ICBA Community Bank Day - The Independent Community Bankers

ICBA Community Bank Day
Mergers & Acquisitions, Capital
Markets & Bank Valuation
Presented by: Thomas R. Mecredy
Senior Vice President
M&A Outlook
Scale
– Scale has never been more important; it is the biggest driver of
acquisitions/combinations
– More than 50% of deal activity is driven by banks with assets
under $200 million
– MOEs of all sizes are being actively discussed even though many
face significant social challenges
– The market is rewarding strategic deals with reasonable
economic results
3
M&A Outlook
Capital/Regulation
– Acts as a catalyst for sellers, a governor for buyers
– Regulatory approval of deals is no longer a simple “to do” item,
there is a need for proactive upfront management
– Very few all cash deals due to capital preservation
– There is an increasing percentage of negotiated transactions
versus auctions
4
Industry Outlook
•
•
•
•
•
Margin pressure continues
Legislative and regulatory costs and pressure on non-credit products
Cost reduction pressures
Declines in industry employment
Changes in talent needed, including more risk management and
compliance
• Need cost savings and/or revenue growth to offset higher
regulatory/compliance costs
• Need for greater size to absorb costs and attract capital with better
returns - M&A as a solution
5
Financial Industry Overview
Performance and Profitability – Today’s best were once considered median or below
1995
2005
2014
1995-2014
Change
ROA
Median
High Performing Range
1.11%
1.29%-1.56%
0.98%
1.20%-1.53%
0.80%
1.00%-1.37%
Down 31 basis
points
ROE
Median
High Performing Range
12.3%
14.2%-17.2%
10.8%
13.2%-17.1%
7.9%
9.6%-12.7%
Down 434 basis
points
Net Interest Margin
Median
High Performing Range
4.72%
5.16%-6.14%
4.06%
4.46%-5.23%
3.61%
3.90%-4.33%
Down 111 basis
points
Efficiency Ratio
Median
High Performing Range
63.2%
52.8%-58.8%
64.5%
51.0%-58.8%
69.8%
55.8%-64.1%
Up 655 basis
Points
Asset Leverage (x)
Median
High Performing Range
11.19x
12.4x-14.6x
10.89x
12.4x-14.8x
9.6x
10.7x-12.6x
Down 1.54x
11.84%
9.14%
2.25%
Net Income Growth
Source: SNL Financial
6
Financial Industry Overview
Performance and Profitability- A Declining Net Interest Margin
Source: SNL Financial; highlighted periods indicate recessions
7
Financial Industry Overview
Performance and Profitability by Asset Size (All FDIC Insured Institutions)
Efficiency Ratio
Net Operating Expense / AA
90.00
3.00
80.00
2.50
2.00
70.00
1.50
60.00
1.00
50.00
0.50
40.00
0.00
<$100M
$100M-$1B
$1B-$10B
>$10B
Source: FDIC
<$100M
$100M-$1B
$1B-$10B
>$10B
8
Financial Industry Overview
Performance and Profitability by Asset Size (All FDIC Insured Institutions)
NPAs / Total Assets
Reserves / Nonperforming Loans
4.00
120.00
3.50
100.00
3.00
80.00
2.50
2.00
60.00
1.50
40.00
1.00
20.00
0.50
0.00
0.00
<$100M
$100M-$1B
$1B-$10B
>$10B
<$100M
Source: FDIC
$100M-$1B
$1B-$10B
>$10B
9
3.00%
2.50%
2.00%
1.50%
4.00%
2.54%
2.56%
2.62%
2.61%
2.45%
2.16%
1.99%
1.87%
1.81%
1.74%
1.66%
1.65%
1.83%
1.82%
1.71%
1.50%
1.28%
1.16%
1.34%
2.29%
3.29%
3.31%
2.66%
2.16%
1.75%
1.54%
1.22%
1.41%
1.62%
2.66%
2.36%
3.50%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Financial Industry Overview
Banks continue to release reserves
Loan Loss Reserves / Total Loans
1.00%
0.50%
0.00%
Source: SNL Financial
10
Financial Industry Overview
The search for efficiency is a driver for consolidation
• Capturing efficiencies continues to be one of the most compelling forces driving
industry consolidation
• Larger banks are more efficient than their smaller peers, with $5 billion to $10 billion
