June 6, 2017
M&A Best Practices:Maximizing the success and minimizing the risk of a bank acquisition, sale, or merger
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Olsen Palmer LLC: Firm Introduction and Credentials
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$76.5mm Sale to:Simmons First National Corporation
$84.9mm Sale to:F&M Bancorp, Inc.
$15.4mm Sale to:Hamilton Bancorp, Inc.
$196.9mm Sale to:Pinnacle Financial Partners, Inc.
$32.2mm Acquisition of:Southern Heritage Bank
Section 363 Bankruptcy Acquisition of: Independent Bankers Bank of Florida
$10.8mm Acquisition of:DeSoto County Bank
Acquisition of:Newton County Bank
Acquisition of 3 Branches from:Atlantic Capital Bank, N.A.
Acquisition of 4 Branches from:Atlantic Capital Bank, N.A.
Acquisition of 1 Branch from:Community First Bank
Merger-of-Equals With:Bank of the South
*Includes transactions executed by Olsen Palmer professionals while at other firms.
Who We Are How We Are Different
Selected Recent Assignments
Sell-Side Buy-Side Branch Transactions, Merger-of-Equals
Advising Clients is Our Only Business
Specialization in Banking Institutions
Elite M&A Expertise
• We do not sell products• No investing, trading, underwriting, or lending conflicts
Client-Centric Approach
• Solely-focused on financial institutions• Industry focus and proprietary market intel yields
advice that maximizes value and minimizes risks
• Principals have advised on over 75 M&A transactions with deal values ranging from $2mm to $4 billion
• Total deal value in excess of $600mm over past 3 years
• Relentless dedication to achieving client objectives• Aggressive, energetic, high-touch approach
$46.6mm Acquisition of:Piedmont Bancshares, Inc.
Model Independent investment banking firm
Focus Advising financial institutions across Mergers & Acquisitions
Credentials • SEC-Registered Broker / Dealer• FINRA-Member
Locations • Headquartered in Washington, DC• Regional office in Chicago, IL
Services • Sell-side / buy-side whole-bank M&A• Branch sale / acquisition• Fairness opinions• Valuations• Board-level strategic planning• Section 363 bankruptcy transactions• FDIC-assisted acquisitions
Olsen Palmer LLCIndependent, truly client-centric approach to merger & acquisition advisory
$319.8mm Sale to:FirstBank
Merger-of-Mutuals with:First Mutual Holding Co.
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Advised Seller
February 8, 2017
Has agreed to be acquired by
Advised Acquirer
May 13, 2016
Has acquired3 branches from
Advised Acquirer
April 1, 2016
Has acquired4 branches from
Advised Seller
November 6, 2015
F&M Bancorp, Inc.
Has been acquired by
Advised Acquirer
September 25, 2015
Has acquired
September 11, 2015
Advised Seller
Has been acquired by
Advised Acquirer
August 31, 2015
Has acquired
Advised Acquirer
April 30, 2015
Has acquired
March 6, 2015
Advised Seller
Has been acquired by
October 1, 2014
Advised Acquirer
Has acquired
November 9, 2012
Advised Acquirer
Has acquired 4 branches from
December 14, 2012
Advised Seller
Has been acquired by
December 7, 2012
Advised Acquirer
Has acquired1 branch from
June 30, 2012
Advised Seller
Has been acquired by
November 30, 2007
Advised Seller
Has been acquired by
July 1, 2007
Advised Seller
Has been acquired by
December 13, 2006
Advised Acquirer
Has acquired
August 1, 2006
Advised Seller
Has been acquired by
March 15, 2006
Advised Seller
Has been acquired by
December 31, 2004
Advised Seller
Has been acquired by
Premier Bank of Brentwood
Advised Seller
December 2, 2017
Has been acquired by
September 1, 2006
Has merged with
Advised Merger-of-Equals
Advised Seller
May 11, 2017
Has agreed to merge with
Advised Seller
May 15, 2017
Has beenacquired by
Denotes Tennessee transaction
KEY:
#1 Tennessee Bank M&A AdvisorOlsen Palmer is the #1 M&A Advisor to Tennessee Banks
Note: #1 ranking based on number of Tennessee whole-bank and branch M&A transactions since 2014. Source: SNL Financial. Transactions illustrated include those executed by Olsen Palmer professionals while at other firm.
