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thanks for being here this is going to be the session on does a merger or sale make sense for my bank if you were thinking this was cannabis or hemp you're on the wrong session you got to go back to the main one and data analytics is next door to the left I do have two of our partners here Chad Flanagan is here he's our partner in charge of our Fargo office and then Dana Aerith is also in the back who also does a lot of M&A and feel free to chime in Dana so and as well as Jill here of course so thank you all for being here today I want to express my gratitude and thanks to Tony for making the trip up here from Minneapolis we do like to get him back to his North Dakota roots once in a while and he also will bring a lot a lot of his expertise to the presentation so thanks for being here Tony owner 6 obsession is ownership succession planning I should say is definitely one of the top concerns in the industry our FDIC panelists today mentioned it as well and and succession planning is typically a part of any of the strategic planning that we do for our bank clients succession issues has spurred a lot of bank sales over the last five to ten years as as Dana and Tony can probably attest to and and but what we're what we're hoping to do today is to kind of give you a different perspective and hope that after this session you understand that there are other options to consider other than selling your bank and hopefully maybe start talking about some of those other options we do welcome your comments and questions at any time during the session because we are recording this if we if you do have a question Tony and I all have to remember to try to repeat it so that we can our listening audience can can get the benefit of that I'm kind of just a guy roaming around with the mic yeah come find you too so follow this is the agenda that Tony and I put together for the accession we do plan to review the emanate trans and I'm gonna start us out with that and then we'll Antonio join us in some of the later part of the presentation but certainly Tony always knows he's free to add anything to the presentation at any time we don't plan to review all of the M&A data that's in here there's a lot of detail stuff in the back of the materials if you downloaded that but we do want to do is have a just a really brief discussion on what's driving M&A activity like we talked about that every year I think for the last five years but we'll kind of touch on that just to kind of get our framework back on it and then really get into some of the my idea is to consider if if you would like to stay independent and that that's really what we're trying to focus on and then we're gonna wrap up the presentation Tony's going to talk a little bit about some of the merger considerations and when we're talking about a merger we're talking what we consider to be a true merger you know not you know there's a lot of transactions out there that are called mergers but there really are acquisitions and and we you know at the end of the day you know you mean the considerate you know the bank that's being acquired is getting stock for their is getting cash for their stock and so it really is an acquisition and there's a lot of regulatory financial and tax reasons for structuring transactions that way but we're talking about our transactions we're at the end of the day you're bringing together shareholder basis as well as you know the operational side of the bank so those are the types of mergers that we want to talk about a little bit today at the end of our session so with that we're gonna get into some of the M&A information part of our comments today are based on other conferences that we've gone to I think the most recent one was the bank holding company M&A session that was down in Minneapolis a couple of weeks ago and I know some of you out here were at that session as well but really at you know at that session many of the presented there presenters there talked about kind of the steadiness of the M&A activity that they're seeing and and the softening in stock prices for stock transactions and some of the reasons for that and and you know what will be there done will revisit some of that I always like to start out with this light I know you probably can't see it back there and you don't have materials in front of you but you know there's a red line you know reflects kind of it reflects the growth of Bank assets in the in the banking industry the blue line is the the number of commercial bank charters and then the I know kind of a yellowish green line is the number of commercial bank charters with assets less than 100 million and so you know obviously there's you know that you know that what is what it does reflect is you know the consolidation there's a decrease of 85 commercial banks thus far in in 2018 this was through June 30th information and of that a little over half 43 of them there's a 43 reduction in the number of commercial banks under a hundred million so again it's just a continuation of the trends that we've been seeing in the last few years the consolidation of the smaller banks and consolidation in general and that's throughout the u.s. right yeah this is throughout the US yeah this is the M&A landscape as a whole exactly yep so weird out you know number charters went from four thousand seven hundred and fifteen down to four thousand six hundred and thirty in the number of banks under 100 million went from you know 1133 down and 1090 just over a thousand small banks or banks over 100 million you know the other thing that you again that it does reflect though and we just typically don't get into it a lot is you know the return on average asset you know that the banks and for the banks of the hole in the US and we'll touch on this little later as 1.37 compared to 1.35 last year so that you know again a nice strong earnings result so far through the first nine months and the return on average equity is about 12% again you know the same as the prior year so all all positives this is this is actually just just kind of lay out what's happening in in the national you know from a national scene and and again as again one of the other bank regulators I can't remember which one mentioned that you know banks are strong I mean banks have enjoyed some consistently strong earnings and