How to Improve the Value of Your Bank Philip K. Smith, President Gerrish Smith Tuck, Consultants and Attorneys Independent Bankers of Colorado 44 th Annual Convention September 20-22, 2017
Increase earnings per share Maintain adequate return on equity Create liquidity for stock Provide adequate cash flow
Maintaining safety and soundness Surviving in your community
Back to basics / make money now Appropriate organizational and ownership structure Capital and strategic planning Merger and acquisition strategies Embrace and adopt change
What Does It Mean To Enhance Stockholder Value YOUR JOB IS TO: Increase earnings per share Maintain adequate return on equity Create liquidity for stock Provide adequate cash flow Maintain safety and soundness
Earnings per share and earnings performance Minimum capital levels Core deposit base Efficiency
Make money now Pricing loans and deposits De-risk earnings stream Source of non-interest income
Your Branch Structure Too many? Wrong locations? Individually profitable? Large banks versus small banks?
Products and Services Why do we have them? Legacy products and services? To many non-profitable accounts? Measuring for profitability?
Bank holding company yes, it s needed Subchapter S Public versus private
Approximately 80% of the community banks are in a bank holding company structure Advantages Improved Capital Planning and Financial Flexibility Control and Ownership Planning / Liquidity Additional Geographic Expansion Techniques Enhanced Operational Flexibility
S Corp Structure A New Tax Structure A New Shareholder Structure A New Value Structure
S Corp Election Considerations Tax Treatment Like a Partnership/ Liability Treatment Like a Corporation Alternative for Bank Holding Company IF All Shareholders Consent 100 or Fewer Shareholders
S Corp Election Considerations Changes Effective 10/22/2004 100 Shareholders Six Generations of One Family Count as One Shareholder Bank IRAs Permissible ESOP as Shareholder
All Subchapter S stockholders must sign an IRS Consent Stockholders must sign Subchapter S Stockholders Agreement Restricts transfers of stock that could terminate Subchapter S election
S Corps Key Advantages: Reduces Taxes Increases Cash Flow for Shareholders Enhances Shareholder Value Key Disadvantages: Complexity of Transaction Possible Elimination of Current Shareholders Political / Social Issues
Public Company (SEC Reporting) More than 2,000 shareholders Very little benefit to most small community banks Private Company Less than 2,000 shareholders (less than 1,200 if deregistering) Which structure adds value?
Old Metrics May Be Old Incent What You Want Earnings Safety Capital Long-Term View of Success
Overcome the Fear of New Capital Get more capital or have enough capital now Regulatory capital requirements Stop worrying about minor dilution No worry of public company status
Overcome the Fear of Using Capital Smart deployment increases value Smart deployment is better than retention
Develop a Stockholder Liquidity Strategy Total number of stockholders Who are your stockholders? Create liquidity for your stockholders Implement stock repurchase transactions
I want to buy another bank I want to position my bank to sell I want to remain independent I want to do something I don t want to do anything I have no idea what I want to do
Create a Target Template Initiate Relationship with Desirable Targets Merger of Equals? Analyze Alternative Uses of Capital Branching vs. Acquisitions Will Your Existing Shareholders be Better Off?
Identify the Reason for a Sale Age of shareholder base and management Competition All the fun you can stand Prepare your bank for sale Maximize earnings Keep contracts short Lock in key personnel Will Your Existing Shareholders be Better Off?
Can we do a better job for our stockholders than another holding company's stock or cash? Conceptual board determination Proactive or reactive? Considerations Current market conditions Succession issues ROE Alternatives
Economic Changes Shareholder Changes Technology Changes Operational Changes Board and Managerial Changes
How to Improve the Value of Your Bank Philip K. Smith, President Gerrish Smith Tuck, Consultants and Attorneys Independent Bankers of Colorado 44 th Annual Convention September 20-22, 2017