• #1 – Sell-Side Transactions
• #1 – Buy-Side Transactions
• #1 – Total Transactions
• $1.3 Billion in Total Tennessee Bank M&A Deal Value
#1 Tennessee BankM&A Advisor
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Update: The Tennessee Bank M&A Landscape
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169
274
357
451
524
435
442
450 47
5
334
254
250
211 26
0
270
271 29
6
288
142
118 17
3
148
230
226 28
5
284
243 260
1.1%
1.9%
2.6%
3.4%
4.2%
3.6%
3.9%
4.1%
4.5%
3.3%
2.6% 2.6%
2.2%
2.9% 3.
0% 3.1%
3.5%
3.3%
1.7%
1.4%
2.4%
2.0%
3.1%
3.3%
4.4%
4.6%
3.9%
4.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0
100
200
300
400
500
600
% o
f U.S
. Ins
titut
ions
Num
ber o
f Tra
nsac
tions
Number of Announced Transactions by Year - left axis Total U.S. Institutions Acquired (%) - right axis
U.S. M&A EnvironmentBank merger activity has picked up sharply in recent years; rate of consolidation is near 25-year high
Source: SNL Financial.
Community Bank M&A VolumeNo. of Announced Transactions & Percentage of Institutions Acquired Since 1990
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The Value of ScaleThere is a clear and significant correlation between bank size and profitability
Note: ROAA is adjusted to account for Subchapter-S elections.Source: SNL Financial.
0.61%0.66%
0.80% 0.79%
0.90%0.93%
0.00%
0.25%
0.50%
0.75%
1.00%
$50M-$200M
$200M-$500M
$500M-$1B $1B-$3B $3B-$5B $5B-$10B
Return on Average AssetsAll U.S. Institutions – Median 2016
79.9%
76.5%
68.9%
66.0%64.3%
61.9%
50%
55%
60%
65%
70%
75%
80%
85%
$50M-$200M
$200M-$500M
$500M-$1B $1B-$3B $3B-$5B $5B-$10B
Efficiency Ratio All U.S. Institutions – Median 2016
8
Source: SNL Financial.
Recent Tennessee Bank M&A TransactionsTennessee bank M&A transactions announced since January 1, 2016
National Bank of Tennessee
Farmers Bank
Tennessee M&A EnvironmentTennessee has seen significant bank M&A deal activity since the beginning of 2016
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3
3
3
3
4
4
4
4
5
8
25
0 6 12 18 24 30
First Citizens
Simmons
NCB
Greene CountyBank
Trans Financial
Regions
First Tennessee
BancorpSouth
Pinnacle
First American
Union Planters
12
12
12
14
15
15
15
17
18
21
23
25
0 4 8 12 16 20 24 28
VA
OH
TN
NE
MO
MN
KS
CA
FL
WI
TX
IL
Tennessee M&A EnvironmentTennessee ranks among top 10 most active states, though the acquirer landscape has evolved
Most Active Acquirers of Tennessee BanksRanked by Number # of Tennessee Banks Acquired since 1990
KeyGoing concern
Acquired
TN is Among Top 15 Most Active States for Bank M&ARanked by whole-bank transactions since 2016
Source: SNL Financial.
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Tennessee Competitive LandscapeThe Tennessee landscape has shifted dramatically over the years
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
1998 2016
Top 10 Players in Tennessee: 1998 vs. 2016Ranked by statewide deposit market share
201 203198
194 191 188184
179174
168160
150
160
170
180
190
200
210
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2016 vs. 2006- 20%
Number of Tennessee-Based InstitutionsAll Tennessee-Based FDIC-Insured Institutions
Note: Deposit data as of June 30, 2016; assets data as of December 31, 2016. Sources: SNL Financial, FDIC.