banks having approximately $2 million more assets per employee than banks less than
$500 million in assets
Assets Per Employee
Source: SNL Financial
11
Financial Industry Overview
Regulatory Compliance-Risk Management
Enforcement Actions
Enforcement Actions as % of Total Institutions
1,400
1,200
1,000
916
800
732
600
400
200
491
260
268
346
416
499
153
104
489
466
0
2008 2009 2010 2011 2012 2013 2014
Informal Orders
9%
2013
9%
2012 6%
326
578
2014
Formal Orders
2011
13%
2010
17%
2009
13%
2008
12%
0%
20%
40%
60%
80%
100%
Source: SNL Financial and FDIC
12
M&A Outlook
Valuation
– Key Characteristics
– Still primarily driven by buyer capacity vs. seller aspirations
– Tangible book value dilution earnback remains the most critical
financial measure
– Highest valuation deals usually executed with premium valued
stock buyers
– Market receptivity to “smart deals” using stock allows sellers to
realize higher effective price than announced value
13
Earnings are the Key Driver for Bank Valuations
•
•
•
Earnings have re-emerged as the primary driver of bank valuations
In 2014, banks with LTM ROAA above 1.00% sold at an average P/TBV of 166%
Comparatively, the average P/TBV for banks with LTM ROAAs between 0% to 0.50% was only
131%
Average P/TBV by Seller ROAA
Source: SNL Financial
14
Texas Transactions – 2014 & 2015
Date
Announced Buyer
01/08/14
01/22/14
02/03/14
02/11/14
02/27/14
03/11/14
03/13/14
03/17/14
04/11/14
04/29/14
04/30/14
05/05/14
05/15/14
06/02/14
06/25/14
07/03/14
07/13/14
07/16/14
07/28/14
08/21/14
09/14/14
09/17/14
10/16/14
12/24/14
12/24/14
12/30/14
01/07/15
01/08/15
02/24/15
03/09/15
03/24/15
03/31/15
04/01/15
05/27/15
05/29/15
Industry Bancshares, Inc.
BancorpSouth, Inc.
Pioneer Bancshares, Inc.
IBERIABANK Corporation
Investor group
Marquette Financial Companies
South Texas Bancshares, Inc.
CBFH, Inc.
Heritage Bancorp, Inc.
Southside Bancshares, Inc.
Turner Bancshares, Inc.
Green Bancorp, Inc.
Carlile Bancshares, Inc.
Independent Bank Group, Inc.
Olney Bancshares of Texas, Inc.
Red River Bancorp, Inc.
First Bank Lubbock Bancshares
Vantage Bancorp Inc.
Allegiance Bancshares, Inc.
Management group
Pilgrim Bancorporation
Park Cities Financial Group, Inc.
Private investors
FNBK Holdings, Inc.
Olney Bancshares of Texas, Inc.
Guaranty Bancshares, Inc.
McGregor Bancshares, Inc.
Guaranty Bancshares, Inc.
First Bank Lubbock Bancshares
Veritex Holdings, Inc.
Overton Financial Corporation
AmeriBancShares, Inc.
First Financial Bankshares, Inc.
Green Bancorp, Inc.
R Corp Financial
City
Industry
Tupelo
Dripping Springs
Lafayette
Minneapolis
Shallowater
Beaumont
Pearland
Tyler
Abernathy
Houston
Fort Worth
McKinney
Olney
Gainesville
Lubbock
San Antonio
Houston
Paducah
Mount Pleasant
Dallas
Dallas
Olney
Mount Pleasant
McGregor
Mount Pleasant
Lubbock
Dallas
Overton
Wichita Falls
Abilene
Houston
Round Rock
State Seller
TX
MS
TX
LA
TX
MN
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
Bank of Brenham, N.A.
Central Community Corporation
C Bar M, Inc.
First Private Holdings, Inc.
Bloomburg State Bank
State Bank and Trust Company
First Amherst Bancshares, Inc.
MC Bancshares, Inc.
Nixon State Bank
OmniAmerican Bancorp, Inc.
Algodon de Calidad Bancshares
SP Bancorp, Inc.
Community Bankers, Inc.
Houston City Bancshares, Inc.
HBank Texas
Chisholm Bancshares, Inc.
Texas Savings Bank, s.s.b.
Medina Bankshares, Inc.
Farmers & Merchants Bancshares
First Paducah Bancshares of Texas
North Central Texas Bancshares
CU Bank Shares, Inc.
Commercial Company, Inc.
First National Bank of Kemp
Vintage Shares, Inc.
