How Do You Make Your Bank Relevant in

Acquire or Be Acquired 2012
How Do You Make
Your Bank Relevant in
Today’s Consolidating Industry?
Mark R. McCollom – Senior MD & Head of Financial Institutions Group
Matthew Jozwiak – Vice President, Financial Institutions Group
Griffin Financial Group, LLC
January 29, 2012
Today’s Talk
Page
3
♦
Presentation Overview
♦
Relevance Defined
10
♦
What Is The Economy And Demographic Change Telling Us Today About
Relevance?
17
♦
How Does Relevance Impact Industry Consolidation?
37
♦
What Do Institutional Investors And Private Equity Have To Say
About Relevance To Investors?
59
♦
What Do I Do If I’m Not Relevant To Investors Or M&A Acquirers?
69
♦
Q&A
81
2
Presentation Summary
What We Explore Today Is “Relevance” In A Changing Bank Marketplace
To:
♦
Potential Merger Partners
♦
Investors Who Provide Growth Capital
3
The Changed Landscape
2007
2011
2013
Loan Growth
to
Deposit Growth
to
NPAs + 90 (all categories)
30-89 days past due
ALL/NPA + 90
Foreclosures
Net Interest Margin
to
Non-interest Income
to
Non-interest Expense
to
Capital Markets Access
to
Valuations
…
Regulatory Pressure
…
“Where We Are
Today Is Where
We Expect We
Will Be In
Twelve Months –
Maybe More”
Mark Zandi, Chief
Economist, Moody’s
Analytics (October 2011)
4
Returns For Community Banks Have And Will Continue To Suffer
Margin
ALLL
Net
Non-Int Income
G&A Expense
Net
Taxes @ 35%
ROA
TCE
ROE
2011
3.50
(0.20)
3.30
0.40
(2.30)
1.40
(0.49)
0.91
2013
3.20
(0.15)
3.05
0.35
(2.38)
1.02
(0.36)
0.66
7.00%
13.00%
8.50%
7.80%
Already high at end of 2011 because
of increased cost of insurance,
regulation and supervision
Margin compression due
to increased competition
and flat yield curve
Improvement very gradually
in economy over a longer
period of time than we’d like
Reduction in overdraft &
interchange fees and
competitive pressure
Future increase in
compliance costs net of
savings initiatives
Higher capital requirements
under Dodd-Frank and Basel
III and more severe risk
weighting … coming soon
Lower returns
5
Over The Last Ten Years, Large Banks Have Typically Been Able To Out-Earn Smaller
Banks Due To Size And Scale And The Ability To Leverage Operating Expenses
Median ROA of Commercial Banks and Savings Institutions
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
0.87
0.97
1.01
1.04
1.01
0.91
0.36
0.43
0.51
0.64
0.61
0.68
0.20
0.42
0.32
0.35
0.42
0.53
0.77
0.74
0.62
0.57
0.64
0.62
0.96
0.93
0.84
0.75
0.79
0.83
Median ROE of Commercial Banks and Savings Institutions
2002 2003 2004 2005 2006 2007
2008
2009
2010
2011
3.33
4.66
4.75
6.54
6.24
6.06
2.43
3.97
3.08
3.50
4.28
4.70
7.17
6.63
5.83
5.38
6.29
5.51
8.66
8.73
7.74
6.75
7.54
7.28
> $20 Billion
$5-20 Billion
$2-5 Billion
$500 Million - $1 Billion
$250-500 Million
<$250 Million
> $20 Billion
$5-20 Billion
$2-5 Billion
$500 Million - $1 Billion
$250-500 Million
<$250 Million
1.47
1.27
1.24
1.20
1.19
1.04
16.95
14.75
13.85
13.40
12.65
9.92
1.40
1.20
1.24
1.16
1.13
1.00
15.58
14.17
13.73
12.80
12.23
9.42
1.31
1.26
1.23
1.16
1.12
1.00
15.34
12.91
13.54
12.69
12.19
9.54
1.33
1.31
1.24
1.18
1.17
1.03
14.47
13.69
13.48
12.81
12.71
9.64
1.27
1.16
1.23
1.16
1.18
1.00
13.96 8.72
12.04 8.49
12.76 10.17
12.89 10.79
12.30 10.50
9.22 8.21
♦
During strong economic times, larger banks meaningfully out-perform community banks
♦
During weak economic times, the larger banks “give bank” some of the excess profits
Source: SNL Financial.
Includes all commercial banks and savings institutions.
6
Loan Demand Contracted Since The Onset Of The Crisis
% Loan Growth from 2004 - 2008
% Loan Growth from 2008 - 2011
Loan
CAGR
(% )
Total
Real
Estate
(% )
Total
Real
Estate
(% )
Banks & Thrifts > $10 Billion
12.47
57.55
Banks & Thrifts > $10 Billion
(2.55)
57.36
Banks & Thrifts $1-10 Billion
6.74
74.25
Banks & Thrifts $1-10 Billion
(6.30)
69.20
(0.28)
76.57
Banks & Thrifts < $1 Billion
(5.00)
74.66
National Banks and Thrifts
Segmented By Asset Size
Banks & Thrifts < $1 Billion
National Banks and Thrifts
Segmented By Asset Size
Source: SNL Financial. Data includes exchange-traded bank and thrift aggregate data.
Residential mortgage loans include 1-4 family mortgages. Home equity loans include revolving home equity and closed end seconds.