asset quality and we're not seeing anything different than that in 2019 this was only through June 30th but you know that reduction of corporate tax rates at the end of 2017 and the little bit of improvement in that interest margin we've had over the last couple years has returned you know has resulted in returns on average assets that are above historical averages so you know it again was dimensions that return on average asses for national banks of the holes 1.37 so it's up slightly from the prior year 1.35 net interest margin is averaged about three point three seven so actually based on the national numbers that's consistent with the prior you know with with the prior year community banks as a whole are higher now they're about three point six seven so about you know a third of a percent higher than the industry you know then the industry as a whole the average leveraged capital ratio for commercial banks is nine point seven seven that's up from nine point six six and for community banks that actually the average as of June 30th was about eleven point one four percent so it you know and I know I think that one of our our our bank grew meetings here earlier this week I think Lake reported we had done a data scan and all the banks in the nation just to kind of see how they would come out with you being able to meet the simplified capital requirement the simplified capital bank leverage ratio model and it looked like you know 85 to 90 percent of the banks in the nation should be able to meet that without any problem going to that simplified capital model so again just it does reflect you know the strength of the banking that strength of the banking industry that you know they ask that quality information that's here as well I'll reflect that this it does reflect the consolidation you know there is a decrease of 85 banks as we mentioned on the previous slide you know that is a that is a net number the actual you know there were actually six new charters in the first six months of 2019 you know six denoble banks there was one fail Bank in 2019 which we hadn't seen for a couple of years actually I don't think they're any in 2018 so there was actually probably about 94 consolidations in you know in the year North Dakota state of North Dakota the condition of banks also remains strong you know based on these condition ratios bait you know banks are holding on to the net interest margin 4.0 four percent this year compactly the same is where it was last year for 2018 you know the return on average assets did dip just a little bit went from one point four to one point three seven capital ratios grew from nine point eight nine to two you know four point or to ten point oh four percent so again strong capital ratio the asset quality ratios are all fairly strong as well low in charge up provision to net charge offs is down a little bit still you know again looks it looks very good this doesn't reflect any consolidation you know there it's showing as of June 30th we still had 73 charters in the state which was where we were last year but there is activity in the state you know been a couple of publicly announced transactions first and farmers banks gonna be merged with first state bank before you know that'll happen before the end of the year as well as the black Ridge bank merger that's going to close before the end of the year as well so so we will have some reduction in the number of charters by the end of the year and we've also worked with a number of banks you know that have you know that are looking you know that are expanding their operation and you know growing doing acquisitions in other states Minnesota and South Dakota for instance in Montana so you know there's more activity that I guess the number here shows thank you know in North Dakota and we expect to see that continued Minnesota Minnesota numbers are also are also strong based on these condition ratios banks you know the the net interest margin dipped a little bit but very you know still pretty strong three point nine three percent compared to three point nine five the that the return on average assets slipped just slightly went from one point three three to one point two nine in Minnesota and pork or leverage ratio you know that actually grew a little bit went from ten point six six to ten point seven five so still pretty strong and and the number of banks at the top there it which which it does show here you went from two hundred and seventy nine banks to two hundred and seventy three banks so six less banks and and you'll notice that by but there was also a reduction of five banks and the in banks with assets of less than a hundred million so a consolidation at that lower level in and there these numbers will move before the end of the year as well the one thing I would point out in Minnesota its compared to North Dakota if you go all the way back to 2014 it's a drop from 323 banks to two hundred and seventy three banks just a little under twenty percent for the bank charters in Minnesota where as North Dakota actually when you look at it as a percentage in that five-year span it's a lot less so yeah this sort of has seen some significant M&A activity yep yeah we've had about a 10% reduction something like that yeah um some of the other transaction data you know the whole the whole bank deals again we won't spend a lot of time this is material that's in your material if you if you choose the download or more if you send me an email will ship multi it will email amount to you naturally the the number of bank transactions I mean it appears we're gonna be about the same place we're at 182 this is as of September September fifth so we're at 182 transactions in 2019 compared to 265 and 2018 so I expect will be close to that by the end of the year I guess what may be a little interesting is the size of the transaction they don't notice that you know the the banks you know in 2017 and 2018 the average size of transaction was 545 in 2017 and it was about 634 million in 2018 and 2019 where the average heads of transactions about 1.9 billion and so I had to look into that to see why and there were actually four transactions so far in the u.s. in 2018 what that included banks with assets of more than 50 million 50 billion I should say and the biggest one being the SunTrust Bank acquisition that was a 226 billion so obviously that kind of excused