Austin Associates, LLC 2012 Webinar Series

Winning Strategies for Successful Community Banks

Thursday, March 15, 2012Webinar 11:00 a.m. – 11:45 a.m.

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Presenters

Craig MancinottiManaging Director & PrincipalAustin Associates, LLC

Rick Maroney Managing Director & PrincipalAustin Associates, LLC

www.austinassociates.com

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Austin Associates’ Practice Areas

Investment Banking

Strategic Consulting

Financial Management

Risk Management and Compliance

Technology Solutions

Insurance and Financial Services

www.austinassociates.com

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The New Normal: Keys for Successful Banks

Bank Director Magazine(4Q 2011, Volume 21, Number 4)

Strategy

Capital

Risk Management

Leadership

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Publicly Traded Banks & ThriftsSummary Stock Performance

Asset Size

Number of

Companies

Total Assets ($Mils)

LTM ROAA

LTM ROAE

NPAs / Total

AssetsPrice /

TBVPS

Price / LTM EPS

> $1 Billion 330 $2,458.3 0.72% 6.35% 1.80% 118% 13.6

< $1 Billion 755 $300.1 0.44% 4.11% 2.15% 71% 12.7

Total 1,085 $490.2 0.51% 4.81% 1.99% 81% 13.1

Publicly Traded Banks & Thrifts

Note: Based on core earnings, if available. Pricing data as of 02/29/2012. Note: Excludes M&A targets and those companies without current pricing multiples.

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Capital LevelsMedian Tier 1 Leverage Ratio

Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.

Source: SNL Financial

7.00%

8.00%

9.00%

10.00%

11.00%

> $1 Billion 8.17% 8.46% 8.57% 8.59% 8.56% 8.72% 8.61% 8.74% 8.91% 9.25% 9.66%

< $1 Billion 9.61% 9.54% 9.62% 9.79% 10.00% 10.17% 10.19% 9.83% 9.60% 9.58% 9.84%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y

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Asset QualityMedian Nonperforming Assets / Total Assets

Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only). Includes companies having reported 12/31/11 assets. Nonperforming assets excludes U.S. guaranteed portion of past due loans and other real estate owned (OREO) covered by loss-sharing agreements with the FDICSource: SNL Financial

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

> $1 Billion 0.50% 0.51% 0.44% 0.36% 0.31% 0.33% 0.61% 1.32% 2.20% 2.08% 1.82%

< $1 Billion 0.47% 0.48% 0.45% 0.38% 0.35% 0.37% 0.50% 0.94% 1.39% 1.49% 1.43%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y

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Earnings & ProfitabilityMedian Return on Average Assets

0.00%

0.30%

0.60%

0.90%

1.20%

1.50%

> $1 Billion 1.08% 1.24% 1.19% 1.14% 1.12% 1.06% 0.90% 0.50% 0.36% 0.57% 0.71%

< $1 Billion 0.99% 1.07% 1.02% 1.01% 1.03% 1.00% 0.91% 0.67% 0.50% 0.61% 0.70%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y

Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.

Source: SNL Financial

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Earnings & ProfitabilityMedian Pre-Tax Pre-Provision / Average Assets

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

> $1 Billion 1.89% 2.10% 1.94% 1.84% 1.81% 1.69% 1.51% 1.38% 1.28% 1.41% 1.36%

< $1 Billion 1.50% 1.61% 1.49% 1.48% 1.50% 1.42% 1.31% 1.18% 1.05% 1.12% 1.11%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y

Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.

Note: Pre-Tax Pre-Provision defined as follows: Net Interest Income + Non Interest Income – Non Interest ExpenseSource: SNL Financial

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Earnings & ProfitabilityTotal Revenue Growth

0.0%

40.0%

80.0%

120.0%

160.0%

200.0%

> $1 Billion 10.1% 25.9% 31.9% 42.0% 59.7% 71.2% 80.7% 95.1% 104.7% 117.3% 119.4%

< $1 Billion 4.3% 15.1% 18.9% 24.7% 30.8% 33.3% 36.4% 43.6% 49.3% 55.6% 58.4%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets. Total Revenue = Net Interest Income + Non Interest Income

Source: SNL Financial

2001Y – 2011Y C.A.G.R.