Loan
CAGR
(% )
7
Too Many Banks For A Contracting Loan Demand
10,000
9,000
8,000
Number of Institutions
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
>$20B
$5-$20B
$1-$5B
$500M-$1B
$250-$500M
$0-$250M
_____
Source: SNL Financial
2005
68
124
440
617
1,242
6,428
2006
64
122
465
665
1,227
6,224
2007
67
120
485
668
1,235
6,039
2008
68
117
492
722
1,250
5,730
2009
59
114
502
713
1,284
5,414
2010
62
108
499
677
1,219
5,165
2011
61
108
500
686
1,191
4,960
8
The Name Of The Conference Is
‘Acquire Or Be Acquired’…
In The Era Of Shrinking Margins And Slower
Loan Growth, We Wonder If A High Percentage
Of Banks Less Than $500 Million In Assets Can
Be Either…
Relevance Is The Key
9
Relevance Defined
10
Relevance Defined
♦
To the point; germane, pertinent; Latin root is relevare – “to lever, lift up”
♦
As for-profit financial institutions, the over-arching theme is the creation of
shareholder value
♦
Other themes, constituencies march in tandem with, or get in the way of, this
central purpose (communities, customers, employees, regulators)
♦
How do you stay relevant – “lifted up” – to these competing groups of
stakeholders?
♦
Remaining relevant to each of these groups is more important today than ever:
•
Investors: Relevance, along with liquidity and market capitalization, will drive investor
demand
• Acquirers: Relevance will drive whether you will be acquired, by whom and your exit
pricing
• Customers – Earning asset growth is material concern for most community bank (and
larger) CEO’s today
•
Regulatory Headwinds – Not remaining relevant decreases your opportunity for a “seat
at the table”
11
So, Why Is Strategic Relevance More Important Today Than
Yesterday?
♦
Reason #1 – Our sector is significantly out of favor with investors vs. the prerecessionary boom
Number of Public Banks
1,400
♦
# of Public
Banks Down
11.0%
♦
Market Cap
Down 45.8%
♦
Remaining
Banks have
Lost 39.1%
Of Market
Value On
Average
1,350
1,300
$1,526.1 in
Market Cap
$743.2 in
Market Cap
1,250
1,200
$827.4 in
Market Cap
1,150
1,100
2002
2005
2008
Market Cap ($ Billion)
2011
2014
♦
With less investor demand for the sector, competition for investor capital will, and
has, intensified
♦
As recently as 5 years ago, a moderately performing community bank could gain
access to public capital sources. This has largely dried up in recent quarters
__________
Source: SNL Financial
Includes all publicly traded banks and thrifts
12
So, Why Is Strategic Relevance More Important Today Than
Yesterday? (cont.)
♦
Reason #2 – Your customers are changing, in many ways
♦
Customers are shifting from loyalty to ambivalence (or worse) as open architecture
technology has lowered switching costs, and put the customer in charge of their
relationship more than ever, instead of being a “hostage” to legacy systems and
brick and mortar locations
♦
Staying attuned to changing demographics will increase your bank’s chances for
success and continued relevance 5-10 years from now (more on this later)
13
So, Why Is Strategic Relevance More Important Today Than
Yesterday? (cont.)
700
300
600
250
500
200
400
150
300
100
200
Price/TBV (% )
Reason #3 – Less Liquidity Events, and at Reduced Valuations
Number of Deals
♦
50
100
0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
Bank & Thrift Company
Government Assisted
Thrift Merger Conversions
P/TBV
♦
With less “tickets being punched,” banks need to carefully evaluate where they fit
in the local, regional banking landscape in order to properly manage investor
__________ expectations
Source: SNL Financial
Includes all announced transactions
For the time frame studied SNL is known to omit very small deals and we approximate that number to be 10-15% of the total pool on any given year
14
So, Why Is Strategic Relevance More Important Today Than
Yesterday? (cont.)
♦
Reason #4 – De Novo’s No Longer Have Attractive Options For Liquidity
Number of De Novo Banks
250
198
200
155
146
150
98
100
50
159
152144
135
96
104
74
70
22 26 26
-- -- - - -
95
14 11 18
5
- 1 1
31 35 31
100
73
62 66
84
69
44
20
22
2 -
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-
De Novo's Started
♦
De Novo's Acquired/Failed
Almost 1,800 new banks were created over the last 20 years and only 600 have
been acquired or failed – what options remain today for the remaining 1,200?
__________
Source: SNL Financial
15
So, Why Is Strategic Relevance More Important Today Than
Yesterday? (cont.)
♦
Reason #5 – The Pool Of Viable Buyers’ Currency Has Been Cut In Half
700
350%
319%
600
300%
280%
296%
279%
276%
240%
500
250%
259%
400
218%
216%
212%
185%
300
200%
180%
155%
159%
152%
145%
155%
137%
112% 100%
200 108%
100
0
1990
$5-$20B 127
$1-$5B 484
P/TBV 112%
_____
Source: SNL Financial
150%
P/TBV (%)
Number of Institutions
239% 242%
50%
1991
125
445
155%
1992
119
435
159%
1993
122
414
152%
1994
138
392
137%
1995
135
415
180%
1996
134
389
218%
1997
115
364
296%
1998
101
382
259%
1999
109
377
242%
2000
117
369
239%
2001
117
370
240%
2002
112
383
216%
2003
120
396
276%
2004
119
409
319%
2005
124
440
279%
2006
122
465
280%
2007
120
485
212%
2008
117
492
185%
2009
114
502
145%
2010
108
499
155%
2011
108
500
108%
0%
16
What Is The Economy And Demographic Change
Telling Us Today About Relevance?
