5 Bank Value Builders for Smart Bank CEOs to Master
What truly drives your bank's value?
And what secretly chips away at it?
While this isn't a complete list, these are the most critical factors that potential buyers examine when valuing your bank.
The 5 Bank Value Builders
1) Consistent Core Earnings
This is by far the most powerful value driver. Nothing impresses buyers more than earnings that are:
- Consistent year after year
- Dependable in different economic conditions
- Predictable for future planning
These earnings must come from your bank's core business operations.
The more boring and stable your earnings trend (either flat or consistently growing), the more valuable your bank becomes.
Think of it this way:
Buyers pay more for certainty.
2) Expense Reduction Potential
This is often called "synergies" in merger language, but it simply means cost savings.
The math is straightforward.
When two banks combine:
- One headquarters building is needed, not two
- One core processing system is needed, not two
- One compliance team is needed, not two
- One executive team is needed, not two
All else being equal, the combined bank will be significantly more profitable than either bank was independently.
The more expenses that can be eliminated, the higher the value to the buyer.
If you want this information, check out Chapter 10 “The Golden Window” in my book. (Click here to order the book).
3) Sustainable Core Growth
Like core earnings, this growth must come from your basic banking business.
Buyers value growth that is:
- Consistent over time
- Dependable across business cycles
- Predictable for planning purposes
The growth doesn't need to be the same percentage every year, but there should be a clear pattern of expanding both loans and deposits from your core customer relationships.
4) Strong Credit Quality
Solid credit quality is expected in bank mergers and acquisitions.
This is interesting because:
- Buyers won't pay extra for a high-quality loan portfolio
- But they will definitely pay less for a problematic one
Think of good credit quality as a “must have” rather than a bonus feature.
It prevents price discounts rather than creating premium pricing.
5) Talented Team Members
Smart buyers will tell you directly: they aren't interested if your entire management team plans to retire at closing.
Why?
- They don't know your bank's operations
- They're unfamiliar with your market
- They don't have relationships with your customers
Your value increases significantly if key leaders commit to staying one, three- or five-years post-sale.
This extends beyond the management team to include:
- Customer-facing employees with "stay-put" agreements already in place
- Team members who fill succession gaps the buyer has
- Specialists who bring skills the buyer needs
The 3 Bank Value Killers
1) Non-Core Earnings
These are earnings that don't come from your fundamental business model.
For example:
- "Cold" loan participations where you have no direct relationship with the borrower
- One-time security sale gains
- Other real estate owned (OREO) sales
- Special non-recurring revenue events
These earnings may contribute to your bottom line today, but buyers consider them "one-time" events that won't continue.
They add to book value but not to valuation multiples.
2) Non-Core Growth
This looks like growth on paper but doesn't create lasting value.
Examples include:
- Wholesale CDs funding wholesale bond purchases
- Purchased loan pools with no underlying customer relationships
- Brokered deposits funding securities
Yes, there might be a positive spread that makes money today, but there's no relationship foundation.
Anyone can buy this business - you bring no special value proposition to it.
3) Large One-Time Transaction Costs
These expenses can significantly reduce your bank's value.
The classic example is a long-term core processing contract with:
- Years remaining before expiration
- High early termination fees
- Substantial data deconversion costs
I cover this Chapter 10 - “The Golden Window” of my book. (Click here to order the book).
Your Value Optimization Action Plan
Audit Your Value Builders
- How consistent are your core earnings?
- What potential expense reductions would a buyer see?
- Is your growth coming from true core relationships?
- How strong is your credit quality?
- Which team members would add value in a merger?
Identify Your Value Killers
- What percentage of earnings comes from non-core sources?
- Are you pursuing growth that has no relationship foundation?
- What contract obligations could create one-time transaction costs?
Remember:
The best time to enhance your bank's value isn't when you're ready to sell.
It's right now, by focusing on these fundamental value drivers every day.
What value builder are you currently strengthening at your bank?
There are no shortcuts or hacks in building the confidence needed for major strategic decisions.
Just proven approaches centered around preparation:
This approach will:
- Inform your strategic planning
- Guide your resource allocation
- Clarify your priorities
- Define your value proposition
This is how savvy bank leaders operate.
They build valuable institutions through preparation, allowing them to choose the optimal path forward on their own timeline – whether that's continued independence or a strategic transaction.
I’ll see you next week.
