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©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
Legal Deal Structures
• Broader use of P&A structure– Excluded Assets
• Loans• OREO• Correspondent Bank Stock
– Escrows– Contingent Liabilities
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
Buyer Protections
• Strong representations & warranties
• Affirmative covenants– Board-meeting access– Continuing due diligence
• Early involvement with regulators
©2014 Baird Holm LLP
Legal Deal Structures
• Key Economic Terms– Minimum Equity and Premium Calculation– Minimum ALLL– AOCI & Unrealized Gain/Loss– Data Processing Termination– Deferred Compensation– Price Protection
©2014 Baird Holm LLP
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)
©2014 Baird Holm LLP
Legal Issues
• Asset Quality – Valuation of Investment Securities– Types of Investments– Adequacy of ALLL
• 1-3 Years
– Push-down valuation impact on balance sheet
©2014 Baird Holm LLP
Legal Issues
• Post-Closing Protections– Indemnification– Escrow/Holdback
• 1-3 Years
– Non-competition
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
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
©2014 Baird Holm LLP
Legal Considerations
• Structure: Merger– Complex pricing formula– Asset quality issues
• Pro Forma HHI: 2400; Increase: 650
• Retention of key employees
• Non-compete covenants