Best Exit Strategy? You want a strong bank you can own forever or sell tomorrow.

In 2017, our bank was eleven years old.

Our loan-to-deposit ratio was running consistently at 100%+.

We had $40 million borrowed on our Federal Home Loan Bank (FHLB) line of credit.

We had $60 million in bonds that we were holding in an unrealized loss position in at the time.

The unexpected 2016 election results, regardless of your politics, had business owners reinvesting in their businesses.

Loan demand was up.

There was newfound clarity on taxes, and wholesale deregulation was taking place. This painted a very optimistic picture for the future. Business owners were finally seeing they could earn a return worthy of their investment dollars.

Because of our loan funding needs and the increased loan demand, we decided to look at possibly acquiring a bank with a complementary balance sheet to fund our growth.

What that meant is that we were most likely looking at a rural bank who had:

• Been established long ago
• Had a very diversified deposit base
• Had a low loan-to-deposit ratio (like 50%) in a lower-growth market because the kids perhaps had left the community for a metropolitan area, but the parents with the deposits still lived there.

Our thought was, if we could merge with a bank like that, we could loan those lower cost and well-diversified deposits, out in our market at a little bit higher spread than we were currently earning.

In exchange, we could supply management succession and IT expertise.

We had developed a team of managers who were all under 40 years old who were high performing and would enjoy the opportunity to take on such a project.

The industry average age of bank management teams was 65 years of age. We knew our management succession would be important.

We built a model, ran call reports through the model, and came up with a top 10 list of those we were interested in but had no idea if they had an interest in any such path.

We began introductory conversations on our own to see if we could begin any sort of relationship prior to bringing in an investment banker to assist us.

The process moved into and through a good part of the summer of 2018.

In August of 2018, the bond market changed.

We were able to get out of the $60 million we had tied up in bonds for a gain.

Suddenly, we could pay down our $40 million FHLB line of credit and our balance sheet looked completely different.

We needed to reanalyze and see if it changed the direction of who we may be interested in possibly acquiring.

We spent the first three quarters of 2019 running the bank and recalibrating the model.

It did indeed give us a new top 10 list.

We built our 2020 business plan around trying to build relationships with this new list.

Then COVID hit.

All conversations came to a halt.

2021 began with a new-found optimism.

Vaccines were going to begin in the first quarter.

People began to slowly start to get together again in the second quarter.

People were going to restaurants and ball games.

Loan pipelines were beginning to fill up.

Things seemed to finally be headed back to our pre-pandemic lives.

Then word of the Delta variant started to arise in the third quarter.

That optimism became guarded.

The loan pipelines remained full, but projects were delayed.

We weren’t quite through this yet.

Our mergers and acquisitions (M&A) conversations were not ready to begin again.

In the fourth quarter, we began preparing our 2022 business plan, and the Omicron variant began to appear.

As our board had conversations about 2022 and the potential plans to pick up on our acquisition strategy, we also broached the topic of our overall strategic options, should we:

• Continue to grow organically?
• Buy a bank?
• Merge with a like-sized bank?
• Should we sell?

We made the decision to see what those alternatives looked like and engaged an investment bank we had become very familiar with over the prior several years to assist us in weighing our options.

The point of this whole story is to provide context for you.

We ended up selling when we were initially looking to acquire.

We had built a bank we could own forever or sell tomorrow.

It was a very successful sale process.

I have been in your chair and know the questions you have on your mind.

My prior capital markets/corporate finance experience allowed me to see the common problems that most business owners faced when it came time to sell their company.

They lacked access to information and guidance, and they missed opportunities to prepare their company for sale and increase value for shareholders.

In most cases, this preparation could have been done years earlier.

We built the bank with that mindset from the very beginning.

Lack of preparation usually results in finding only a single buyer and having no room to negotiate.

It means leaving the worth of your bank and your story to chance.

If you and the board ultimately want to sell, an investment banker can only work with the bank provided to them.

It is very important to have the bank in a position to provide optimal value before handing it off to the investment banker.

You don’t want the regret of finding out the value drivers during the process and having to wonder, “What would our value have been if we could have known the process and changed a few things before we went down this path?”

It's never too soon to get started.

By starting today, whether you intend to sell your bank or not, you will gain peace of mind knowing you put the bank on the right path towards meeting your fiduciary obligations.

You will also leave a long-lasting legacy of your career.

Action plan:

• Take some time to reflect on whether you are ready for a sale if the decision was made to sell tomorrow.
• If your shareholders and/or your board wanted to proceed down the path tomorrow, are you confident in communicating how the process works?
  • Or how long it takes?
  • What the sequence of events are?
• Would you be able to manage the process, confidentially, in addition to running the bank?
• Do you have weaknesses that could be addressed that would improve the value?

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.