Texas Leadership Bank
Oglesby State Bank
DCB Financial Corporation
First National Bank of Colorado City
IBT Bancorp, Inc.
Vision Bank - Texas
Northern Bancshares, Inc.
FBC Bancshares, Inc.
Patriot Bancshares, Inc.
Schwertner State Bank
City
Brenham
Temple
Kerrville
Dallas
Bloomburg
Carrollton
Amherst
Houston
Nixon
Fort Worth
Abernathy
Plano
Fort Worth
Houston
Grapevine
Decatur
Snyder
D'Hanis
Houston
Paducah
Iowa Park
Dallas
Mason
Kemp
Waxahachie
Royse City
Oglesby
Dallas
Colorado City
Irving
Richardson
Chillicothe
Conroe
Houston
Schwertner
Target Financials
Return Return Equity
on
on
to
Assets Equity Assets
State
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
99,748
1,310,971
35,744
357,442
12,893
194,557
18,067
279,776
75,753
1,391,313
27,885
304,009
571,645
322,969
111,559
145,578
73,656
47,403
541,375
45,716
239,891
592,681
37,641
53,873
187,006
75,345
13,598
121,633
41,701
121,420
179,459
48,732
371,810
1,372,471
40,164
1.19
1.15
0.23
0.42
0.08
0.02
-1.62
0.62
0.20
0.48
1.35
0.41
1.36
1.42
1.10
1.51
-0.87
-0.17
0.85
-0.08
0.75
-0.31
0.97
0.36
2.05
0.49
1.00
1.20
0.30
1.02
0.72
1.09
1.10
0.58
0.43
12.82
9.71
2.82
4.59
0.75
0.15
-8.59
7.03
3.23
3.12
13.25
3.73
12.96
17.30
10.31
14.85
-11.24
-1.01
9.56
-0.84
8.09
-2.79
9.87
3.24
21.51
4.19
9.77
6.03
3.07
11.51
7.63
8.81
14.24
6.64
3.62
9.62
9.80
8.55
9.02
11.39
12.81
17.41
8.04
7.12
14.89
10.22
10.79
10.42
8.24
11.70
10.30
7.59
16.57
9.04
9.01
8.85
10.90
9.79
11.38
9.20
11.44
10.88
19.50
9.02
9.55
10.23
12.49
7.59
8.97
12.55
0.62
3.42
0.00
0.00
0.00
1.58
0.00
0.00
0.56
0.95
0.61
1.31
0.88
0.18
0.00
0.25
5.49
0.94
1.24
1.34
0.39
1.87
0.00
3.72
2.30
0.09
0.46
0.80
0.00
0.63
0.29
0.41
0.56
1.43
0.00
NA
191.35
NA
199.79
92.50
NA
58.69
188.24
150.17
147.14
NA
145.30
NA
189.09
162.51
NA
98.34
NA
NA
NA
NA
NA
NA
NA
220.84
NA
NA
NA
NA
172.76
NA
NA
400.20
145.52
NA
NA
212.29
NA
199.79
92.50
NA
58.69
188.24
150.17
147.14
NA
145.30
NA
196.99
162.51
NA
98.34
NA
NA
NA
NA
NA
NA
NA
220.84
NA
NA
NA
NA
172.76
NA
NA
404.53
156.81
NA
NA
14.70
NA
44.44
NM
NA
NM
36.67
NM
43.64
NA
36.49
NA
16.87
16.27
NA
NM
NA
NA
NA
NA
NA
NA
NA
11.52
NA
NA
NA
NA
19.08
NA
NA
16.97
17.69
NA
NA
15.98
NA
17.91
10.54
NA
10.24
20.16
10.69
22.56
NA
15.79
NA
14.86
19.01
NA
7.47
NA
NA
NA
NA
NA
NA
NA
13.64
NA
NA
NA
NA
16.86
NA
NA
20.12
13.76
NA
NA
14.47
NA
15.67
-1.28
NA
-11.16
13.70
4.07
15.66
NA
7.96
NA
12.39
12.02
NA
-0.17
NA
NA
NA
NA
NA
NA
NA
10.37
NA
NA
NA
NA
9.06
NA
NA
15.84
7.41
NA
1,391,313
121,420
270,442
12,893
2.05
0.62
0.61
(1.62)
21.51
6.64
6.28
(11.24)
19.50
10.22
10.71
7.12
5.49
0.56
0.92
0.00
400.20
162.51
170.83
58.69
404.53
162.51
173.79
58.69
44.44
17.69
24.94
11.52
22.56
15.79
15.31
7.47
15.84
10.37
8.40
(11.16)
Summary Statistics:
High
Median
Mean
Low
NPAs/
Assets
Price
to
Equity
Announcement Terms
Price
Price
Price
Premium
to
to
to
on Core
Tang. Equity Earnings Assets Deposits
Total
Assets
$(000)
Type
of
Consideration
Cash
Cash, Common Stock
Cash
Common Stock
Unclassified
Cash
Cash, Dividend to Seller
Cash
Unclassified
Cash, Common Stock
Mixture
Cash
Cash
Cash, Common Stock
Cash
Cash
Cash
Common Stock
Common Stock
0
Cash
Cash
Unclassified
Mixture
Cash
Cash, Common Stock
0
Cash, Common Stock
Cash
Cash, Common Stock
Cash
0
Mixture
Mixture
Cash, Common Stock
Source: SNL Financial
15
Publicly Traded Texas Banking Organizations
Price to:
Company
Ticker
City
Comerica Incorporated
Cullen/Frost Bankers, Inc.
