Community Bank CEOs: Reverse Engineer Your Bank for a Successful Bank Sale

You know your bank better than anybody.

If you had a magic wand you could wave to buy another bank, and the bank would fix all of your bank’s weaknesses, what would the bank 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?

What would the balance sheet look like?

Would it offer complementary services such as insurance, trust, leasing, or wealth management?

Would it offer additions to talent where gaps exist today?

Would it offer management succession where gaps exist today?

Would it have a more robust treasury services offering?

Would you want more board members, or would you prefer not to add more complexity to your board?

Really think through this.

Think through everything you would want and remember there is no cost to this—you have a magic wand you can wave to get exactly what you’re looking for.

The exercise may be a bit eye opening, or you may have been thinking about this for quite some time and already know exactly what you’d want.

We were an acquirer in the years prior to our sale.

At this point, you may be asking yourself, “What does this have to do with selling a bank?”

Bear with me – we will get there shortly.

We went through this process in detail.

We built acquisition models and ran call reports through them to develop a top ten list.

This analysis was very informative for us.

It made us examine these questions from different angles.

The analysis also made us examine ourselves.

How far away would we be willing to go geographically to acquire?

I got in the car and drove seven hours to the market we were considering.

That trip made me realize that for us, that was too far.

If we ever had problems in that market, the trip would make closer oversight difficult.

We kept refining our scope the more we studied.

We were running hot.

Our loan-to-deposit ratio was running consistently above 100%, we had $40 million borrowed on our Federal Home Loan Bank (FHLB) line of credit and we had $60 million in bonds with an unrealized loss position at the time.

We were looking for a balance sheet that would complement ours. Low loan-to-value, a diversified deposit base built over years.

We were a de novo about 10 years earlier, so our deposits naturally had concentrations.

We were in a growing metropolitan market and finding a bank we could buy likely meant looking in a rural market.

Rural market growth has been slowing over the years as the kids who grew up in those markets moved to larger markets for career opportunities.

The parents remained in the rural markets, and they had the deposits, but because the kids had left, there wasn’t much growth.

Many rural banks lacked management depth for the same reason the growth was down in the market—those in the early stages of their careers had left for more opportunity elsewhere.

Management at the rural banks was aging and succession planning was becoming an issue. We had recognized the demographic wave of retiring baby boomers during the early stages of our bank’s existence.

The bank was just a few years old; we couldn’t afford to “buy” talent and we recognized we needed to develop the talent ourselves.

That proved beneficial as the average age of our management team was 45 years old versus the industry average of 65 years old.

As a side note, at the time of our sale, I was 62 years old, and our president was 67 years old. We brought up the average age, and our team was all under the age of 40. We began the process of recruiting, hiring, and developing the team 13 years prior to our sale.

So, in exchange for taking deposits from the slower-growth rural market and loaning them out in our higher-growth metropolitan market, we could be their management succession plan.

In addition to that, information technology (IT) was typically something rural markets would outsource, and our team was very comfortable with IT.

We were looking for a combination that would make us both stronger. In other words, we were looking to make 2 + 2 = 5.

The process we went through to find who we might be interested in buying was very instructive.

We were bought by a bank that was roughly 6 times our size and they were much like the banks we modeled acquiring.

The bank that bought us was predominately in rural markets, had a great deposit base, a lower loan-to-deposit ratio, and was looking for additional growth in a metropolitan market to build value for the franchise overall (these are my words and thoughts, not theirs, as I cannot speak for them).

The process of figuring out who would complement us led us to becoming more familiar with our own value.

The process, reverse engineered, was very instructive as to the value we could bring to somebody else.

Action plan:

• If you had a magic wand you could wave to buy another bank, what would the bank look like that you would want most?
• Think through everything you would want and remember there is no cost to this—you have a magic wand you can wave to get exactly what you’re looking for.

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.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell - serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.