17
Economic Growth
Update on Economy
(October 2010)
Never???
Previous peak
Return to
2006 peak
2006
4Q09
2015+?
Today?
Date
OR…
18
Economic Growth
Update on Economy
(November 2011)
Never???
Previous peak
Return to
2006 peak
2006
4Q09
2015+?
Today?
Date
19
Losing Faith
20
“Where We Are Today Is Where We Expect We
Will Be In Twelve Months – Maybe More”
Mark Zandi, Chief Economist, Moody’s Analytics (October 2011)
21
“The odds of a double dip Recession in
the next six months are about 40%”
Mark Zandi, Chief Economist, Moody’s Analytics (November 2011)
22
“The odds of a US Recession in 2012
stand at more than 50%”
San Francisco Fed (November 2011)
23
“The United States has a 40%
chance of slipping into a double-dip
recession in 2012…”
Doug Duncan, Fannie Mae Economist (December 2011)
24
Consumer Lending Demand Will Remain Weak
♦
Households Have Significantly Deleveraged
25
Residential Lending, Driven By Housing Demand, Has Hit Bottom
– Maybe
26
Negative Equity Is Still An Issue And The Later The Recovery, The
More Acute The Problem – Home Equity Lending Will Remain Sluggish
27
Non-Financial Corporations In The US Have Low Debt And Close
To Record Cash Reserves – Outlook For C&I Is Weak
Cash And Net Long-Term Debt As A Share Of Balance Sheet Assets
__________
Source: Investment Strategy Group, Empirical Research Partners
Data as of November 2011
Note: Based on largest 1,500 stock excluding autos, financial and utilities; data smoothed on a trailing one-year basis
28
Fed Takes Aim At Long Term Rates – Yield On Earning Assets
Will Remain A Challenge
29
Economic Recovery? Data Still Appears Mixed
30
Employment Outlook For 2012 Q4 Is Somewhat Better Than
Today
31
Changing Demographic Trends – The Pot is Melting….More than
Ever Before
2010
2000
2015
♦
As the US non-Caucasian (and ESL) population continues to shift, banks need to
educate and train their employees, and identify and capitalize on opportunities to
take advantage of these cultural shifts
♦
Not simply a big-city phenomenon (see following page)
__________
Source: SNL Financial
32
The Pot is Melting….In Cities Large And Small…Is Your Bank
Adapting To These Changes?
Caucasian
Population
Change
2000-2015
(projected)
(26.46)
(25.33)
(24.92)
(17.82)
(15.94)
(15.62)
(12.03)
(11.91)
(11.50)
(11.42)
(10.99)
(10.12)
Market Name
Manor, PA
Lansdowne, PA
Penn, PA
Allentown, PA
Millersville, PA
Reading, PA
Hazleton, PA
Hatfield, PA
Bethlehem, PA
Fort Washington, PA
West Reading, PA
Chesterbrook, PA
(3.88) Pennsylvania
(4.43) USA
2010
Population
(actual)
Caucasian Population/
Population (%)
2000
2010 20015
(%)
(%)
(%)
Black Population/
Population (%)
2000
2010 20015
(%)
(%)
(%)
Asian Population/
Population (%)
2000
2010 20015
(%)
(%)
(%)
Hispanic Population/
Population (%)
2000
2010 20015
(%)
(%)
(%)
3,207
10,745
356
111,176
8,106
86,603
22,132
2,846
75,814
3,535
4,099
4,688
99.39
75.25
96.52
72.55
92.45
59.18
94.70
82.19
81.85
91.30
89.33
89.71
75.93
58.52
74.72
59.04
79.14
46.26
85.06
74.21
73.18
82.80
81.24
82.17
72.93
49.92
71.60
54.73
76.51
43.56
82.67
70.28
70.35
79.88
78.34
79.59
0.11
18.98
1.52
7.85
4.31
12.25
0.82
1.77
3.64
3.04
4.03
1.84
23.64
33.43
20.51
10.56
16.12
12.93
1.57
2.32
5.36
5.40
6.25
1.94
26.53
41.12
22.96
11.75
18.08
12.88
1.89
2.57
6.05
6.11
6.96
2.00
0.21
2.87
2.27
1.12
1.60
0.65
12.05
2.22
5.03
1.53
7.07
0.16
4.00
2.80
1.59
1.61
0.87
16.94
3.50
10.61
2.00
14.08
0.21
4.50
3.03
1.74
1.60
1.00
19.68
3.92
12.62
2.13
16.41
0.86
1.48
24.44
2.55
37.31
4.85
3.34
18.23
0.71
7.78
2.03
1.00
2.49
0.28
39.78
4.65
54.12
18.00
6.36
27.16
1.64
17.39
2.90
1.18
2.93
0.30
45.60
5.58
58.97
21.72
7.75
30.77
2.13
21.81
3.36
12,574,407
311,212,863
85.37
75.14
82.63
71.93
81.49
70.71
9.97
12.32
10.64
12.47
10.87
12.47
1.79
3.64
2.57
4.52
2.95
4.93
3.21
12.55
5.16
16.23
6.07
17.80
__________
Source: SNL Financial
Includes selected PA cities with over a 10% change demographically to its Caucasian population
33
The Boomers are Aging…Is Your Bank Adapting To These
Changes?