First Financial Bankshares, Inc.
Green Bancorp, Inc.
Guaranty Bancshares, Inc.
Hilltop Holdings Inc.
Independent Bank Group, Inc.
International Bancshares Corporation
LegacyTexas Financial Group, Inc.
North Dallas Bank & Trust Co.
Prosperity Bancshares, Inc.
Southside Bancshares, Inc.
T Bancshares, Inc.
Texas Capital Bancshares, Inc.
Trinity Bank, N.A.
Triumph Bancorp, Inc.
Veritex Holdings, Inc.
CMA
CFR
FFIN
GNBC
GNTY
HTH
IBTX
IBOC
LTXB
NODB
PB
SBSI
TBNC
TCBI
TYBT
TBK
VBTX
Dallas
San Antonio
Abilene
Houston
Mount Pleasant
Dallas
McKinney
Laredo
Plano
Dallas
Houston
Tyler
Dallas
Dallas
Fort Worth
Dallas
Dallas
6/2/2015
Closing
Price
$49.200
$74.570
$30.740
$14.490
$26.500
$21.820
$40.870
$26.550
$26.500
$66.750
$54.380
$26.790
$6.900
$55.070
$61.000
$12.440
$13.990
Date of
Financial
Data
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
3/31/2015
LTM
EPS
Book
Value
Tang.
Book
Value
$3.15
$4.42
$1.41
$0.68
$1.58
$2.04
$2.00
$2.17
$0.96
$2.21
$4.35
$1.01
$0.87
$2.97
$2.98
$2.04
$0.76
$42.12
$43.80
$11.01
$11.22
$14.73
$16.63
$30.77
$24.37
$15.99
$52.20
$47.15
$17.17
$6.10
$29.89
$22.34
$13.52
$11.30
Tang. Dividend
Equity
Yield
Total
Assets
($M)
Selected Financial Information
Equity Return Return NPAs/
to
on
on
Total
Assets Assets Equity Assets
Efficiency
Ratio
65.25%
56.65%
48.05%
59.39%
66.11%
82.37%
55.51%
51.90%
54.56%
69.21%
39.69%
58.39%
75.46%
54.20%
42.07%
71.82%
62.84%
Earnings
Equity
$38.49
$33.26
$9.52
$9.92
$12.51
$13.44
$16.65
$20.10
$12.20
$52.20
$19.47
$13.27
$6.10
$29.44
$22.34
$11.84
$9.15
15.6
16.9
21.8
21.3
16.8
10.7
20.4
12.2
27.6
30.2
12.5
26.6
7.9
18.5
20.5
6.1
18.4
1.17
1.70
2.79
1.29
1.80
1.31
1.33
1.09
1.66
1.28
1.15
1.56
1.13
1.84
2.73
0.92
1.24
1.28
2.24
3.23
1.46
2.12
1.62
2.45
1.32
2.17
1.28
2.79
2.02
1.13
1.87
2.73
1.05
1.53
1.71%
2.84%
2.08%
0.00%
9.43%
0.00%
0.78%
2.18%
1.96%
1.02%
2.00%
3.43%
0.00%
0.00%
1.25%
0.00%
0.00%
$69,336.0
$28,159.0
$6,025.4
$2,252.7
$1,496.0
$12,562.9
$4,258.4
$12,374.4
$6,512.5
$1,300.6
$21,606.9
$4,732.4
$171.2
$17,325.5
$209.5
$1,472.7
$808.9
10.82%
10.34%
11.72%
13.04%
8.20%
14.19%
12.93%
13.09%
11.69%
10.31%
15.28%
9.19%
14.37%
8.76%
11.95%
17.16%
14.23%
0.87%
1.08%
1.63%
0.80%
0.71%
2.05%
0.87%
1.18%
0.92%
0.46%
1.43%
0.58%
2.19%
1.00%
1.68%
2.15%
0.82%
7.92%
10.33%
13.77%
6.23%
7.92%
13.53%
6.61%
9.33%
6.54%
4.34%
9.52%
6.69%
16.08%
10.61%
14.15%
14.92%
6.53%
Median:
18.4
1.31
1.87
1.25%
$4,732.4
11.95%
1.00%
9.33%
Source: SNL Financial
0.46%
0.21%
0.34%
0.63%
0.49%
0.28%
0.43%
1.14%
0.46%
0.64%
0.15%
0.58%
0.60%
0.40%