the numbers a little bit and I think the on the SunTrust one the the book that the what I remember is the the price to tangible work with about 178 or something like that is what I looked at on that one we'll get into that later as far as the Midwest area you know that this is the 13 states kind of up in the Upper Midwest here number of transactions so far today we're at 80 you know we're at 83 transactions when you include banks and thrifts with the whole so I expect by the end of the year we're gonna be close to that 2018 level of 100 and you know 116 120 transaction average bank size the other thing that we look at here is you know the you know in in 2017 the average size about 288 million for an average sized transaction which is what you'd expect more in our Midwest Bank sizes here in 2018 it did grow to four hundred and sixty-five and so far in 2019 the average sizes are own you know is around five hundred and thirty million but again there are three three pretty large transactions for the Midwest three that were that had assets of excess of a billion dollars and including Chemical Bank which was I think about 21 billion so again that kind of skews the numbers and it has an impact on it so really the same story as you know as nationally or continuing to see that smaller banks are getting acquired you know and and and you know the reason for that is a lot of smaller banks are feeling that pressure to to sale or to merge to be able to manage you know their stress points and their you know and as a result that there is going to be a kind of a shrinking pool of those banks that you that are available now we're getting to some of the actual pricing data and this one is the head scratcher for me you know it's it reflects the decline or the the decline in the average price for bank transactions we you know in 2017 we're at one hundred and seventy five point seven or one hundred seventy five percent basically a tangible book was the average price 2019 it's a hundred and fifty five and again this is the this is the national information that the p/e ratio price earnings ratio went from 24 down to sixteen and and when you look back on that and the and the condition information that we looked at it you know for Minnesota and North Dakota and and naturally you know there's really no reason for that price decrease based on that you know based on bank operations you know earnings are still the same as they were in their prior year and I you know I guess the theory that was discussed at the bank holding company Association is you got a member that the transactions that are getting reported are the public transactions a lot of those are stocked for ED transactions and and and and the theory is is that the price has often a little bit for some of the publicly traded banks that are that are doing these transactions as a result the the price you know they're pricing out the acquisition targets a little bit lower as well to keep their ratios but you know to get their price you know the stock 4 stock ratios that they want and and that this really is maybe more of a correction you know we had some pretty good increases here you know and a 19% increase from from 2016 to 17 a lot of that had to do with the tax you know the tax law change and the and the Trump administration coming in we had another 7% increase in from 2017 to 2018 and and so this you know maybe it isn't too surprising to see that we have you know about 11 percent decrease so far in 2019 and and you know you know again you know I don't think well we are not seeing that in the ommunity bank transactions that were working in and I do really think that this is really more of an anomaly for the publicly traded banks and the the the stock for stock transactions that are being reported so theoretically I do think that you know the Bank pricing is going to is going to continue to increase you know I I view it more of a little bit of a correction and the publicly reported data I actually did take a look at it as nine-thirty just to see this information was as a beginning of September September 5th and by a 9:30 at the average price it went from one 55.2 160 percent of book so it's I would expect by the end of the year it'll probably be up a little bit anyway but again it's it was kind of a head scratcher when you see the performance information out there that it really is there's no reason from a performance reason why we ought to see a dip in the pricing I think the key there Tim though to is just again this is publicly reported right nation I think and Tim said it but anecdotally what we've seen in the private smaller bank deals there's always unique considerations but pricing really hasn't dipped right at all yep and in the transaction yeah the cash transaction and that was actually talked about at the bank holding company association M&A conference as well as that for the for the cash transactions pricing is kind of tick you know probably at a minimum kind of staying at the same level let's see we did see the same same type of change as far as the publicly traded banks and the in the Midwest the Upper Midwest section here you know we were at 2017 155 times tangible book and one hundred and sixty percent of tangible book in 2018 2019 we're at 136 0.9 so a little bit of a again a little bit of a dip there you know again we're not seeing that in the cash transaction that we're seeing we seen the same type of thing in the in the p/e ratios you know went from 19 actually 20 the last you know 20 times earnings in the last two years down the fifteen point four so I think it's time to buy if the prices are that low you guys get off and buy some banks but no I I do think they're gonna kind of you know rebound and and again we're not seeing you know we're still seeing that one-and-a-half to 175 you know as far as kind of an average price rains and further in more rural areas of probably 175 to to down you know more in the in the in the more urban areas so again we're not seeing that softening and the in the transactions that we're working on this is just that trend again so you know that that that dip kind of does looks pretty obvious in this one here when you kind of see that trend you got it you got it the only thing I was going to point out that when you kind of read out the the price the tangible book for the whole period you know we're at one five five