♦
A seismic
shift in
population
demographics
is occurring –
implications
to financial
system are
enormous
Demographic Summary: United States of America
Base
Current
Projected % Change % Change
2000
2010
2015
2000-2010 2010-2015
Total Population
281,421,906
0-14 Age Group (%)
21.41
15-34 Age Group (%)
28.10
35-54 Age Group (%)
29.43
55-69 Age Group (%)
12.01
70+ Age Group (%)
9.05
Median Age (actual)
35.30
311,212,863
20.08
27.22
28.03
15.54
9.12
37.00
323,209,391
20.13
26.97
26.02
17.31
9.57
37.30
10.59
(6.20)
(3.13)
(4.75)
29.37
0.84
4.82
3.85
0.25
(0.93)
(7.17)
11.35
4.94
0.81
♦
Most bank executives today are Baby Boomers….are the Gen-Xers ready and
trained to take their place?
♦
Gen X-ers, much smaller in number, are hitting the prime “borrowing years” of age
35-55
♦
As this population shrinks over the next 20 years (Gen X-ers and Gen Y-ers), and
Boomers live longer but are net savers, not borrowers, how will banks respond to
this shift?
__________
Source: SNL Financial
34
Detailed Data – National
Demographic Summary: United States of America
Base
Current
Projected % Change % Change
2000
2010
2015
2000-2010 2010-2015
National
Unemployment Rate (%)
12.0
Total Population
0-14 Age Group (%)
15-34 Age Group (%)
35-54 Age Group (%)
55-69 Age Group (%)
70+ Age Group (%)
Median Age (actual)
281,421,906
21.41
28.10
29.43
12.01
9.05
35.30
311,212,863
20.08
27.22
28.03
15.54
9.12
37.00
323,209,391
20.13
26.97
26.02
17.31
9.57
37.30
10.59
(6.20)
(3.13)
(4.75)
29.37
0.84
4.82
3.85
0.25
(0.93)
(7.17)
11.35
4.94
0.81
56,644
42,164
21,587
70,173
54,442
26,739
79,340
61,189
30,241
23.88
29.12
23.87
13.06
12.39
13.10
54.60
12.32
3.64
75.14
12.55
0.14
0.88
2.43
5.46
61.00
12.47
4.52
71.93
16.23
0.16
0.94
2.99
6.99
63.40
12.47
4.93
70.71
17.80
0.16
0.95
3.22
7.55
11.72
1.23
24.28
(4.27)
29.38
14.12
6.83
23.30
28.02
3.93
0.06
9.04
(1.69)
9.67
(0.89)
0.75
7.57
8.12
10.0
8.6
8.0
6.0
4.0
Average Household Income ($)
Median Household Income ($)
Per Capita Income
Diversity Index (actual)
Black (%)
Asian (%)
Caucasian (%)
Hispanic (%)
Pacific Islander (%)
American Indian/Alaska Native
Multiple Races (%)
Other (%)
Year: 2011
Deposit Market Share Summary for US
2011
Rank
1
2
3
4
5
6
7
8
9
10
Institution (ST)
Bank of America Corporation (NC)
Wells Fargo & Company (CA)
JPMorgan Chase & Co. (NY)
Citigroup Inc. (NY)
PNC Financial Services Group, Inc. (PA)
U.S. Bancorp (MN)
Toronto-Dominion Bank
SunTrust Banks, Inc. (GA)
Bank of New York Mellon Corporation (NY)
BB&T Corporation (NC)
Total For Institutions In Market
__________
Source: SNL Financial
2011
2011
Number Total Deposits
of
in Market
Branches
($000)
5,818
948,680,150
6,380
776,948,901
5,550
743,269,042
1,045
318,793,764
3,086
201,390,317
3,139
198,407,561
1,312
142,448,746
1,710
126,776,134
27
114,253,354
1,857
113,766,414
98,096 7,421,292,284
2011
Total
Market
Share
(% )
12.78
10.47
10.02
4.30
2.71
2.67
1.92
1.71
1.54
1.53
2.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US
67% of
the deposits
in the
country are held
by Top 50
Banks
$Dep/Pop
$
23,846
$Dep/HH
$
63,560
$Dep/Br
$
75,860,615
Total Businesses
United States of America
12,188,266
National
New privately-owned housing unit permits (single+multi)
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2006
2007
2008
2009
2010
35
What Is The Economy And Demographic Change Telling Us
Today About Relevance?
ANSWER – It Is Much More Difficult To Be
Relevant Today Vs. Yesterday, And Tomorrow
Will Continue To Be Challenging
36
How Does Relevance Impact Industry Consolidation?
37
Is Your Bank Staying Relevant To Potential Acquirers?
700
300
600
250
500
200
400
150
300
100
200
Price/TBV (% )
First, a look at the data – who is really driving consolidation?