> $1 Billion = 7.3%

< $1 Billion = 4.3%

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Evaluating Strategic Alternatives is a Strategic Planning Process

Effective Strategic Planning for community banks

General Process

1. Solicit input from Board and Key Officers

2. S.W.O.T./Strategic Priorities Questionnaire

3. Evaluate condition and performance of Bank

4. Evaluate market opportunities/limitations

5. Board planning meeting to reach consensus

6. Develop written Strategic Plan document

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First Step: Solicit Input from Board and Key Officers

Start the process with a Confidential Questionnaire

S.W.O.T. Analysis: List 3 Greatest1. Strengths2. Weaknesses3. Opportunities4. Threats

List 5 most important Strategic Planning Priorities

Use Questionnaire Results to Develop Agenda for Strategic Planning Session

Consider using Facilitator

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Review Condition and Performance of Bank

Objective evaluation of balance sheet and income statement

Comparison to relevant peer group

Growth, loan mix, deposit mix, liquidity, asset quality, capital, etc.

Wide range of profitability metrics: “Understand why you earn what you earn”

Identify areas for potential improvement

Understand the impact on your Strategic Planning

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Evaluate Market Opportunities/Limitations

Population Trends

Unemployment

Income Statistics

Housing Market

Major Employers/Industries

Economic Development

Deposit Market Share Analysis

Key Market Opportunities

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Sample Agenda

Market Update: Equity markets, M&A, Regulatory, Economic

Bank Performance Review and Peer Comparison Questionnaire Results Core Strategy: Growth vs. Profitability Expansion Opportunities: De Novo/Acquisition Capital Planning: Alternatives to increase capital Fee Based Business Lines: Trust, Insurance, other Management Succession Establishing Long-term Financial Goals

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After the Planning Meeting…

Prepare written summary of planning meeting

This summary should outline the “consensus” views of the Board

Management is “directed” to develop a written strategic planning document consistent with the Board’s consensus views

The “Strategic Plan” should be ratified by the Board

Review progress Quarterly at Board Meetings

Update the Strategic Plan annually

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Successful Strategies - Case Studies

#1 Balanced Growth and Profitability: Merchants National Bank, Hillsboro, OH

#2 Growth Strategy: Waterford Bank, Toledo, OH

#3 Troubled Bank Capital Raise: Anonymous

#4 Clean Bank Capital Raise: Hills Bancorp, Hills, IA

#5 Deleverage: First Security Bank, Bozeman, MT

#6 Troubled Bank Acquisition: CrossFirst Holdings, Overland Park, KS

#7 Clean Bank Acquisition: Any Bank, USA

#8 Sale: Mainline Bancorp, Inc., Ebensburg, PA

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Case #1: Balanced StrategyCompany Profile

Company: Merchants Bancorp, Incorporated

Bank Sub: Merchants National Bank, Hillsboro, OH

SEC Reporting: No (Deregistered in 2005)

Traded: Private

Assets: $572 million

TARP Outstanding: No

Year Est.: 1879

# of Offices: 12

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Case #1: Balanced StrategyBranch Map – Merchants National Bank

Active Branches of Merchants National Bank

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Case #1: Balanced StrategyKey Strategies – Merchants National Bank

Capital - effective capital management

Growth – opportunistic acquisition

Growth - successful branching strategy

Expenses – efficient operations

People - the right structure and leadership

Translates into strong profitability and enhanced shareholder value

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Case #1: Balanced StrategyStrategic Initiatives – Merchants Bancorp

2003 – repurchased $7M of common stock from a family interest (11%) with internal funds

2005 – completed “going-private” reverse stock split transaction to deregister from the SEC

2009 – acquired CB Bancorp, Higginsport, OH ($111M in assets); a portion of the funding came from the issuance of subordinated debentures to directors

Ongoing stock repurchase program

Established 6 de novo branches since 1990 (8 total offices) – county seat strategy

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Case #1: Balanced StrategyThe Results – Merchants Bancorp, Inc. 2002 – 2011 Performance

% of Avg. Assets Average Range

Net Interest Income 3.99% 3.83% - 4.34%

Non Interest Income 0.49% 0.41% - 0.53%

Non Interest Expense 2.37% 2.07% - 2.68%

Pre-Tax Pre-Provision 1.97% 1.55% - 2.37%

Net Income (ROAA) 1.20% 0.97% - 1.53%

Since 2002, 7.0% CAGR in total revenue

Since 2002, 160% return (book value appreciation plus cash dividends)

2010 – ranked by SNL Financial as one of the top 100 “best performing community banks” ($500M to $5B)

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Case #2: Growth StrategyCompany Profile

Company: Waterford Bancorp, Inc.