Institution Headquarters Total Assets ($Bn)
Memphis $28.4
Nashville $11.1
Nashville $3.3
Franklin $2.9
Chattanooga $2.7
Lebanon $2.1
Dyersburg $1.6
Nashville $1.3
Columbia $1.3
Farragut $1.3
Top 10 Largest Tennessee-Based BanksRanked by total assets
Indicates new entrant into thetop 10 over the past 20 years
/
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M&A Strategic Alternatives & Best Practices
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StrategicAlternative
Description Merits Disadvantages
• Acquisition of:
o Whole bank
o Branch(es)
o Non-bank
• Consideration paid in the form of either cash and/or stock
• Achieve greater operating scale
• Exploit significant expense synergies
• Balance sheet and loan portfolio diversification
• Unlock incremental Earnings per Share (“EPS”) growth
• Enter new market and/or achieve greater share in existing market
• Likely requires paying premium price
• Requires significant amount of capital
• Potential long-term dilution to tangible book value per share
• Requires regulatory approval
• Incorporates significant execution risks
• Strategic Merger with similarly-sized institution
• Low-to-No Premium Stock-for-Stock Combination
• Achieve greater operating scale
• Exploit significant expense synergies
• Balance sheet and loan portfolio diversification
• Unlock incremental Earnings per Share (“EPS”) growth
• Enter new market and/or achieve greater share in existing market
• Retain partial autonomy
• Conflicting cultures can impede / erode value creation
• “Social issues” commonly prevent agreement: o Ownership % of each bank in combined entity?o Allocation of Board seats to each party?o CEO? CFO?o Chairman?o Name of combined company?o Headquarters location?
• Sale of institution
• Existing shares exchanged for consideration in form of either cash and/or acquirer’s stock
• Depending on outlook of other strategic options, may maximize shareholder value
• In stock-based deals, allows for incremental value appreciation and/or “double dip” if / when buyer subsequently acquired
• Pre-empts erosion in M&A valuation due to increasing supply of sellers and decreasing supply of buyers
• Cedes control
• Cash transaction allows no upside valuation potential
• Appeal of stock-based consideration based on acquirer's liquidity, trading volume, strategic prospects, dividend yield, etc.
• Value maximization likely entails expense synergies
Overview of M&A-Related Strategic AlternativesEach alternative has its own merits and potential disadvantages
Strategic Merger /
Merger-of-Equals
Acquisitions
Sale
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Best Practices: Acquisition(s)
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Action Description
Define • Strategy and rationale for acquisitions
Establish • Clear strategic and financial criteria
Analyze • Financial implications of any potential transaction, especially EPS, IRR, Book Value Earnback & Capital
Assess • Capital capacity to consummate an acquisition: cash, common stock, preferred stock, debt, etc.
