Do more than Survive, Thrive with 5 Power Value Drivers

What drives value, and what detracts from it?

This is not an exhaustive list, but it is the most significant.

First, we'll look at five primary value drivers that influence value.

By far the most important value driver is core earnings.

These are earnings that are consistent, dependable, and predictable.

These earnings are resulting from the core business of the bank. So, the duller the trend of core earnings, being the same or growing consistently every year, creates value better than anything.

The second value driver is cost savings or expense reduction, often referred to as “synergies.”

It's very straightforward.

You take two existing banks and combine them to cut expenses.

All else being equal, the new bank will be far more profitable than either of the two independently.

The greater the number of expenses that may be decreased, the greater the value.

We will cover the core contract in a little more detail in an upcoming newsletter about “The Golden Window.” If you want the information prior to having to wait for that newsletter, you can find it in Chapter 10 of my book beginning on page 71. (Click here if you would like to order the book).

The third value driver is core growth.

This has the same properties as core earnings.

This growth is coming from the core business of the bank.

This is consistent, dependable, and predictable growth.

It doesn’t have to be at the same rate of growth every year, but consistent, dependable, and predictable growth in both loans and deposits create value.

The fourth value driver is credit quality.

Credit quality is expected in the world of bank mergers and acquisitions.

It drives value, but the value is expected to be there, because no one pays a premium for a high-quality loan portfolio.

What it does is prevent price declines.

High credit quality is expected—it’s treated as a given.

The final value driver mentioned here is talent.

Savvy bank buyers will flat out tell you they aren’t interested in buying the bank if it is the selling bank’s management team’s desire to retire at closing.

They are unfamiliar with your bank.

They are unfamiliar with your market or your people.

There's a lot more value if you're willing to stick around for a year, three years, or five years to make the transaction work.

Talent beyond management is a value driver if key employees, particularly customer-facing employees, have Stay-Put provisions already in place.

It reduces the risk that they may not stay if control changes, and the buyer must negotiate the agreements.

Other employees who may not be bound by Stay-Put agreements but solve succession planning needs the buyer has or can serve in another role that is needed also can enhance value.

There are also value detractors that would-be sellers should be aware of.

The first value detractor is non-core earnings.

A good example may be cold loan participation earnings:

• Loans where the bank is blind to the customer and there is no other relationship other than the loan participation.
• You likely have never had a conversation with the borrower, only working through the lead participant to get information or financials.
• The income was basically worthless in terms of value. It contributed to book value, but it is considered “one-time” earnings by the buyer that will not be repeated.

Another example would be a one-time gain on the sale of securities, other real estate owned (OREO), or non-core earnings do not generate ongoing value.

Non-core growth is a value detractor as well.

This is also a scenario in which value is not generated.

Wholesale CDs, the proceeds of which are used to buy wholesale bonds, inflate the balance sheet.

There's a money-making spread play there.

There is a favorable spread, but it is not indicative of core growth.

Non-core growth will detract from value.

There is no relationship behind that growth.

You are just buying this business. Anybody can buy it.

 You bring no value proposition to this business.

The third value detractor is large one-time transaction costs.

These expenses can reduce value.

A long period remaining on a data processing contract is one example.

The first thing you should do is look up your core contract expiration date.

What is the termination fee if you decide to leave before your contract expires?

What are the deconversion fees to get your data onto another core system?

Again, we will cover the core contract in a little more added detail in in an upcoming newsletter about “The Golden Window.” If you want the information prior to having to wait for that newsletter, you can find it in Chapter 10 of my book beginning on page 71. (Click here if you would like to order the book).

Action plan:

• Audit your value drivers:
  • Core earnings.
  • Cost savings.
  • Core growth.
  • Credit quality.
  •  Talent.
• Audit your value detractors:
  • Non-core earnings.
  • Non-core growth.

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.