Bank Sub: Waterford Bank, NA, Toledo, Ohio

SEC Reporting: No

Traded: Private

Assets: $360 million

Date Est.: August 29, 2007

# of Offices: 1

ATMs: None

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Case #2: Growth StrategyBranch Map – Waterford Bank

Active Branch Proposed Branch

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Case #2: Growth StrategyDe Novo Bank Matures – Waterford Bank

De Novo bank opened August 2007

Niche market – small business, professionals, high net worth

Highly customized, exceptional service; Experienced employees

No trust, No investment products, No insurance

Created mortgage banking division in 3rd year

Keys to success – management, connected directors and access to capital

4th Anniversary – all financial goals exceeded

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Case #2: Growth StrategyStrategic Plan Development – Waterford Bank

Solicited Input from all directors and employees

S.W.O.T. Analysis

Questionnaires: 5 Most Critical Planning Priorities

Consensus: “Stay Focused”

Primary Strategic Objectives

1. Operate as a “High Performance Bank”

2. Culture of “Best Practices”

3. Deliver “Superior Shareholder Returns”

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Case #2: Growth StrategyStrategic Planning Priorities - Waterford

1. Remain focused on existing target markets

2. Recruit, attract and retain experienced staff

3. Enhance Enterprise Risk Management (“ERM”)

4. Offer competitive products and services

5. Expand mortgage banking division

6. Open new branch and expand main office

7. Consider targeted stock offering to new branch customer prospects

8. Prudently pursue advances in technology

9. Maintain credit quality

10. “Targeted” Tier 1 Leverage Ratio of 9.0%

11. Organic Growth: $65 million in 2012, $70 million/year 2013-2015

12. ROA of 1.00% by 2013

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Case #3: Troubled Bank Capital RaiseCompany Profile (Note)

Company: XYZ Bancorp

Bank Sub: XYZ Bank

SEC Reporting: Yes

Traded: NASDAQ

Assets: < $ 1 billion

TARP Outstanding: No

Note: Given the timing of the proposed transaction the identity of this company could not be disclosed

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Case #3: Troubled Bank Capital RaiseCompany Profile Summary

Strong core deposit base

Attractive market

Aggressive expense reduction program

Significant credit losses the past 4 years

Consent Order in place

Nonperforming levels improving but elevated

PTPP earnings still at depressed levels

Stock trades at deep discount to book

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Case #3: Troubled Bank Capital RaiseThe Strategy

Raise $10 -15M of common to achieve IMCRs

Approach local investors (non-shareholders) for $5-8M of offering

Rights offering for $5-10M

Approach institutional investors for balance

The “story” must be developed to address asset quality, earnings and valuation proposition

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Case #4: Clean Bank Capital RaiseCompany Profile Summary

Company: Hills Bancorporation, Hills, Iowa

Bank Sub: Hills Bank and Trust Company

SEC Reporting: Yes

Traded: OTC

Assets: $2.0 billion

ROAA: 2011 – 1.37%; 5 yr avg. – 1.08%

ROAE: 2011 – 13.4%; 5 yr. avg. – 11.3%

Capital Ratios: (1) Tier 1 - 9.80%Total Risk Based - 14.31%

(1) Consolidated ratios before offering

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Case #4: Clean Bank Capital RaiseThe Strategy

Raise up to $30 million in a public offering

Priced at $63.00 per share or approximately 138% of TBV and 10.0 x EPS

Use of Proceeds (as stated in S-3 filing)(i) further capitalize the Bank;

(ii) periodic stock repurchases to create liquidity for stock;

(iii) working capital and other general corporate purposes; and

(iv) potential acquisition opportunities, although there are no current plans or specific targets for any such acquisition.

Results: Sold $26 million in 3 months to existing stockholders and a limited number of new shareholders

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Case #5: Deleveraging StrategyCompany Profile

Company: Inter-Mountain Bancorp, Inc.