Apprise • Regulators of potential M&A plans
Understand • Legal and fiduciary implications of M&A
Educate • Board and key constituents on M&A landscape, valuation, deal process, fiduciary duties, and risks
Identify • Broad list of potential targets
Initiate • Relationships with potential targets
Engage • Expert advisors –investment banker, legal, accounting – well before any potential deal
Acquisition Best PracticesDefining a clear strategy will increase the success and minimize risk of pursuing acquisitions
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Operating Scale
Diversification
Enhanced Fee Income
Cultural Compatibility
Market Share
Maintain Brand / Identity
Minimize Ownership Dilution
Human Capital
Enhance Overall Franchise Value
Deposit Funding and/or Loan Growth
Strategic ConsiderationsStrategic Rationale for an Acquisition
Criteria:Earnings per Share (“EPS”)
Accretion
Internal Rateof Return
(“IRR”)
Tangible Book Value Dilution
Earnback(in Years)
Regulatory Capital
(Leverage Ratio)Description:
Customary > 0 - 5% 10 - 15% 3-5 years > 9 - 10%
Exceptional > 5 - 10% > 15 - 20% < 3 years > 10%
Sub-Optimal < 0% < 10% > 6 years < 9%
Financial ConsiderationsFinancial Rationale for an Acquisition
Acquisition RationaleAny acquisition should satisfy previously-established financial and strategic criteria
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Best Practices: Merger / Combination / Merger-of-Equals
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Merger Characteristics and Best PracticesStrategic mergers have unique elements to be considered
Advantages and Risks
Advantages:
• Leverage fixed costs over larger asset base
• Solve succession issues
• Increase shareholder base / stock liquidity / price multiples
• Diversify markets / loan portfolio
• Create greater lending potential lending limits
Risks:
• Perceived loss of control (board/ management/ shareholders)
• Disagreements over relative value contribution
• Personalities / egos
• No premium – no pressure to do the deal
• If private, may trigger SEC registration
Non-Financial Issues Determining Ownership Split Best Practices
•Company and bank name
o Surviving name / charter
•Company and bank headquarters
•Resulting board of directors:
o # of seats each / titles
•Resulting CEO and transition plan, if applicable
•Senior management structure
o All C-level positions
•Employment contracts / severance / stay bonuses
•Resulting benefit plans
•Registration or exemption of securities being issued
•Balance sheet contribution:
o Loans
o Core deposits
o Nonperforming assets
•Equity Contribution:
o Tangible common equity
o Adjusted tangible common equity (w/ fair value adjustments)
•Earnings Contribution:
o Net Income
o Normalized Net Income (for nonrecurring items)
o Pre-Tax Pre-Provision Income (core earnings)
•Market Capitalization
•Evaluate rationale for a combination…i.e., unlocking value by realizing greater operating scale
•Remain flexible and approach negotiations collaboratively
• Identify potential counterparties with complementary social issues
“Secret Sauce” of a successful merger:Complementary management succession
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Merger Key Issues and QuestionsA discussion of tactical and strategic perspectives is recommended
Board Dynamics • Role and involvement of Board in decision-making?• Meeting frequency and committee structures?
“Best Athlete” • Confirmation of shared perspective on selecting “best athlete” for all relevant positions
• Confirm timing and expectations of CEO transitionCEO Transition
• Shared long-term strategic vision? Long-Term Vision
• Comfort with evolving toward a growth-oriented strategic bias?• Philosophy on follow-on acquisition(s) of smaller institutions?
Growth Outlook
Credit Culture • Compatible perspectives on loan growth, asset classes, lending limits, credit quality, etc.
Technology • Outlook on technology, systems, products, functionality, etc.
Regulatory • Views on and status of relationship with relevant regulators
Geography • Discussion of any relevant geographic implications
Synergies • Timing and scope of post-combination expense reduction
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Best Practices: Sale
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Action Description
Understand • M&A environment, deal drivers, and valuation implications
Educate • Board and key executives on M&A landscape, valuation, deal process, fiduciary duties, and risks
Review • All potential strategic options periodically (e.g., quarterly, semi-annually, annually)
