©2014 baird holm llp bank m&a today to acquire or be acquired? amber n. preston jonathan j....

©2014 Baird Holm LLP

Bank M&A TodayTo Acquire or Be Acquired?

Amber N. Preston

Jonathan J. Wegner


Overview

• Market Drivers

• Legal Trends

• Case Study


MARKET DRIVERSBank M&A Today: To Acquire or Be Acquired?


M&A 2013: U.S. Overview

Number of Deals % of Banks

2013 248 3.64%

23-Year Hist. Median 292 3.52%

1990-99 Hist. Median 491 3.90%

2000-07 Hist. Median 272 3.06%

Source: KBW


M&A 2013: Iowa OverviewDate Acquirer Target Structure

12/31/2013 Iowa State Bank (Hull) Iowa State Bank (Remsen) Affiliate Merger

12/28/2013 Central Bank Liberty Bank, FSB P&A

12/6/2013 Pilot Grove Savings Bank State Central Bank P&A

11/2/2013 NXT Bank Liberty Bank, FSB Branch P&A

10/26/2013 Community National BankCedar Rapids Bank & Trust

Co. Merger

10/12/2013 Northwest BankFirst National Bank (Sioux

Center) Merger

10/7/2013 Clear Lake Bank & Trust Co. Community National Bank Branch P&A

8/5/2013Security State Bank

(Radcliffe)Security State Bank

(Hubbard) Branch P&A

7/9/2013 Central State Bank West Chester Savings Bank Affiliate Merger

7/9/2013 Central State Bank Freedom Security Bank Affiliate Merger

7/1/2013 Page County State BankFirst Federal Savings Bank of

Creston Merger

5/13/2013 Quad City Bank & Trust Co. Community National Bank Change in Control

3/1/2013 Community First Bank First Iowa State Bank Change in Control

1/1/2013 Central State Bank Farmers Savings Bank Merger


Iowa M&A: Historic Trends

Conversions Mergers Failures Total

2012 3 7 0 329

2011 2 13 1 333

2010 0 7 0 345

2009 0 8 1 352

2008 1 12 0 361

2007 0 10 1 372

FDIC-supervised banks


Pricing has begun to recover


But the market favors size


Rising costs reward efficiency


Number of Iowa banks by assets


M&A drivers in banking todayMarket Factors

• Low rate environment • Strong agricultural

income• Weak loan demand • FCS/Credit Union

competition• Decline in mortgage

revenues• Succession issues

Cost Drivers

• NIM pressure• Rising compliance costs • Basel III capital

requirements• Pressure on ROA/ROE


M&A drivers in banking todaySellers turning to market

• 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

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


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


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


Underlying financials drive divide

• Assets: $100 million• TCE: $9 million • Net Income: $850,000

– ROA 0.85% – 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


LEGAL TRENDSBank M&A Today: To Acquire or Be Acquired?


Legal Deal Structures

• Broader use of P&A structure– Excluded Assets

• Loans• OREO• Correspondent Bank Stock

– Escrows– Contingent Liabilities



• Traditional stock/merger deals– Special dividend to BHC of excluded assets– Buyers causing sellers to form liquidating

LLCs / liquidating trusts• Servicing provided by buyer


Buyer Protections

• Strong representations & warranties

• Affirmative covenants– Board-meeting access– Continuing due diligence

• Early involvement with regulators



• Key Economic Terms– Minimum Equity and Premium Calculation– Minimum ALLL– AOCI & Unrealized Gain/Loss– Data Processing Termination– Deferred Compensation– Price Protection


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)


Legal Issues

• Asset Quality – Valuation of Investment Securities– Types of Investments– Adequacy of ALLL

• 1-3 Years

– Push-down valuation impact on balance sheet


Legal Issues

• Post-Closing Protections– Indemnification– Escrow/Holdback

• 1-3 Years

– Non-competition


CASE STUDYBank M&A Today: To Acquire or Be Acquired?


Case Study: Party Profiles

Target

• 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

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


Case Study: Other ConsiderationsTarget

• Bank stock loan: $400M• Goodwill: $350M• Core Term Fee: $120M• Severance: $250M?• Bond Valuation?

– Muni Portfolio

• Problem Loans?

Acquirer

• In-Market Competitor• Conditions:

– Bank Stock Loan– Capital Commitments


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


Legal Considerations

• Structure: Merger– Complex pricing formula– Asset quality issues

• Pro Forma HHI: 2400; Increase: 650

• Retention of key employees

• Non-compete covenants


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

©2014 baird holm llp bank m&a today to acquire or be acquired? amber n. preston jonathan j....

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