0.00%
1.54%
0.30%
0.46% 58.39%
16
200
357
# Deals
0
281
230
228
163
178
119
143
288
296
271
270
260
211
1.34
1.25
1.16
1.05
2.18
2.27
2.18
2.13
2.05
1.62
1.22
1.15
2.05
1.71
2.72
2.33
2.22
1.85
400
263
300
504
464
600
279
100
458
500
1.91
# of Deals
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Median Price / Tang. Book (x)
Mergers & Acquisitions- U.S. Banks & Thrifts
Price/Tangible Book Value
Source: SNL Financial
17
Stock is More Common in Deals
•
•
Buyers are using stock in almost 9 out of every 10 deals
Many sellers prefer stock transactions in today’s environment as they believe M&A
pricing hasn’t recovered to pre-recession levels and there is the ability to have the
transaction value appreciate with an increase in the buyer’s stock price
Consideration Trends - Healthy Bank Deals
100%
80%
46.2%
42.3%
51.2%
60%
40%
34.6%
38.5%
19.2%
62.9%
15.9%
31.7%
14.5%
19.2%
17.1%
22.6%
2011
2012
2013
20%
0%
2010
Stock
50.0%
Cash
34.1%
2014
Mixture
Source: SNL Financial
18
Negotiated or One-on-One
• Process can vary but generally involves seller and buyer
exclusively engaging in discussions to merge, may execute
reciprocal NDA with exclusivity period (30-60 days)
• Material terms typically agreed to through use of term sheets or
non-binding letter before comprehensive due diligence
• Buyer and seller will conduct due diligence on each other and
begin negotiating merger agreement
• No need for “market check” if it is a fair deal (is good for
employees, customers and the community)
19
Parameters in Bank M&A Today
Earnings Accretion
–
–
–
–
–
Year one earnings accretion becoming less paramount as deal values continue to rise
Depending on buyer/size, accretion in the first year needs to be meaningful
EPS accretion must justify or counteract any TBV dilution
Market wants to see a strong IRR of 15%+
Training (often overlooked)
TBV Dilution
–
–
Wall street equity research analysts generally want to see a sub-4 year earnback period
Buyers are more willing to stretch TBV dilution, within reason
Efficiency & Cost Savings
–
–
–
Buyers want to see higher cost savings than previous years to increase pro forma earnings and
book value
Average expected cost savings in 2014 were 33.3%, the highest in recent years
Less desire for costly high concentration brick and mortar branches
20
M&A – EPS Accretion
The industry has long focused on earnings accretion resulting from M&A
transactions. The table below shows reported EPS accretion expectations
for transactions over the last ten years where data was available.