Bank Sub: First Security Bank, Bozeman, MT

SEC Reporting: No

Traded: Private: S Corporation - Shareholder Agreement with transfer restrictions

Assets: $566 million at 12/31/11

Year Est.: 1919

# of Offices: 9

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Case #5: Deleveraging StrategyBranch Map

Active Branches of Inter-Mountain Bancorp, Inc.

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Case #5: Deleveraging StrategyMarket Leading Bank Hits Speed Bumps First Security Bank acquired 3 banks since 2000 (West

Yellowstone, Three Forks and Fort Benton); acquired an insurance agency in 2001; acquired a bank branch in 2001; and established 2 de novo branches (Big Sky in 2005 and Bozeman in 2006)

Assets increased from $443 to $604 mm from 2005 to 2010

Net income ranged from $10.0 to $10.2 mm from 2005 to 2007; PTPP earnings over 2.00%

NPAs increased from $4.0 to $27.7 million from 2007 to 2010

Earnings decline in 2008 and 2009, and First Security Bank reports $5.7 million loss during 2010, PTPP declines to 1.17%

Bank enters into MOU in September 2010

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Case #5: Deleveraging StrategyStrategic Plan Development

2-Year Planning Horizon – 2011 and 2012

Solicited Input from all directors and key officers

S.W.O.T. Analysis and Questionnaire to identify critical planning priorities

Strategic Alternatives Considered:

1. Sell – no buyers; high NPAs; create more value by fixing problems; board owns 50% plus

2. Raise Equity – low stock price; dilution concerns

3. Deleverage Balance Sheet

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Case #5: Deleveraging StrategyStrategic Planning Priorities

1. Full compliance with MOU is the “highest” priority

2. Organizational realignment; establish CCO position and Branch President/CLO position; needed to separate credit decision from sales

3. Develop written Capital Plan; achieve Tier 1 leverage ratio of 9.0%; Capital Plan adopted in January 2011; Holding company to borrow $5 million and downstream to bank as equity

4. Engage in a “Moderate Balance Sheet Reduction” strategy; reduce assets by $50 million in 2011; reduce CRE concentration; no branching or acquisitions

5. Develop financial metrics to measure condition and performance of bank: (1) capital; (2) asset quality; (3) earnings; (4) liquidity; (5) interest rate risk; (6) growth; and (7) diversification.

6. Review and update written management succession plan

7. Revise board agenda; enhance board package; improve meeting efficiency; commensurate with size and complexity of bank

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Case #5: Deleveraging StrategyBank Level Financial Forecast – Inter-Mountain

Actual

2011 2012 2011

Assets $552,323 $562,382 $565,802

Net Income $2,724 $4,103 $3,855

Tangible Equity $51,861 $54,323 $53,866

ROA 0.47% 0.74% 0.68%

NCOs $4,004 $2,420 $2,812

NPAs $22,574

Forecasted

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Case #6: Troubled Bank Acquisition (Note)

Company Profile - Buyer

Company: CrossFirst Holdings, LLC

Bank Sub: CrossFirst Bank, Overland Park, KS

SEC Reporting: No

Traded: Private

Assets: $247 Million

Year Est.: 2007

# of Offices: 1

Deal Closing: June 30, 2010

Note: This case study was presented at the 2012 Acquire or Be Acquired Conference by Bob Monroe of Stinson Morrison Hecker LLP

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Case #6: Troubled Bank AcquisitionCompany Profile - Seller

Company: Leawood Bancshares, Inc.

Bank Sub: Town & Country Bank

SEC Reporting: No

Traded: Private

Assets: $92 Million

Year Est.: 2001

# of Offices: 1

Deal Closing: June 30, 2010

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Case #6: Troubled Bank AcquisitionBranch Map

CrossFirst Bank Town & Country Bank

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Case #6: Troubled Bank AcquisitionDeal Profile

Town & Country troubled because of significant asset quality issues

Buyer desires to limit risk from Town & Country troubled loan portfolio

Town & Country’s $65 million loan portfolio has $5.3 million of non-performing loans and the collectability of $15 million concerns Buyer

Seller has no ability to retain troubled assets

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Case #6: Troubled Bank AcquisitionDeal Terms Buyer issues equity units to Seller (Buyer entity is an LLC) Seller contributes all stock of Town & Country to Buyer Seller entity must hold all equity units for 2 years and

cannot distribute to its shareholders Buyer retains Town & County as free-standing bank

(changes name to CFBank) Value of deal is subject to performance of underlying

assets of Town & Country; number of equity units can increase or decrease to zero based on complex formula.

