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Bank M&A Today To Acquire or Be Acquired?

Bank M&A Today To Acquire or Be Acquired?. Amber N. Preston Jonathan J. Wegner. Overview. Market Drivers Legal Trends Case Study. Bank M&A Today: To Acquire or Be Acquired?. Market Drivers. M&A 2013: U.S. Overview. Source: KBW. M&A 2013: Iowa Overview. Iowa M&A: Historic Trends.

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Bank M&A Today To Acquire or Be Acquired?

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  1. Bank M&A TodayTo Acquire or Be Acquired? Amber N. Preston Jonathan J. Wegner

  2. Overview • Market Drivers • Legal Trends • Case Study

  3. Bank M&A Today: To Acquire or Be Acquired? Market Drivers

  4. M&A 2013: U.S. Overview Source: KBW

  5. M&A 2013: Iowa Overview

  6. Iowa M&A: Historic Trends FDIC-supervised banks

  7. Pricing has begun to recover

  8. But the market favors size

  9. Rising costs reward efficiency

  10. Number of Iowa banks by assets

  11. M&A drivers in banking today Market Factors Cost Drivers NIM pressure Rising compliance costs Basel III capital requirements Pressure on ROA/ROE • Low rate environment • Strong agricultural income • Weak loan demand • FCS/Credit Union competition • Decline in mortgage revenues • Succession issues

  12. M&A drivers in banking today Sellers turning to market Buyers are eager to close Activity is increasing Interest in M&A is high Strategic mergers are the latest trend Buyers are maintaining financial discipline • Sellers presenting cleaner balance sheets • Lower credit marks • Less OREO/Toxic Assets • Higher ALLLs • Pricing coming out of the doldrums • Better performing banks are considering sale

  13. Bank performance improvement • Strong equity market performance in 2013 • Over $1 billion up 83% (122% since 2011) • Under $1 billion up 37% (60% since 2011) • Pricing differential supported by underlying financial performance • Stronger currency for deals

  14. But why still fewer deals? • “Unrealistic” seller expectations • Buyer’s unwilling to close bid-ask spread • But… • Earnings recovery • Lower NPAs & reverse provisions • Sellers unsure where to put proceeds

  15. Underlying financials drive divide • Assets: $100 million • TCE: $9 million • Net Income: $850,000 • ROA0.85% • ROE 9.4% • DCF Value: $9.9MM • Assumptions • 5% growth rate • 12% discount rate • 9% capitalization rate • Profile • 110% P/TCE • 11.6x P/E

  16. Bank M&A Today: To Acquire or Be Acquired? Legal Trends

  17. Legal Deal Structures • Broader use of P&A structure • Excluded Assets • Loans • OREO • Correspondent Bank Stock • Escrows • Contingent Liabilities

  18. Legal Deal Structures • Traditional stock/merger deals • Special dividend to BHC of excluded assets • Buyers causing sellers to form liquidating LLCs / liquidating trusts • Servicing provided by buyer

  19. Buyer Protections • Strong representations & warranties • Affirmative covenants • Board-meeting access • Continuing due diligence • Early involvement with regulators

  20. Legal Deal Structures • Key Economic Terms • Minimum Equity and Premium Calculation • Minimum ALLL • AOCI & Unrealized Gain/Loss • Data Processing Termination • Deferred Compensation • Price Protection

  21. Current Legal Issues • TARP/SBLF • TRUPS • Bank Stock Loans • Mortgage repurchase obligations • FHLB borrowings • HHI/Antitrust • Regulatory orders • BSA/AML Compliance • Fairness opinions (stock deals)

  22. Legal Issues • Asset Quality • Valuation of Investment Securities • Types of Investments • Adequacy of ALLL • 1-3 Years • Push-down valuation impact on balance sheet

  23. Legal Issues • Post-Closing Protections • Indemnification • Escrow/Holdback • 1-3 Years • Non-competition

  24. Bank M&A Today: To Acquire or Be Acquired? Case study

  25. Case Study: Party Profiles Target Acquirer Assets: $63MM Equity: $7.11MM Leverage: 10.75% Tier 1/RBC: 16.95% ROA: 1.09% ROE: 9.85% NPAs: 2.29% Loans: $33MM Securities: $23MM • Assets: $100MM • Equity: $9.76MM • Leverage: 9.72% • Tier 1/RBC: 25.39% • ROA: 0.33% • ROE: 4.93% • NPAs: 1.90% • Loans: $24MM • Securities: $64MM

  26. Case Study: Other Considerations Target Acquirer In-Market Competitor Conditions: Bank Stock Loan Capital Commitments • Bank stock loan: $400M • Goodwill: $350M • Core Term Fee: $120M • Severance: $250M? • Bond Valuation? • Muni Portfolio • Problem Loans?

  27. Case Study: Acquisition Proposal • 100% Tangible Book • $150M Adjustment to Real Estate • $240M ALLL Provision • Bond Portfolio Mark-to-Market • Pre-Closing Loan Review • $500M Escrow for Indemnities

  28. Legal Considerations • Structure: Merger • Complex pricing formula • Asset quality issues • Pro Forma HHI: 2400; Increase: 650 • Retention of key employees • Non-compete covenants

  29. Valuation Issues • Real estate book value • Troubled assets • Sale of troubled assets • Baseball arbitration provision • “Perpetual escrow” for specified loans • BOLI & Salary Continuation Plan • Pre-closing bond valuation • Broker’s fee

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