21
Tangible Book Value
• Investors are becoming more
comfortable with longer tangible
book value earnback periods
Tangible Book Value Earnback
for Whole Bank Transactions
• The average range of TBV earnback
is currently 3 years, which is up
from 2 years in 2011
• Rising M&A prices are leading to
less EPS accretion and longer TBV
earnback periods (investors are
more comfortable as economy
continues to improve)
Source: SNL Financial
22
Exchange Ratio – Publicly Traded Buyer
Fixed Price – It is what you think it is; same as a cash price
Considerations for buyers and sellers:
Buyer
Seller
Pros
Cons
If stock price goes up during
executory period, deal becomes
more accretive
If stock price declines, deal
becomes more expensive
Price certainty
Could be leaving money on the
table if buyer stock performs well
23
Caps, Floors & Collars
•
Caps: One-sided protection that limits upside a seller can receive and a buyer must
pay in a deal
– Example: fixed exchange up to a certain stock price
– Above that stock price, deal to target becomes fixed
•
Floors: One-sided protection that limits downside a seller can receive
– Fixed exchange ratio down to a certain stock price
– Below that stock price, deal to seller becomes a fixed price
•
Collars
– Combination of a cap and a floor
– Almost all deals that employ price protection use collars in order to offer two-sided
protection
– Collars can be used on fixed price (fixed price within collars, fixed exchange thereafter) or
fixed exchange deals (fixed exchange within collars, fixed price outside the collars)
24
Case Study – Publicly Traded Buyer – Leveraged Seller
Art of the Exchange Ratio – Collar/Cuff
Buyer
Financial Performance
Seller
Financial Performance
$5,848,202
$371,862
Tangible Equity/Assets
10.19%
4.22%
LTM ROA
1.65%
1.01%
LTM ROE
14.00%
22.37%
LTM Efficiency Ratio
48.38%
66.07%
NPAs/Assets
0.37%
0.56%
Tangible Book Value
$9.14
$17.24
Earnings Per Share
$1.41
$4.14
Current Market Value
$28.50
-
Price/Tangible Book
3.12x
-
Price/LTM Earnings
20.21x
-
Total Assets ($000)
25
Case Study
Example of Buyer Stock Price Equaling $28.50
(The 10 Day Average Prior to Executing Definitive
Agreement)
Buyer
Stock Price
$22.50
$23.50
$24.50
$25.50
$26.50
$27.50
$28.50
$29.50
$30.50
$31.50
$32.50
$33.50
$34.50
Seller Receives Seller Receives Purchase Price
# Buyer Shares
Cash
(Million)
2,231,941
$6,781,328
$57.0
2,231,941
$4,549,387
$57.0
2,231,941
$3,317,446
$58.0
2,231,941
$2,085,505
$59.0
2,226,415
$0
$59.0
2,145,455
$0
$59.0
2,070,175
$0
$59.0
2,000,000
$0
$59.0
1,934,426
$0
$59.0
1,873,016
$0
$59.0
1,846,154
$0
$60.0
1,820,896
$0
$61.0
1,768,116
$0
$61.0
Price/Required Tangible Equity at closing = 4.06x
Price/2014 Earnings = 16.23x
Premium on Core Deposits = 14.92%
26
Case Study – Price and Volume Chart
$36.00
1,400,000
$34.00
1,200,000
$32.00
1,000,000
$30.00
800,000
$28.00
600,000
$26.00
400,000
$24.00
200,000
$22.00
0
$20.00
Price
1,600,000
Buyer
Price and Volume Activity
Daily: March 10, 2014 - March 9, 2015
volume
27
Prepare for M&A Success
•
•
•
•
•
•
•
•
Strategic plan
Capital and capital planning
Asset quality
Earnings quality
Management and people
Operational capabilities
Cost savings and revenue enhancements
Appropriate valuations
28
M&A – Due Diligence
Due Diligence
– Credit due diligence – consider outside assistance
– Line up your investment banker early
– Utilize senior management – they will “own” this after the deal,
so get their buy-in upfront
– No question is a bad question; due diligence is not the forum to
show how smart you are. Listen, dig deep and ask questions.
– Involve your regulators early in the process
29
Challenges to Overcome with Target CEO
•
•
•
•
•
•
•
•
•
Fat & Happy
No skin in the game
Needs a job until retirement
New owners will hold him responsible for performance
More difficult to BS a good operator
Likes being the Boss
Embarrassed to admit short comings
Afraid of culture change
Sometimes 2nd or 3rd generation bank CEO
30
Wrong Reasons for a Buyer CEO to do a Deal
•
•
•
•
•
•
Bigger bank, bigger salary
Little or no skin in the game
It’s not his money
Ego
May not understand transaction & damage to shareholders
Pressure from analysts or investors
31
Integration Overview
Success Factors
–
–
–
–
–
Fully integrate the acquisition
Maximize the economic value of the acquisition
Minimal customer impact
Capture the strengths of both organizations
Transfer of loyalties of acquired personnel
Common problems
–
–
–
–
–
–
–
Incomplete integration
“Us” vs. “Them” mentality
Lack of adapting to demands of larger scale
Deterioration of quality of customer service
Slow to take advantage of efficiencies of consolidation
Failure to recognize strengths of acquired organization and key people
Failure to deal with known problems up front
32
Purchase Accounting-Loan Portfolio
Treatment of the Allowance for Loan Losses
•
Determine if any loans to be acquired have deteriorated credit quality
–
–
–
Each loan is recorded at its fair value (taking into consideration credit risk and interest rate) and
there is no initial ALLL recorded
Post acquisition an ALLL would be established for credit losses incurred subsequent to the
acquisition date
Starting “Day 2” need to keep separate set of books for acquired loan portfolios
• Example
–
–
–
Bank pays $800 for a loan with outstanding principal balance of $1,000. At date of acquisition, the
expected credit loss on the loan is $150.