Number of Deals
♦
50
100
0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0
Bank & Thrift Company
♦
Government Assisted
Thrift Merger Conversions
P/TBV
1994 showed the highest levels of consolidation – since this high water mark, the
industry has averaged 146 deals per year since 2008
♦
Deal pricing is also down significantly from a median deal value in 1999 of 264%
__________ of tangible book value to 108% in 2011
Source: SNL Financial
Includes all announced transactions
For the time frame studied SNL is known to omit very small deals and we approximate that number to be 10-15% of the total pool on any given year
38
The Industry Continues To Shrink
Banks And Thrifts Merged
Dollar Amounts in Billions
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Institutions
15,158 14,482 13,853 13,221 12,604 11,971 11,454 10,923 10,464 10,222
New Charters
191
114
80
67
68
111
157
199
221
270
Mergers
453
515
509
612
657
722
660
725
671
496
% of Banks and Thrifts Merged
3.0
3.6
3.7
4.6
5.2
6.0
5.8
6.6
6.4
4.9
9,904
223
533
5.4
9,614
146
417
4.3
9,354
95
332
3.5
9,181
118
273
3.0
8,976
128
319
3.6
8,833
179
310
3.5
8,680
194
342
3.9
8,534
181
321
3.8
8,305
98
293
3.5
8,012
31
179
2.2
7,658
11
197
2.6
7,436
3
144
1.9
1991
1992
1993
1994
1995
1996
1997
1998
16,000
800
14,000
700
12,000
600
10,000
500
8,000
400
6,000
4,000
4.6%
3.0%
3.6% 3.7%
5.2%
6.0%
5.8%
6.6%
6.4%
4.9%
300
5.4%
4.3%
3.5%
2,000
3.0%
2.2% 2.6% 1.9%
0
100
0
Institutions
♦
200
3.6% 3.5% 3.9% 3.8% 3.5%
Number of Mergers
2000
Number of Institutions
1999
1990
Mergers
While deal volume is down on an absolute basis from the last major period of
consolidation, on a % basis, the volume is more rational, given a smaller pool of
banks, weaker currency, and accounting changes of today versus 10-15 years ago
_____
Source: FDIC Historical Trends
Includes commercial banks and savings institutions
39
The Midwest Banking Market – A High Percentage Of Small
Banks
# of
Institutions
3,156 45.1%
Midwest
$0-$250M
2,401
76.1%
385
12.2%
$250-$500M
$500M-$1B
191
6.1%
$1-$5B
$5-$20B
>$20B
144
23
10
4.6%
0.7%
0.3%
♦
88% of Midwest banks are small ($500
million)
♦
Only 5% are in the $1-20 billion size
♦
Conclusion – less logical buyers
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
40
The New England Banking Market – Geography, Buyers Are
Concentrated
# of
Institutions
New England
290
$0-$250M
102
72
$250-$500M
$500M-$1B
64
$1-$5B
$5-$20B
>$20B
43
4
5
♦
16% of New England banks in $1-20
billion bucket versus only 5% in the
Midwest
♦
More buyers means higher deal pricing
(more favorable credit quality helps
too…)
4.1%
35.2%
24.8%
22.1%
14.8%
1.4%
1.7%
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
41
The Mid-Atlantic Banking Market – Both Concentrated And
Fragmented
# of
Institutions
602
Mid-Atlantic
$0-$250M
245
135
$250-$500M
$500M-$1B
100
$1-$5B
$5-$20B
>$20B
76
26
19
8.6%
40.7%
22.4%
16.6%
12.6%
4.3%
3.2%
♦
Only 63% of banks are <$500 million
♦
17% in the $1-20 billion range
♦
Population density, close geography
drive this
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
42
The Southeast Banking Market – A De Novo Leader
# of
Institutions
Southeast
1,304 18.6%
$0-$250M
787
60.4%
250
19.2%
$250-$500M
$500M-$1B
151
11.6%
$1-$5B
$5-$20B
>$20B
94
13
9
♦
Southern states led de novo formation
(and failures) over the past decade
♦
80% of banks <$500 million
7.2%
1.0%
0.7%
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
43
The Southwest Banking Market – Texas Drives The Market
# of
Institutions
Southwest
1,136 16.2%
$0-$250M
806
71.0%
151
13.3%
$250-$500M
$500M-$1B
92
8.1%
$1-$5B
$5-$20B
>$20B
65
13
7
♦
84% of banks <$500 million
♦
Limited buyer – 7% of banks in $1-20
billion class
5.7%
1.1%
0.6%
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
44
The West Banking Market – Deal Pricing Is Yet To Recover
# of
Institutions
West
517
$0-$250M
298
90
$250-$500M
$500M-$1B
49
$1-$5B
$5-$20B
>$20B
56
16
8
♦
7.4%
57.6%
17.4%
9.5%
West is more consolidated than SW,
SE and Midwest 15% of banks $1-20
billion
10.8%
3.1%
1.5%
# of
Institutions
Nationally
7,000
4,639 66.3%
$0-$250M
$250-$500M
1,083 15.5%
$500M-$1B
647 9.2%
$1-$5B
$5-$20B
>$20B
West
Midwest
New England
Mid-Atlantic
Southwest
Southeast
__________
Source: SNL Financial
Top 5 States refer to number of institutions
Top 5 States
TX
IL
MN
IA
MO
478
95
58
6.8%
1.4%
0.8%
2,116 30.2%
570 8.1%
541 7.7%
370 5.3%
322 4.6%
313 4.5%
45
Deal Volume Is Down…But Not As Much As Valuation
Total Market Cap
Total Tangible Equity
Total 'Excess Market Cap'
Total Deal Value
Deal Value/Excess Market Cap
Average Deal Consideration
Year % Cash
% Stock
1990
47%
53%
1991
43%
57%
1992
42%
58%
1993
35%
65%
1994
34%
66%
1995
37%
63%
1996
36%
64%
1997
20%
80%
1998
15%
85%
1999
26%
74%
2000
27%
73%
2001
48%
52%
2002
57%
43%
2003
47%
53%
2004
51%
49%
2005
49%
51%
2006
50%
50%
2007
50%
50%
2008
43%
57%
2009
36%
64%
2010
48%
52%
2011
43%
57%
_____
Source: SNL Financial
2000-2002 Avg 2003-2006 Avg 2008-2010 Avg
1,192.9
1,515.4
891.0
406.4
537.5
783.4
786.5
977.9
107.6
30.4
78.4
15.4
3.9%
8.0%
14.3%
♦
When comparing the recent 4-year cycle “bust” versus the
previous 4-year cycle “boom”, companies tended to
invest/risk/spend a similar portion of their excess market cap on
strategic transactions
♦
So, deal volume appears rationale today….as wealth drops, so
does spending
♦
Cash consideration picked up considerably in 2001 following
the elimination of pooling-of-interests accounting in 2000
♦
Recently, capital preservation is winning out over weak
currency, as stock % in deals have crept back up despite weak
valuations
♦
So, it appears traditional deals may remain under stress for a
while….which calls for a new model (more on this later)
46
Who Are The Buyers?
