
• Lower book value.

Shareholders don’t care about multiples.

They just want the highest price per share they can get.

What To Do Next:

If you want to increase the price, you must start writing your own story.

Yes, fate can still be a part of writing the story – but you’re not leaving it up to fate to write alone.

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank. Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

A great place to start is to focus on these 5 things:

Step 1: Reverse Engineer

If you had a magic wand and could buy a bank that would complement yours, what would it look like?

What market(s) would it serve?

What products would it offer?

What would the deposit mix look like?

What would the loan portfolio mix look like?

Would it offer additions to talent where gaps exist today?

Having answers to these questions and others you come up with will be incredibly informing.

Step 2: Refocus Perspective

Now that you have an image of a bank that complements yours, if you were together what could the combined banks DO?

And what could they BECOME?

Dream big. Give this some serious thought.

This will open your eyes to things you may have never considered possible.

Step 3: Recalibrate Your Earnings

If you were 5 – 7 times the size you are now, and well-capitalized, how much more could you loan out to your existing loan customers?

What internal holds or legal lending limits currently restrict your ability to lend more to existing customers?

Which loan participations would you buy back?

What would this do to your earnings?

We often don’t consider what the value within our loan portfolio base may be to someone larger than us. After all, unless you are going through a process like this, when will you ever think about it?

Step 4: Audit Your Talent

As CEO, your job is to make yourself replaceable. Have you done that?

Don’t get me wrong, no matter how high and far you look, you won’t find a leader who can do exactly what you do.

But can the bank operate successfully on a day-to-day basis with little to no effort on your part for an extended time?

Step 5: Get Oriented to Your Golden Window

Nobody can pick exactly when to sell your bank, but it is possible to know when it isn’t the best time to sell. The timing of your exam cycle and the expiration of your core contract can provide some great clues.

The Golden Window is when you have just completed your Safety & Soundness, BSA, and IT exams, you have 18 months until the next exam cycle AND your core contract is 18-24 months from completion as well.

Do you know when the Golden Window is for your bank?

This is how savvy bankers build value.

They don’t think about multiples. And they don’t spend too much time comparing themselves to banks that have recently sold, or the value of the bank down the street.

They build smart, valuable banks through intelligent discovery.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.