Bank Mergers and Consolidation: Structuring M&A Deals - - PowerPoint PPT Presentation

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Bank Mergers and Consolidation: Structuring M&A Deals - - PowerPoint PPT Presentation

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Presenting a live 90-minute webinar with interactive Q&A Bank Mergers and Consolidation: Structuring M&A Deals Overcoming Hurdles of Capital Requirements, TARP Funds, and Other Regulatory Demands TUESDAY, DECEMBER 3, 2013 1pm Eastern

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Bank Mergers and Consolidation: Structuring M&A Deals

Overcoming Hurdles of Capital Requirements, TARP Funds, and Other Regulatory Demands

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

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have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

TUESDAY, DECEMBER 3, 2013

Presenting a live 90-minute webinar with interactive Q&A

Mark C. Kanaly, Partner, Alston & Bird, Atlanta

  • C. Robert Monroe, Partner, Stinson Morrison Hecker, Kansas City, Mo.
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Bank Mergers and Consolidation: Structuring M&A Deals

December 3, 2013

Mark Kanaly mark.kanaly@alston.com (404)881-7975 Bob Monroe bmonroe@stinson.com 816.691.3351

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SLIDE 6

Overview of Banking Environment

  • Excess Funding
  • Limited organic loan growth
  • Lingering credit issues – provisions and credit

costs continue

  • Hangover capital structures put pressure on bank

earnings

  • Net interest margin compression

6

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SLIDE 7

Overview of Banking Environment

(continued)

  • Higher Capital Requirements/Less Leverage
  • Higher Regulatory Costs and Scrutiny
  • Intense Pricing Competition
  • Spread crisis
  • Lack of plentiful buyers in $5B+ asset range

7

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SLIDE 8
  • The United States has far more financial institutions than any of the other

major developed economies in the world (sources: CIA World Fact Book; SNL Financial; European Central Bank; Canadian Bankers Association; Japanese Bankers Association)

  • Additionally, the United States has more financial institutions per citizen

than any of those developed economy peers

8

Overview of Banking Environment

(continued)

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SLIDE 9

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Overview of Banking Environment

(continued)

  • This financial services market saturation potentially

sets the stage for massive industry consolidation during the next decade

  • The majority of this consolidation will occur in the

community banking space (less than $10B in total assets)

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SLIDE 10

Types of Banks that are Emerging

  • Smaller Banks ($500 million or less) hoping to

become larger - MOEs

  • Large Number in Midwest hoping to get to $500

million+

  • Survivors and Thrivors
  • Regional Banks increasing Footprints
  • Size seems to be a theme

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Why that Fosters M&A

Lack of robust organic loan growth + Increasing compliance and regulatory costs + Public markets celebrating the stocks of acquisitive banks + Sharp decline in FDIC-assisted transactions ____________________________________ = Significant M&A pressure on banks

  • The analyst and investment banking communities have

been fueling this fire . . .

  • Public market valuations speak clearly to this point

11

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Types of M&A/Trends

  • FDIC Assisted Transactions Dwindling
  • A lot of Asset Purchase Transactions (leaving bad

assets with Seller and entering into Servicing agreements)

  • Traditional Stock Purchase and Merger Transaction
  • More Stock Deals (?)
  • More Branch Deals

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Valuation and Pricing

  • Credit analysis and credit marks dictate pricing
  • Important role of third party loan review
  • Ability to measure / manage risks in resulting loan portfolio
  • Deals are priced based upon book value and not

earnings

  • Analyst community is judging deals by two metrics:
  • Earn-back period for dilution to tangible book value
  • Cost savings
  • Role of Goodwill and Deferred Tax Assets

13

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SLIDE 14

Earnback/Holdback Periods

  • Many deal types (i.e., asset, stock and merger) have

Earnback/Holdback Provisions

  • Similar to Assisted Deals
  • Time Periods vary from 1-3 years
  • Deal Documents very hard to negotiate (indemnity

provisions)

  • Kill many Deals

14

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Tangible Book Value vs. Earnings Analysis

  • Price to Tangible Book Value
  • Derivative of earnings
  • Cited most often in an absence of earnings
  • Sets the pricing ceiling in boom times and the pricing floor

in recessionary times

  • Earnings
  • True measure of profitability and value
  • The key metric in normal economic periods
  • Sets the pricing floor in boom times and the pricing ceiling

in recessionary times

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Tangible Book Value vs. Earnings Analysis