Percentage of Banks In Each Asset Grouping That Are Acquirors (#
1990 1991 1992 1993 1994 1995 1996
$0-$250M
0.3
0.8
0.8
0.8
1.2
0.9
1.1
$250-$500M
1.3
2.4
2.3
4.5
4.8
4.9
5.8
$500M-$1B
3.9
5.1
6.5
8.3
13.8
10.9
12.8
$1-$5B
9.7
9.4
20.7
23.7
27.0
23.1
21.3
$5-$20B
16.5
20.0
45.4
83.6
69.6
51.1
58.2
>$20B
50.0 123.8 162.5 220.7 227.6 200.0 108.1
All Banks & Thrifts
1.3
2.0
2.7
3.5
4.2
Percent of Banks In Each Asset Grouppi ng
Who Were Buyers
250.0
220.7
3.6
of Deals / # of Banks in Asset Grouping)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1.0
1.1
0.7
0.8
0.6
0.5
0.6
0.6
0.6
0.6
0.9
0.5
0.4
0.5
7.1
5.3
5.4
3.0
4.0
3.3
2.5
2.0
2.3
3.3
2.8
1.8
0.5
1.2
1.4
9.6
12.2
6.1
6.3
6.0
5.7
6.3
6.2
7.1
5.9
6.7
3.2
2.0
2.1
2.8
29.9
32.2
20.2
14.1
16.2
13.1
18.9
19.8
15.9
12.9
10.9
3.0
3.2
5.6
4.4
9.3
13.0
11.3
8.2
71.3
79.2
44.0
22.2
20.5
13.4
19.2
27.7
26.6
36.1
25.0
10.3
2.6
100.0
111.1
69.1
69.6
53.4
29.5
36.9
37.7
32.4
39.1
37.3
19.1
-
3.9
0.5
4.1
4.5
3.3
2.6
2.6
2.3
2.8
3.0
3.0
3.4
3.4
1.7
1.5
2.3
1.9
227.6
200.0
200.0
162.5
150.0
123.8
108.1
111.1
100.0
100.0
69.1
69.6
53.4
50.0
50.0
29.5
36.9
37.7
32.4
39.1
37.3
19.1
11.3
-
8.2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$0-$250M
♦
$250-$500M
$500M-$1B
$1-$5B
$5-$20B
>$20B
Banks greater than $1 billion in assets, the historic consolidators, are buying at a
fraction of pace seen from 1991-2007, limiting a small bank’s chances of achieving
a liquidity event for its shareholders
_____
Source: SNL Financial
Excludes Government Assisted Deals
47
How Many ‘Serial Acquirers’ Really Exist?
Multiple Deal Acquirers Since January 1, 2005 (excludes Gov. Assisted)
# of
# of
Acquirers Acquisitions
2
3
4
5
6
7+
Northeast
11
25
9
1
1
0
0
0
Mid-Atlantic
20
49
15
2
2
1
0
0
Midwest
54
138
40
8
2
1
2
1
Southeast
39
89
30
7
2
0
0
0
Southwest
26
65
19
5
0
1
0
1
West
24
67
15
4
3
1
0
1
174
433
128
27
10
4
2
3
Multiple Deal Acquirers Since January 1, 2005 (excludes Gov. Assisted)
# of
# of
Acquirers Acquisitions
2
3
4
5
6
7+
$0-$250M
10
24
7
2
1
0
0
0
$250-$500M
20
48
15
4
0
0
1
0
$500M-$1B
25
52
23
2
0
0
0
0
$1-$5B
56
132
45
6
2
2
1
0
$5-$20B
38
109
23
7
4
2
0
2
>$20B
16
48
8
4
3
0
0
1
Undisclosed
9
20
7
2
0
0
0
0
174
433
128
27
10
4
2
3
♦
The Midwest and Southeast have led the way in M & A transactions the past 5
years
♦
Over 63% of ‘Serial Acquirers’ are greater than $1 billion in assets when excluding
government assisted deals
♦
As seen above, private equity and newly created acquirers, who lack a disclosed
asset value, are highly involved in rolling up and recapitalizing distressed
situations, especially government assisted deals
_____
Source: SNL Financial
Includes all banks and thrifts that have made 2 or more acquisitions since January 1, 2005
48
Which Size Target Banks Are The Most Likely To Sell And Why?