nationally here on this graph one one point four in the Midwest region here you know when you look at the average over the that 11-year period we're at it's actually four nationally it's about a hundred and thirty five so we are still you know significantly above the average it's about 135 and in the region our region it's about a hundred and one hundred and thirty percent of tangible book value and the other the other thing you remember is you know this is this you know when they're showing the pricing you know this is a percentage of tangible percentage of tangible book and you know so basically that means your your bank equities less your goodwill or deposits and other intangibles are being taken out of the capital in a lot of the pricing mechanisms that we see in transactions if there is a you know if it is a pricing mechanism is usually it's based on a tangible base capital you know which would be probably closer to an eight percent number and then the excess capital is either distributed out or paid out at you know no premium so when you convert that to this graph you know you would expect these to be maybe a little bit less than what we're seeing in actual transactions you know as far as a pricing mechanism median this is this is basically the same data though just showing the price earnings you know and again you know we're showing that showing the decrease here to fifteen and sixteen times earnings in in the 2019 year and again the average is probably if the I did pull that number for the whole eleven year period here the averages are about twenty one times earnings nationally and about eighteen times earnings in the Midwest so again we're significantly below that so I did wanna I did throw in a couple graphs that aren't did your material that you thought it'd be interesting to show kind of the de novo activity you know so far this is through October 21st there's been ten de Deauville banks in the nation pretty much all out on the on the East Coast and the West Coast with the exception and there was one in Oklahoma City and I really don't know the history story on that one but otherwise they're all been kind of East Coast and West Coast and that interesting there yeah there really has been no de novo activity we actually been down to see the FDA see with one potential group with yeah ID in connection but but that kind of fizzled out and there really hasn't been anything in the Midwest but I think a lot of that has to do with if you look at the Charter numbers up there yeah you ever seen any of those maps we were down in Arizona and there's 15 Bank charters total in that state branches down there but there's there's only 15 charters and so I think some of the areas where they're doing de Novo's there's a little bit more of an opportunity for a banks startup there's still a fair number of charters in this kind of Midwest quarter all the way from North Dakota down to Texas yeah and and you know a big reason for that is there are a lot of chairs in the Midwest you know I did take a look at if you look at all the charters of the 13 states from North Dakota down to Texas in the Midwest here and we got 60% of the bank charters of the whole nation in those 13 states so there is a lot of banks in in the Midwest and and you know a lot of them you know there's still a lot of banks under a hundred million and and I you know it's still cheaper to buy a biobank than to form a DeNoble Bank with the capital requirements that they're requiring them and we have seen that we have some investor groups come in looking to just yeah by a charter if you can find a twenty-five to fifty million dollar bank you know at least in Minnesota it's somewhere close to the Metro some of the outside investor groups they'll come down and do that rather than trying to take the two years it would take to get it up and running and then whatever the burn rate is so de novo is are still at least in this region stalled out yeah and I don't think we'll see any in you know as long as we still have a pretty good surplus of banks in the in the area here this here shows this this is just that hole to an oil activity for the last 20 years I just think it's kind of an interesting graph I mean you got it gotta remember if you have men in the industry very long it might surprise you but at one point there were you know 100 and some turnover was that a year being formed and you know back in that pre you know that pre-financial crisis area you know before 2009 so I don't know if we'll ever get back to that point but a bit but you know certainly the consolidation is going to continue up in this area with that that was really all we wanted to share on some of the bank prints information any questions on that before we kind of get into the rest of the presentation the next section we wanted to just talk about options for considering your bake investment and kind of Columbia I should have used what Aaron of the Federal Reserve said he said keeping community banks around I like that that may be a better title for this presentation but we just wanted to talk you know you know before we talk about some of the reasons why banks sale we wanted to remind you why a bank investment is an attractive investment you know as we just looked over you know community banks are averaging a 10 percent you know return on average equity you know so the be you know when you compare that to the return on equity that you're going to get in the stock market and especially a stock market that's experiencing the volatility we have right now community bank investments you know do provide pretty consistent returns and and above stock market averages you know so it is really a pretty attractive investment from that perspective you know the tax law you know that if you talk about the dilute of effect of the income taxes but you know but also you know you know which basically are talking about there is if you if you do decide to sell your bank investment you're only gonna have your after-tax proceeds to invest in a stock market but from another you know from a tax perspective you know that the new tax law was really favorable for banks you know the 20% qualified business income banks qualify for that so that's really attractive and the 21 percent see corporated is really attractive so really the tax law changes where really is you know the banking industry really did Bennett