Determine • Your bank’s estimated actual market value before initiating a sale
Identify • (And actively monitor) list of potential acquirers
Initiate • (And maintain) relationships with potential acquirers
Evaluate • Best option for approaching sale: 1) one-off, 2) discreet process, 3) broad auction
Revisit • Term and penalties of any long-term commitments, especially data processing
Refresh • Employment agreements and affiliated documents
Avoid • Window Dressing
Engage • Expert advisors –investment banker, legal, accounting – well before any potential deal
Sale Best PracticesObserving several key best practices in pursuing a sale will maximize value
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Options for Exploring a SaleThere are generally 3 options for conducting a sale, each with implications on confidentiality and valuation
1. Unilateral Discussions 2. Discreet Marketing Process 3. Broad Auction
Description Discreet negotiations w/ only one party Simultaneous discussions w/ several parties Formal auction among multiple parties
No. of Parties Involved 1 2 - 10 > 10
Benefits• Maximizes discretion• Greater diligence on prospective acquirer• Enhanced relationship with acquirer may
correlate to higher value
• Avoids “all eggs in one basket” approach of unilateral discussions
• Allows for leveraging multiple parties• Utilizes proprietary market intelligence
to exclude irrelevant parties
• Typically maximizes value• Maximizes negotiating leverage• Minimizes the duration to closing
Limitations • Value may be lower than broad auction• Longer duration to closing
• Less discreet than unilateral discussions• Value may be lower than broad auction
• Least discreet options• Arms-length process may dissuade
certain buyers
Summary: DiscretionValue MaximizationSpeed to Closing
Low
High
Low
High
Low
High
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M&A Case Study: Sale of Clayton Banks to FirstBank
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M&A Case StudyIn largest TN deal in over 15 years, Olsen Palmer advised Clayton Banks in sale to FirstBank
Transaction Profile
Branch Footprint Transaction Summary and Valuation Multiples
Branch Key:
Financial and Operating Summary
February 8, 2017
Advised Seller
The undersigned served as financial advisor to Clayton HC, Inc., parent company ofClayton Bank & Trust and American City Bank
Have agreed to be acquired by
(13)
(45)
(5)
Original As-AmendedTransaction Date February 8, 2017 May 26, 2017Anticipated Closing Date Q3 2017 Q3 2017Form of Consideration:
Stock 5,860,000 shares 1,521,200 sharesCash N/A $124.2 mmSpecial Dividend $79.5 mm $79.5 mmDebt $60.0 mm $60 mmTerms of Debt 5.5% fixed-to-floating, due 2027 5.5% fixed-to-floating, due 2027
Note: Value reflects FBK’s close on 2/7/17. Clayton Banks’ financial information is as of Q4 2016 and has been tax-effected to reflect “S” tax election. Source: SNL Financial
Location Knoxville, TN Tullahoma, TNYear Established 1889 1974CEO Travis Edmondson Troy MartinBranches 13 5FTE 200 59Assets ($mm) $886.9 $307.9ROAA (LTM) 2.5% 1.7%Efficiency Ratio (LTM) 34.1% 42.8%NPAs / Assets 2.6% 1.6%
Type Acquisition of 2 bank subsidiaries from 1 parent holding company
Acquirer • Parent: FB Financial Corporation (NYSE: FBK)• Bank Subsidiary: FirstBank
Seller • Parent: Clayton HC, Inc. • Bank Subsidiaries: Clayton Bank & Trust, American City Bank
Transaction Value:
• Original: $284.2 million (at agreement date 2/2/17)• As-Amended: $319.8 million (at amendment date 5/26/17)
Rationale• Knoxville scale & management• Market extension in Tennessee• Compelling financial returns
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-20%
0%
20%
40%
60%
80%
100%
120%
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17
FirstBank (FBK)
SNL U.S. Bank Index
Source: SNL Financial.
FirstBank vs. SNL U.S. Bank IndexPercentage Change – Since FirstBank Initial Public Offering
U.S. Presidential Election 11/8/2016Share Price: $20.84FBK Initial Public
Offering 9/15/2016Share Price: $19.00
Earnings Release 1/26/2017
Share Price: $24.99
Earnings Release 10/27/2016
Share Price: $21.64
Announcement of Clayton Banks Acquisition 2/8/2017
Share Price: $24.21
M&A Case StudyFirstBank’s stock price has increased 43% since announcing the acquisition of the Clayton Banks
Earnings Release 4/24/2017
Share Price: $35.71
Christopher OlsenManaging Partner
O: 202.627.2043M: [email protected]
2020 K Street NWSuite 450Washington, DC 20006
www.olsenpalmer.com
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General Information and Limitations