Percentage of Banks In Each Asset Grouping That Are Sold (# of Deals / # of Banks in Asset Grouping)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$0-$250M
1.2
1.9
2.4
3.2
3.9
3.4
3.6
3.6
4.2
2.9
2.2
2.3
2.2
2.6
2.7
3.1
3.2
3.4
1.9
1.8
2.4
1.9
$250-$500M
2.1
2.1
3.7
5.3
5.7
3.9
4.9
5.8
4.8
4.6
3.1
3.0
2.6
2.8
2.3
2.6
2.9
2.2
0.7
0.7
1.5
1.6
$500M-$1B
1.5
1.8
6.3
7.2
5.9
4.4
6.4
7.2
7.6
5.4
4.0
5.1
2.0
3.8
4.7
3.1
3.8
3.3
1.5
0.8
2.2
1.9
$1-$5B
1.7
4.7
5.5
7.0
6.9
5.3
5.7
7.7
7.1
5.0
4.9
4.3
2.9
6.1
5.6
2.5
4.7
4.5
1.2
1.0
2.8
2.2
$5-$20B
1.6
4.0
5.0
0.8
2.9
8.9
3.7
7.8
5.0
2.8
5.1
4.3
0.9
2.5
3.4
4.0
4.9
5.8
2.6
1.8
4.6
2.8
>$20B
14.3
3.4
3.4 15.2
8.1 11.1 14.8
7.3
8.9
3.4
1.6
1.5 10.1
1.5
7.8
4.5
7.4
1.6
3.3
All Banks & Thrifts
1.3
2.0
2.7
3.5
4.2
3.6
3.9
4.1
4.5
3.3
2.6
2.6
2.3
2.8
3.0
3.0
3.4
3.4
1.7
1.5
2.3
♦
Mega-deals of the mid-1990’s (and their failures) led to mid-sized deals becoming
more the norm over the last decade
♦
In “normal” times (pre-2008), banks greater than $1.0 billion were generally 2X
more likely to be acquired than banks of smaller size
♦
About 2% of small banks (<$250 million) have sold each year since 2008, and
represent about 67-81% of total M&A volume each year, despite being only 66%
of the total number of financial institutions
♦
The size most “in play” on average during the period of 1993-2007 has been banks
in the $1-5B million category
•
1.9
5.3% of these banks were sold in any given year, on average, more than 1.6 times the
M&A average across all segments
♦
_____
Source: SNL Financial
Excludes Government Assisted Deals
“Sharks can’t stop swimming…”
49
Let’s Match Up Buyers And Sellers – What Is The Typical
“Relative Size”?
Relative Size of Acquisition (%)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0-5%
5-10%
10-25%
25-40%
40-60%
>60%
26.2
12.4
24.9
14.6
10.7
11.2
24.3
19.5
26.1
11.9
7.5
10.6
22.0
16.1
33.3
14.0
7.5
7.0
24.8
16.8
26.5
14.2
7.1
10.6
23.5
19.7
29.9
10.7
6.0
10.3
23.7
22.0
26.7
10.6
8.9
8.1
23.8
16.8
31.1
9.0
7.8
11.5
20.1
17.6
31.0
12.6
10.0
8.8
20.7
12.6
23.4
18.9
9.0
15.3
8.3
18.3
25.0
18.3
15.0
15.0
20.0
12.0
24.0
17.0
9.0
18.0
11.8
18.6
29.4
10.8
13.7
15.7
Median
16.1 13.2 13.5 14.3 12.4 13.0 13.6 16.2 20.6 24.0 21.0 18.5
♦
Pre-2008, buyers generally merged with targets that were less than 25% of the pro
forma entity
♦
Post-2008, PEG-led re-caps and “take-unders” of larger unhealthy sellers, by
smaller, healthier buyers has skewed the data somewhat
♦
For disclosed deals, median relative size of seller assets has shifted upward from
13% in 2005 to 18.5% in 2011 – this implies that lower premiums are allowing
banks the opportunity to grow more quickly when they do transact a deal and a
greater willingness to pursue a merger of equals
_____
Source: SNL Financial
Includes all announced deals with disclosed asset sizes for both the buyer and the target
Excludes Government Assisted Deals
50
With Decreasing Supply Of Buyers, Other Performance Factors May Impact
Strategic Relevance And Increase The Number of Potential Buyers
♦
Ultimately it is the exit multiple – the shareholder value creation – that provides
the best yardstick for measuring strategic relevance
♦
As exit multiples are a function of market forces, the economy, etc., in addition to
strategic relevance of the target, we attempted to normalize for some of these
variables
•
We reviewed the last ten years of M&A data – 2,176 total deals (1,689 deals with
pricing disclosed)
• We selected the top 10% of deals in each discrete year in terms of Price / TBV
−
♦
Top 10% of deals are selected each year from all public deals with available P/TBVs
We then performed a “deep dive” on this pool to better understand what drove their
higher prices
•
•
•
•
•
•
Size
Geography
Urban/Suburban vs. Rural Market
Credit Performance
Financial Performance
# of Credible Buyers
51
The “Best” Deals For Sellers – 2002 Through 2011 – The Larger
The Bank, The Better The Pricing
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Avg
Avg
Avg
Avg
Avg
Avg
Avg
Avg
Avg
Avg