for benefit from them a lot and is another good reason to stay in the banking and here and we're going to kind of speed through some of some of these things you know we you know I think maybe the last one I wanted to touch you know these are just some of the some of the reasons to continue to hold but the estate planning and Ramona was just in here talking about some of the S state planning advantages you know with the eleven and a half million dollar exemption roughly you know there's a lot of our closely held bank owners that it may not be subject to estate taxes you know with their with the you know with with that level of of exemption you know especially when you consider that's you know that's an individual exemption so huge opportunities for people to be able to you know plan you know to hold their you know transfer their their bank investment at death and get a step-up in basis in it so again some some pretty significant reasons to why you might want to continue to stay in banking and hold on to your investment some of the other you know some of the other reasons for continuing banking include you know sometimes the bank just is in a position right now to be sold you know if you had if you've had a change turnover in management or you have some kind of regulatory issues sometimes it's better to hang on to that investment and try to kind of get it back into it so that it is more profitable Bank and in a better possession to be sold and of course you know we think banks are you know we know banks are appreciating assets you know we you know a lot of the you know a lot of the you know the you know we've been talking about the price you know the price er you know the price pricing of banks you know you are we kind of are we at the peak right now I you know I really don't think so you know I mean you remember that banks for selling back at 230 times book you know times tangible book value or 24 times you know earnings you know bet you know back in the earlier years you know I I think our girlfriend is going to continue so you know I think by hanging onto your back investment you're going to improve your you know your your your position on that Bank investment if you hang on to it for period of time and of course you know the market you know the market area provides for growth and up in profit profit opportunities I mean we are seeing a lot of banks that are taking advantage of the current market right now and acquiring some of the smaller institutions that do feel the pressure to to sell because because of their having difficulties dealing with some of the things were going to talk about in a second here and and and our growing you know enhancing their market and in their profitability by by growing the bank through some acquisitions again this I know you guys know all this stuff we talked about this every year for the last number of years but I we just wanted to kind of hit touch on that before we get into some of the some of the other strategies that we're gonna talk about here to help these are you know it and I think I can't remember which one of the regulators thought you know talked about you know the you know the some of them the primary reasons these I think I probably the two biggest reasons the two why we are seeing banks for sale liquidity of the bank investments of the huge deal and in succession and you know it you know many times we're seeing banks that have shareholder bases that are aging you know you have Cheryl's that are looking for some liquidity or want to do some diversification to help with their retirement and and a lot of times banks you know aren't in a position to help them with that and so they kind of resolve to a sale to provide that liquidity to the shareholder base and or or maybe maybe perhaps the the bank investment has already been transferred onto the next generation and they're along no longer living in the community and and they don't feel the same you know the same loyalty to the community and and to you know to the bank organization and they want to get you know get some liquidity other in other you know we've we run into the situation as far as management secession you know the banks have have been operating pretty well the last few years and maybe they haven't taken the opportunity to invest in that next level of management and I've actually had those discussions fairly recently with a couple of bank clients where they they feel they need you know they they wish they maybe would have went back five years and and maybe carved out some of that earnings that they that they you know that that they booked to invest in that next level of management and a girl that next level of management because they're they're in a place now where they senior management is sixty plus and and they don't have anybody that can run the bank and so they are feeling pressured to who you know to sell the bank so these are probably the two biggest reasons that we that we see and and again I think it was Dan that said you know do yourself a favor and and get the it you know you know get that succession planning working sooner rather than later because it really is for your benefit of your your organization long-term and we totally agree with that other reasons you know these these are other reasons that and I that were mentioned I think also as far as white banks are looking to sell you know the I don't know that the regulatory burden is maybe is is bad now is what it has you know certainly we still there's still a lot of regulatory burden but I think we're seeing some changes you know the new capital model I think will help a little bit and some of the other regulatory relief that's being talked about a you know all at all I think banks are a little more optimistic under the Trump administration than they were previously and and so I you know it's still probably on the list you know I think more it's probably more banks that are dealing with technology issues banks that are dealing you know with you know with with you know finding personnel you know that the technology issue is a big deal you know and they and and you know they they feel they have to make some pretty significant investments to stay up to speed on that and that maybe they're not getting the you know that they're getting the return on their investment and and and in that case maybe there is a reason why they need