At final settlement, any remaining equity units, if any, will be distributed to Seller shareholders, who then become Members of Buyer

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Case #6: Troubled Bank AcquisitionSummary – CrossFirst and Town & Country

End of story coming soon

Seller shareholders may receive Units of Buyer, but amount uncertain

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Case #7: Clean Bank AcquisitionBUYER Profile

Company: Any Bank Holding Company

Bank Sub: Any Bank

SEC Reporting: No

Traded: Private

Assets: under $1 Billion

Deal Closing: 2012

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Case #7: Clean Bank AcquisitionSELLER Profile

Company: Any Bank Holding Company

Bank Sub: Any Bank

SEC Reporting: No

Traded: Private

Assets: Smaller than the Buyer

Deal Closing: 2012

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Case #7: Clean Bank AcquisitionTypical Process Seller Advisor Conducts Marketing Process

Never expect to buy a bank for $1 less than someone else is willing to pay….DON’T take it personal

Prepare “Indication of Interest” based on Confidential Information supplied by seller’s advisor

Conduct on-site due diligence

Prepare Final Bid

Negotiate Deal Contract

Secure Regulatory Approval

Closing & Integration

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Case #7: Clean Bank AcquisitionKey Tips for Buyers Proactive M&A Outreach…maybe you can avoid the auction! Don’t underestimate culture “fit” or lack of… Critical Financial Metrics

1. Purchase accounting impact2. Pro Forma Capital ratios3. EPS Dilution/Accretion; Cash EPS Dilution/Accretion4. Tangible Book Value Per Share Dilution/Payback Period5. Internal Rate of Return6. Guideline Transactions Analysis7. Discounted Cash Flow Analysis

Due Diligence: “Goldilocks” Approach

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Case #8: Sale StrategyCompany Profile

Company: Mainline Bancorp, Inc.

Bank Sub: Mainline National Bank, Ebensburg, PA

SEC Reporting: No

Ticker: MNPA

Exchange: Pink

Assets: $238 million

TARP Outstanding: $4.5 million

Year Est.: 1944

# of Offices: 8

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Case #8: Sale StrategyBranch Map

Active Branches of Mainline National Bank

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Case #8: Sale StrategyStrategic Planning Overview

Slow growth markets

Profitability depressed – margin compression from lack of loan growth, plus OTTI losses

Consent Order issued March 2011

No significant asset quality issues

TARP overhang of $4.5 mil

Stock was illiquid and traded at deep discount to book (< 50% of TBV)

CEO succession issues

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Case #8: Sale StrategyEvaluating Strategic Options

Earn-out of TARP – partial take out of TARP could be feasible by 5th year anniversary

Capital raise – significant dilution and high execution risk

Sell – valuation analysis; assessment of market timing; and assessment of potential buyer-candidates

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Case #8: Sale StrategyImplementation

Retained Austin Associates in May 2011

Marketing process started June 2011

21 institutions contacted; 5 nonbinding offers received

Offers ranged from 80% - 128% of tangible book; (demonstrates the importance of a market check!)

60 day negotiation process

Deal announced September 2011

Deal closed March 9, 2012

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Case #8: Sale StrategyResults

Deal Value ($mils): $21.4Announcement Date 9/14/2011Announced Deal Value per Share $69.00Consideration 60% Stock / 40% CashPrice / Tangible Book 128%Price / LTM Core EPS 28.9Premium to 09/13/11 Trading Price 294%

S&T Bancorp Financials(For the LTM Period Ending June 30, 2011)

Total Assets ($bils) $4.1Core Net Income ($mils) $45.2Core ROAA 1.10%Core ROAE 7.82%

Tangible Equity / Tangible Assets 10.82%NPAs / Total Assets 1.72%

Stock Price (1 Day Prior to Announcement) $16.93Price / Tangible Book 151%Price / LTM Core EPS 12.2

S&T Acquisition of Mainline Bancorp

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Case #8: Pro Forma Branch MapMainline & S&T

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Question and Answer Session

Craig MancinottiManaging Director & PrincipalAustin Associates, LLC

Rick MaroneyManaging Director & PrincipalAustin Associates, LLC

www.austinassociates.com