Core deposits drive the premium of bank stock valuation. The example I like to use is the bank that got paid 4.5x book to merge with another bank. Now every bank thinks it should get 4.5x book for its bank. However, the reason that this bank got this high premium was the substantial level of stable core deposits it had on the balance sheet.
I love EVE!
EVE is the economic value of equity, which is one way to measure the economic capital (value) of your institution. Dr. Ed Seifried and I discuss our love of EVE in The Art of Strategic Planning in Community Banks. We even go further with our love of EVE in our soon-to-be-published The Art of Risk. While most directors and CEOs roll their eyes to comply with the regulators on EVE, Dr. Ed and I believe that EVE is a significant indicator of your bank's value. EVE assigns premiums and discounts for the various components of your balance sheet. Like Monopoly, you add up the premium and discounts of all that "stuff" you have on the balance sheet. You add that to your capital and it should approximate the market valuation of your bank.
Now do you see why we love EVE?
In our strategic planning efforts, we believe that all banks should focus on EVE as the core of their strategic plan. Directors and management should look at where EVE is now in relation to the market value of their stock. They should project where they want their value to be in 10 years and use EVE as a method to monitor the bank's progress compared to your strategic plan. Then you can lay out how you are going to get there.
To embrace EVE, you need to know EVE
In our strategic planning efforts, we believe that all banks should focus on EVE as the core of their strategic plan. Directors and management should look at where EVE is now in relation to the market value of their stock. They should project where they want their value to be in 10 years and use EVE as a method to monitor the bank's progress compared to your strategic plan. Then you can lay out how you are going to get there.
Dress her up!
If you are starting with reasonable EVE numbers, most likely you are making realistic assumptions about how stable your core deposits are. However, are your assumptions documented and supportable? If not, I believe you must take additional steps, such as a core deposit study that analyzes the actual history of how stable your core deposits are in reality. If this drives the majority of your economic value, shouldn't you have a sophisticated method of evaluating your core deposits and intangible value?
Where will you take her?
The strategic plan should determine how much core deposits will be needed. From there, an economic value can be derived for what the bank may be worth in the future. Are the directors happy with the value and are they excited to motivate all involved? Management compensation can be designed to reward the management team as EVE progresses toward the board's strategic goals.
How do we improve EVE?
There are numerous tactics and strategies to develop core deposits. The first step is committing focus, time, and resources to make it happen. In most cases, your bank has all the pieces of the puzzle. Now they have to be put together.
BNK can help to make your dreams of EVE come true
BNK has:
- The strategic planning know-how to create a strategic plan that will focus on gaining the value of core deposits and how to do it.
- A sophisticated core deposit study that helps you document and measure the value of your core deposits.
- The external modeling expertise or the consulting expertise working with internal models to realistically model EVE.
- The the expertise to do model reviews and model validation, of which EVE is one component.