to look for a merger partner to kind of to get the Desai's where they can be more efficient as a bank but number one I do think the main reasons why we're seeing its kind of back to that first light as the liquidity issues and the management succession issues I think that's right yeah I I think we have seen you know it depends on where the banks are located at but there are there are some banks to that that sat out the recession and the pricing has come back up and that they're at a point where they think that they can get a high enough price it ties into liquidity but there's some that are selling based on price alone right um and the the Charter structure is it's time for maybe an investor group you l ok at those de Novo's in the old the old model was to start at a novo grow it and then cash out your investor group there are some of those old de Novo's that are maybe sat through the recession and now looking to get out yeah with that I'm gonna turn it over to Tony he's gonna talk about some of the liquidity some of the options that you have for addressing liquidity give you that you want to yeah you gonna stay here I'll wander around up okay alright so and again we've seen a lot of the M&A but rather than talking through what could what do you do with M&A versus you know just if you get to a point where do you sell your bank that that liquidity issue is such a big issue it's been something that we've had a lot of discussions about so what I thought I'd talk about is a little bit of if you've got a more diverse shareholder base if it's if it's closely held there's maybe only three or four shareholders it's it's a little bit different situation but where you've got that broader shareholder group that's maybe aging or have been invested for a long period of time what are your options and it's it's not an easy it's not easy answer it's a privately held organization still is hard to get cash up but there are some things that can be done that we've seen and I'll kind of walk through each step because we've worked we've talked to different clients and we've seen them implement different one of these to varying degrees of diskette success and I'm actually I want to talk about first the kind of a matching program first that's kind of the baseline easiest thing you can do and it's it really is no more than the bank saying look if any shareholders interested in buying stock if it comes available we can keep a list of those names and if anyone comes to us looking to sell their stock we can put those parties in touch and it you want to be careful but it's it's trying to create at least some type of limited market for your shares it's not publicly traded but it is seeing if there's interest from some shareholders and increasing their stake and and then when there are shareholders who are need to liquidate are looking to liquidate for whatever reason it's putting those two in touch they the key here is though it's a privately traded stock so you don't want to the bank or the holding company cannot be seen as a broker dealer as part of this so it typically we've got some guidelines that we talk through with the organizations that are doing this because it they can what they should do is they should make it known and they can at a periodic basis just remind the shareholder groups it and typically that's tied to you know initial announcement and then the annual shareholder meetings to say just remember we have we have or help facilitate a matching program which is if anyone is interested in selling we have a list of buyers who would be interested we can get them those names they can reach out or if someone is interested in buying or increasing their stake we will get their name on that list other than that the the holding company needs to be careful that it's not helping negotiate the deal it's not giving an opinion to value it's not acting as a transfer agent for the money itself really the holding company only thing the holding company should do after putting the buyer and seller in touch they strike their own deal and once they've done that now they're gonna have to make sure that they're working through any type of buy sell or shareholder agreement but once they've done that the holding company's only concern is has there been a valid sale and if there has give us the proper documentation and we'll transfer seller your stock ownership interest to the buyer and and that's that's really all that the holding company should be doing to kind of make sure they're not acne as a security agent but again that's that's a very simple program for organizations to have to provide at least some potential liquidity the next the next type of liquidity programs that we see are different types of repurchase programs by the holding company itself so instead of if you don't have a list of shareholders who are actively interested in buying more stock the holding company itself can look at what whether they want to use some of their excess capital if we're talking about M&A some holding companies have looked around our organizations have looked around and say yeah we really can't find and attract a target or I just had this discussion I've had a bank client who's participated in I think three bids in a row they've tried to be very conservative and and fiscally responsible about how they submit the bids they said you know we're just not in the range that we're willing to pay we're gonna focus instead rather than trying to keep doing M&A that we're not willing to pay what's required we're gonna focus take that extra capital instead and do some repurchase programs and increase the value of the remaining shareholders through that and there's really two ways that can be done for a private holding company the first is the buybacks and the second is kind of a formal tender offer and there's differences between the two from a legal perspective the the buybacks are really a much more open-ended flexible program and and the key there is that it's that it's not a set period it's not a fixed price it's it really is an ongoing consideration by the holding company in in one of two fashions the first is just letting shareholders know look if you if you have a need to sell if you're interested in selling the holding company may consider on a case-by-case basis redeeming shares at a set price and depending on what you have for a buy sell agreement