(continued)

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  • Banks historically traded at 13x to 15x core earnings and

sold at 17x to 20x core earnings

  • Rising real estate values, lenient lending standards and

lower compliance costs permitted ROAs of 1.00% or more

  • 5% Tier 1 Leverage was considered healthy, making high

ROEs relatively easy to achieve

  • It wasn’t uncommon for acquirers, returning 1.30% ROA on

5% capital and trading at 380% of TBV, to acquire targets at 17x-20x earnings and still have an accretive acquisition

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Tangible Book Value vs. Earnings Analysis

(continued)

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SLIDE 18

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Tangible Book Value vs. Earnings Analysis

(continued)

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SLIDE 19
  • More restrictive lending standards and fierce competition for good

credits putting pressure on spreads

  • Increased regulatory burden is driving higher fixed compliance costs
  • Both put pressure on ROAs, making 1.00% exceptional instead of the

norm

  • 8% Tier 1 Leverage is the new “healthy,” making high ROEs harder to

achieve

  • Dividend yields will also have a substantial impact on trading price
  • Depressed valuations lead to lower merger premiums (per SNL, YTD

average P/TBV for bank mergers in the Southeast: 105.3%)

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Tangible Book Value vs. Earnings Analysis

(continued)

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SLIDE 20

20

Tangible Book Value vs. Earnings Analysis

(continued)

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21 Across market cycles, larger community banks enjoy a significant trading price advantage over their smaller peers

Source: SNL Financial

Tangible Book Value vs. Earnings Analysis

(continued)

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SLIDE 22

Regulatory and Other Deal Hurdles

  • TARP
  • TRUPS
  • CRA
  • Bank Stock Loans
  • AML/BSA/OFAC Scrutiny
  • QM
  • Consumer Protection Rules
  • Consumer Advocacy Groups

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SLIDE 23

Regulatory Issues Facing Private Equity and Hedge Fund Investors

  • Ownership Thresholds and Resulting Ownership

Structure

  • Voting vs. Non-Voting Positions
  • ROI and Internal Timelines
  • Liquidity Events
  • Multiple Stakes/Co-Investment
  • Passivity Commitments

23

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SLIDE 24

Other Challenges

  • HHI
  • Regulatory Orders
  • Stockholder Challenges (Dissenters)
  • Fairness Opinions for Stock Deals
  • Seller Board
  • Seller Management

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SLIDE 25

Other Challenges (continued)

  • Pricing (be sure purchase price calculations are

understood – use examples)

  • Investment Portfolio Valuations and types of

Investments

25

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Credit Diligence and Risk Allocation

  • Avoid Surprises
  • Conveyance of Order
  • Pro Forma CAMELS 2 Requirement
  • Third Party Loan Review
  • Lending Constraints Going Forward

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SLIDE 27

Legal Due Diligence

  • Review all written and oral contracts as soon as

possible

  • Data processing
  • Employee benefits
  • Real estate being acquired
  • Title work
  • Survey (?)
  • Environmental search

27

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SLIDE 28

Legal Due Diligence (continued)

  • Real Property Leases
  • Personal Property Leases
  • Litigation
  • Securities Issued by Seller
  • Bylaws and Articles (Bank and BHC)
  • Insurance (including D&O and BOLI)
  • TRUPS and TARP (if applicable)

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SLIDE 29

Legal Due Diligence (continued)

  • Other Debt Documents (FHLB & Bank Stock loan)
  • Past Securities Offering Documents
  • Shareholder Agreements
  • Sample of Loan Documents
  • OREO
  • Vendors

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SLIDE 30

Legal Due Diligence (continued)

  • Exams (SAS and Compliance)(be careful)
  • Tax returns
  • Accountant Work Papers
  • Deferred Comp Agreements
  • Employment and Retention Agreements

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SLIDE 31

Earnouts/ Holdbacks

  • Negotiation “Bridge”
  • Gentlemen's wager
  • Equity True-Ups
  • Escrow
  • Warrant
  • Earnouts
  • Challenges in Implementation

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SLIDE 32

Equity True Ups

  • Purchase Consideration Normally Determined Last

Day of Month Prior to Closing

  • May Have an Equity True Up 30-90 Days after Closing

with Independent Consultants Handling

  • Appeal Process

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SLIDE 33

Stock vs. Cash

  • Board Duties
  • Challenges in Valuation
  • Diligence Implications
  • Securities Law Implications

33