Day 1 journal entry is:
Loan Receivable
$1,000
Cash
$800
Non-credit discount
$50*
Credit related discount
$150**
*Account is accreted into interest income over the life of the loan
**Not recognized in interest income, subsequent changes evaluated in same manner as originated loans. May be recharacterized as acceptable if expected cash flows improve.
33
Capital Raise Options
Strategies for a successful capital raise
1. Have a clear business plan
– Size and nature of offering match use of proceeds
2. Start with insiders
– Strong vote of confidence by insider knowledge
3. Find and nurture a lead investor
– Many other investors want both validation and comfort that someone
is “doing the heavy lifting” on diligence
– Often acts as the price setter
4. Be reasonable on terms
– Recognize need for adequate return for given risk
34
Who Invests in Community Banks?
Two types of investors have differing motivations
•
Insiders / Locals
–
–
–
–
•
Control of destiny: insiders
Support of local community
Prestige
Long term
Institutional investors
– Value appreciation
a)
b)
c)
d)
e)
Internal growth of earnings, book value
Consistent, above average performance
M&A control premium potential
Annual income (dividends)
Short term
35
Criteria for Access to Capital from Private Equity/
Institutional Investors
The investment community’s criteria for banks deemed eligible for
capital has evolved into the following:
•
Critical mass (generally $500 million or greater in assets)
•
No looming balance sheet hole to plug (proactively addressed NPAs)
•
Attractive demographics and ability to generate quality loans
•
Low/manageable level of NPAs with organic capital generation capabilities to
offset future credit costs
•
Qualified management team with a proven track record
•
Loyal and low cost deposit base
36
Private Equity / Institutional Investors Weigh in on
Strategic Relevance
Market Valuation:
•
Returns are a function of five factors: entry point, growth, dividends, exit point
and time horizon
•
With industry growth and exit multiples uncertain, investors are more focused
on entry points
•
Focus on lack of liquidity may cause asset size to increase
•
At the same time, large-cap stocks (which typically trade at premiums to microcap stocks) remain conservative, causing investors to favor these names over
small and micro-cap stocks due to favorable liquidity
37
Capital Components
•
CET 1
– Sum of common stock instruments and surplus, net of treasury stock
– Retained earnings
– Accumulated other comprehensive income
•
Additional Tier 1
– Non-cumulative perpetual preferred stock
– Tier 1 minority interests
– Grandfathered TRUPS (subject to limitation)
•
Tier 2
–
–
–
–
Subordinated debt
Other classes of preferred stock
Non-Tier 1 minority interests
Loan and lease losses < 1.25% of risk weighted assets
38
TCE Ratio for the Industry is at 70-Year High
• Bank TCE ratios fluctuated between 4.6% and 8.1% from 1941-2009 (average
of 6.7%). At the end of 2014, the industry TCE ratio equaled 8.9%.
• The 8% Tier 1 common ratio minimum should not be particularly burdensome
for most banks.