there may be some latitude for what you can set for that price and and how you consider that a lot of a lot of organizations may actually go a little bit further and and kind of as a policy as they're doing some of their budgeting or at the start of the year say this year and they don't disclose this number to shareholders but they'll say this year we're gonna make available five hundred thousand or a million whatever the number is or stock buybacks if we're approached now that's not going out and formally telling the shareholders that the holding company is specifically looking to redeem but there's a number that they have in mind if someone approaches them then they have the authority to buy that back upon a agreed upon price again that the key from a securities regulation standpoint is that it's open and ongoing it's not a fixed offer and it's it's really the Cheryl they're coming to the holding company instead of the other way around there's always still regulatory considerations the Federal Reserve still looks at you know that there's the SR 904 that came back out back in the recession about the need to consult with the Federal Reserve and if there's a redemption over a certain percentage in any given year of outstanding stock that requires Federal Reserve approval you know and we're we've seen that we have seen that work these repurchase programs and kind of you know the the flexible ones is that you know if a shareholder needs some extra liquidity you know there's a section 302 B it qualified redemption and if it's less if you're redeeming less than 80% of their their interest in an S corp world that's treated as an S corp distribution it's not treated as a gain or loss on sale of stock and so there's some real advantages to doing a 302 B election if you're if you're an S corporation shareholder to get some liquidity to a one particular shareholder there it's treated as a dividend to them and so it's just a non-taxable distribution to them and we we've done that for some you know a number of our shareholder groups probably a few of them every year where they were they have a shareholder that needs some liquidity but that would fall under that I would have said yeah yes yeah yeah the other repurchase offer is actually a formal tender offer and that's a now this is this is governed by securities regulations and this this does have some guidelines that need to be followed around it but but it actually it's it's somewhat open-ended but this is more of the concept of the holding company instead of just having an internal policy of if someone comes to us this is the amount we have set aside it's really making a formal offer to the shareholder group to say this year we have this much money we're gonna make an offer out to shareholders at this price up to again five hundred thousand a million whatever the number is and it's gonna be offered to again at this price to these shareholders and and you can tell them what the terms of that offer are and the period of time that it'll remain open and the benefit of that is is it does one it sets some guidelines around what the liquidity event is it puts some pressure on the shareholders themselves to consider whether or not they want to opt out but you get to set the guidelines on it you can decide ooh if it's going to be applied to any shareholders equally so if you have 20 shareholders who come in and say we want to participate in the tender offer it can be done pro rata everybody gets one twentieth it can be done pro rata based shares it can be done we're gonna we're gonna redeem the smallest shareholders first the key is simply when you go out with your offer making sure it's very clear what the terms of that offer are what the total amount is what the price per share is who gets to participate and what's the order that they're gonna be ready and the key then is is following that the specific requirements from a Securities and Federal Reserve perspective the Federal Reserve is going to have the same considerations but the Securities piece has some some disclosure issues fairly simple to follow the biggest of which it has to remain open for at least 20 days I'm gonna speed this up quick because we're getting close and I'm not gonna run us over a couple of other liquidity solutions that we have seen capital raise which seems counterintuitive but we have seen a number of banks do capital raises lately connected to actual stock redemptions and that seems counterintuitive but actually having some portion of the proceeds of a capital raise go to a Redemption can be a good thing for raising capital simply because it it shows that there is an appetite for liquidity on a potential somewhat regular basis so depending on how it's structured and how the disclosures are go out it can show that there may be liquidity events at certain points in time the other thing that we have seen a number of community banks look at are explorers ESOP formation and we probably have one or two Bank clients a year ooh look at starting an esop and and probably that many who actually do in a given year put an esop together now that can provide liquidity but that's not an immediate answer again that that goes kind of almost to the succession planning an esop can be beneficial for liquidity five ten years down the road but the first say you start an esop there's not going to be necessarily a whole lot of liquidity with the ISA so those are those are some things that we've seen again the remaining options really from a liquidity standpoint if you get through those as a private company that the the only other options there's always the option to do a quasi public offering rather than actually register there is the ability to be traded on the Pink Sheets or other that's that's an involved process and then there is the option to do an initial public offering we have seen some of those for the larger banks I'm Alerus just did one but that's with the security regulations now that's that's such an involved process there's not a lot of smaller banks where that's a realistic opportunity right so again our our presentation is focused on then what are some other options and this is something if you were at the bank holding company Association we presented on this Paul sirak and I talked about a case study of one Bank in particular that we've worked with but we've had a couple of others one Southern Minnesota where they've looked at we don't want to exit the banking space but we have some some issues that we can't solve on our own and they're trying to figure out what they can do small mergers and again Tim was specific when we're talking about mergers in a lot of transactions they structure it they call it a cash forward merger meaning at closing one institution merges into another that's the legal structure but the institution that gets merged in their shareholders all get paid cash and and they're out so it's well it's technically a legal merger that's not the type of merger we're talking about here we're talking about really two organizations to share holder groups partnering in some form or fashion and that's not an easy thing to do it takes a very specific set of banks that they have to find the right relationship but if it works it can be a very beneficial thing for both organizations again we put up some of the reasons but what can happen if you find the right partner and you can get comfortable get a working relationship is is ultimately that the whole is greater than the sum of the parts and in the specific cases that we've seen this work one thing that was solved for was one bank had a clear succession planning issue but had some excess capital and ability to provide some liquidity and the other Bank had some succession but an aging shareholder group where some of them were looking for some more liquidity than they were able to provide at the time and and when we talk about merging the groups it doesn't mean it has to be pure stock for stock some of the transactions that we structure and there's still gonna be an organization that survives but we have seen part cash part stock mergers or in the particular case I was talking about the the surviving organization was the one with liquidity so they issued shares but then had 30% of the price paid in cash and that's important there is it there is an exchange ratio where I think it's you have to have at least forty percent forty percent stock yet for the stock exchange to be tax-free the cash is always taxable there's always a basis gain on that but that is that is important but a couple of keys in any transaction like that and this is hard to distill down into a five-minute presentation but a couple of keys one finding the right partner I talked about that but then from the get-go understanding what you have for some type of shareholder agreement that the two merged shareholder groups are going to have to live with because there can be very different cultures it depends on how really transferable one party stock is versus another there's a lot out of there's a lot of issues to resolve there and then really the biggest in any of these comes down to what we call societal issues and it could be things like what's the the surviving name whose name survives what who's gonna be the president who's gonna be the CEO who sits on the board of the bank those type of societal issues are things that that you have to address upfront and that's where finding the right partner discussing those and seeing if you can make that work really becomes important I'm gonna go through just again to that the special considerations that come up and and this is this is true of almost any M&A deal but certainly becomes more relevant if you're trying to do this type of thing because both sides are gonna have to understand when you're when you're looking at doing a merger and you're getting stock instead of cash it's as important for the seller to understand the buyer as it is for a buyer to understand the seller typically in a standard deal if you're the buyer you're gonna need to do due diligence you're gonna want reps and warranties from the seller there's gonna be special covenants on how it operates but if you're you're taking stock as part of it you're investing in the buyer as much as they're investing in you so you want as a seller in that particular case to know the same things about the buyer you're gonna want to understand what their plans are what they're giving you for reps and warranties whether there's any type of third party termination or other issues that come as a result of that transaction due diligence is gonna go both ways in these types of transactions yeah and and I I think that's important because it truly is putting the two together and I'm going to flip back just one last piece because but the the piece that comes in two is that the valuation of the stock it's not going to be one for one that there is going to have to be an analysis of what the value the fair market value of each Bank stock is based on and and typically you need an independent third party to do that value to have some arm's length the parties ultimately have to agree on what the value of each Bank stock is so you can come up with an exchange ratio but there's gonna be things that go into what their trends are recent losses are what's the historical Trading ratio it's not a one-for-one proposition and it's important for legal reasons that that whatever is agreed upon be deemed fair to all shareholders because there are rights triggered on whether it be North Dakota corporate law or Minnesota corporate law there's rights triggered as to what minority shareholders can do if it's it's not deemed fair at all shareholders so with that I think I'm actually good because we have tell think we're done so if there's questions you can certainly feel free to come up and catch Tim and I we can and what we're seeing you know when we work through I mean we probably look at a few of these transactions a year and and you know many times by the time you get down and kind of plug in some values for them and look at the exchange ratios you know it's either not acceptable to wonder the other and they go away but but we are seeing more and more of them and like I said Tony was involved with one with our firm here that that happened just recently in and we are seeing more more of these and I think we will see more and more of these options because it it does allow those organizations to grow that organization and maybe address some some succession issues but you know also address the you know kind of the size issue so that they can better fund some of these costs that they have to deal with so anyway thank you for being here we appreciate you guys being here and see it the reception you