Source: SNL Financial
39
Stock Repurchase Analysis
Total Assets
$500,000,000
Equity
$40,000,000
Earnings
$4,000,000
# of Shares
500,000
Interest Rate
3%
Tax Rate
35%
Shares Repurchase (10%)
50,000
Current "Market Price" Per Share
$80.00
Earnings Per Share
$8.00
Book Value Per Share
$80.00
ROE
10.00%
Equity/Assets
Offering Price
8.00%
Pro Forma Values
Price/
Share
Debt
Book
Book Value
Book (%)
Price
Assumed
Earnings
70%
$56.00
$2,800,000
80%
$64.00
90%
Equity/
EPS
Value
Per Share
ROE
Assets
$3,945,000
$8.77
$37,200,000
$82.67
10.60%
7.44%
$3,200,000
$3,938,000
$8.75
$36,800,000
$81.78
10.70%
7.36%
$72.00
$3,600,000
$3,930,000
$8.73
$36,400,000
$80.89
10.80%
7.28%
100%
$80.00
$4,000,000
$3,922,000
$8.72
$36,000,000
$80.00
10.89%
7.20%
110%
$88.00
$4,400,000
$3,914,000
$8.70
$35,600,000
$79.11
10.99%
7.12%
120%
$96.00
$4,800,000
$3,906,000
$8.68
$35,200,000
$78.22
11.10%
7.04%
130%
$104.00
$5,200,000
$3,899,000
$8.66
$34,800,000
$77.33
11.20%
6.96%
40
10,324
10,100
9,739
9,456
9,241
9,053
8,843
8,755
8,594
8,430
8,175
7,811
7,513
7,245
6,940
6,659
84,290
85,473
86,051
86,559
87,770
89,772
92,030
94,740
97,263
99,152
99,540
98,509
98,183
97,330
96,329
94,715
Total Branches
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
# of Institutions
10,711
83,287
11,159
82,079
11,661
81,342
12,248
80,958
12,950
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
81,245
# of Branches
Industry Consolidation and Branch Trends
Total Institutions
• The total number of financial institutions declined 49% over the last 20 years while the number of branches increased 14%
• The decline in the number of branches over the last few years is predominantly driven by acquisitions and subsequent branch
footprint consolidations of large financial institutions.
Source: FDIC
41
Industry Consolidation and Branch Trends
600
500
400
300
200
100
0
New Charters
Mergers
Failures
Source: SNL Financial
42
Industry Consolidation and Branch Trends
The total number of insured institutions has decreased 64% since 1984. In 1996, the Small
Business Job Protection Act amended the Internal Revenue Code of 1986 to allow qualifying
institutions to become subchapter S corporations for federal tax purposes.
Source: SNL Financial and FDIC
43
Industry Consolidation and Branch Trends
Change in Branches by Year
3,500
2,500
2,710
2,002
2,258
2,523
1,889
1,500
388
500
-500
-326
-1,500
-853
-1,031
-1,001
-1,614
-2,500
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: SNL Financial
44
Industry Consolidation and Branch Trends
Are We Still Overbanked in the U.S.?
• It appears that banks are reacting appropriately to the over-building that
occurred in the mid 2000’s, but does the recent expansion of mobile and
online banking dictate further moves?
Source: SNL Financial
45
Industry Consolidation and Branch Trends
Preferred Banking Method
Internet
31%
Branches
21%
ATM
Mobile
14%
10%
Telephone
7%
Mail
6%
Unsure
•
11%
•
While customer self-service interaction
continues to increase, customers
continue to use the branch to open
accounts, apply for loans and problem
resolution.
Branch transaction volumes are
decreasing and foot traffic is declining
5% annually and overall traffic could
plummet by as much as 60% within 5
years.
Source: SNL Financial and FDIC
46
Pressures Facing Community Banks
• The big banks have gotten bigger, much bigger
• In comparing the top 10 banks (by asset size) 20 years ago to the top 10 banks
today, we see that deposit market share has increased by 40%
Source: SNL Financial
47
Conclusion
•
•
•
•
•
•
•
•
•
Asset quality concerns are near pre-cycle levels
Growth/earnings growth is now driving pricing
Rising rates will again make deposits attractive
Negotiated transactions are becoming favored, which allows sellers to pick a
buyer with the most upside/best currency
Strategic mergers will continue, but will remain difficult
Diminished importance of branch network
EPS accretion and synergies are most important
Challenges of scale for small banks and challenges of regulation for the largest
banks will continue
Focus on tangible book value dilution and immediate EPS accretion and earnback period when pricing a deal
48
Questions?
Intended for institutional investors only. Although the information included in this report has been obtained
from sources we believe to be reliable, we do not guarantee its accuracy. All opinions expressed in this
report constitute the judgments as of the dates indicated and are subject to change without notice. This
report is for informative purposes only and is not intended as an offer or solicitation with respect to the
purchase or sale of any product. The accuracy of the financial projections is dependent on the occurrence
of future events which cannot be assured; therefore, the actual results achieved during the projection
period may vary from the projections. Member FINRA/SIPC.
Tom Mecredy
tmecredy@viningsparks.com
512-495-9890
49