# P/TBV # P/TBV # P/TBV # P/TBV # P/TBV # P/TBV # P/TBV # P/TBV # P/TBV # P/TBV
Deals (%) Deals (%) Deals (%) Deals (%) Deals (%) Deals (%) Deals (%) Deals (%) Deals (%) Deals (%)
Target
$0-$250M
$250-$500M
$500M-$1B
$1-$5B
$5-$20B
>$20B
Top 10%
♦
160
28
10
11
1
1
139.5
253.6
258.8
241.0
302.4
283.3
180
32
20
24
3
1
152.8
198.8
269.0
262.6
284.7
373.5
182
27
26
23
4
7
170.3
230.8
255.2
250.3
278.9
331.5
202
32
19
11
5
1
166.2
239.7
282.5
286.3
331.1
279.6
200
36
25
22
6
5
162.4
248.9
290.4
340.6
357.3
312.4
205
27
22
22
7
3
148.9
261.2
251.3
238.0
300.9
372.6
111
9
11
6
3
5
122.0
170.8
151.5
134.0
72.1
85.5
97
9
6
5
2
0
61.9
75.0
42.6
73.3
57.4
0.0
125
18
15
14
5
1
71.8
65.5
83.5
35.9
89.0
97.6
96
19
13
11
3
2
50.4
60.2
68.1
97.4
76.6
99.8
18
347.0
21
358.0
23
404.9
22
387.8
24
437.5
22
414.6
10
310.3
6
207.2
10
226.8
7
194.5
Clearly….size matters
Top 10% of Deals
♦
Almost uniformly, the best deals involved larger companies
•
Size = efficiency
• Scale = pricing power
• Revenue Diversification = earnings consistency
$0-$250M
$250-$500M
$500M-$1B
$1-$5B
$5-$20B
>$20B
Total
♦
Of the best-priced deals, only 32% were for companies smaller
than $250 million despite representing 70-80% historically of
the total deal volume during the period from 2002-2011
♦
Conclusion – to increase your chances of a strong exit
multiple……GROW
_____
Source: SNL Financial
Excludes Government Assisted Deals
52
26
31
32
12
10
163
52
The “Best” Deals For Sellers – 2002 Through 2011 – Geography
Mid-Atlantic
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
25
25
34
28
26
33
31
20
9
23
19
201.8 180.1 244.3 286.1 263.7 188.6 208.0 134.4 102.1 110.1 116.2
Midwest
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008 2009
73
67
68
99
91
95
112
56
41
183.2 186.2 171.6 171.0 204.0 257.1 206.6 166.0 102.1
New England
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
11
8
17
11
7
16
18
7
11
11
7
220.9 227.1 218.2 245.9 272.7 226.7 294.0 204.0 134.8 136.0 130.1
Southeast
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008
47
51
60
54
65
62
58
31
194.6 188.8 239.1 236.9 220.9 202.1 199.0 146.8
Southwest
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
38
36
49
42
51
56
42
24
17
35
23
190.8 168.5 194.7 226.4 224.2 186.8 199.1 180.6 165.5 140.4 124.9
West
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008
24
24
32
35
30
32
25
6
197.9 141.5 182.3 190.1 231.3 311.6 248.3 190.5
Nationally
Number of Deals
Average P/TBV
10 Year Avg 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
218
211
260
269
270
294
286
145
119
178
144
204.1 187.5 215.6 224.8 228.7 244.5 230.2 170.0 114.1 119.7 108.6
♦
2009
29
56.0
2009
12
73.7
2010 2011
65
34
88.9 111.9
2010
30
79.9
2010
14
96.7
2011
34
82.4
2011
27
86.4
West
Mid-Atlantic
Midwest
Southwest
New England
Southeast
Top 10% of Deals
Mid-Atlantic
Midwest
Northeast
Southeast
Southwest
West
Total
27
28
12
43
38
15
163
New England market has generally been a price leader due to scarcity value (few
banks in the market), cleaner seller profiles and an abundance of bidders with
overlapping geography
_____
Source: SNL Financial
Excludes Government Assisted Deals
53
The “Best” Deals For Sellers – 2002 Through 2011 –
Urban/Suburban MSA’s Versus Rural Micro Markets
Nationally
Number of Deals - Urban/Suburban
Average P/TBV - Urban/Suburban
Number of Deals - Rural
Average P/TBV - Rural
10 Year
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
151
148
188
192
186
209
181
94
81
121
106
199.1 229.1 246.5 240.0 261.1 248.0 170.8 103.4 117.9 110.4
215.2
63
72
77
84
85
105
51
38
57
38
157.2 176.6 169.0 200.8 201.0 196.4 168.5 135.0 125.2 100.0
♦
Of the deals, 69.2% were for targets headquartered in MSA’s with populations
greater than 50k (defined for the above purposes as urban/suburban)
♦
147 of the 163 of the top 10% of deals based on P/TBV were headquartered in
metro areas since 2002
♦
Conclusion – Given a strategic choice for expansion, favor urban/suburban vs.
rural (but be wary of mission drift)
_____
Source: SNL Financial
Excludes Government Assisted Deals
67
176.0
54
The “Best” Deals For Sellers – 2002 Through 2011 – Credit Risk
Profile
♦
Of the top 10% “best” deals, the average NPA’s/Assets was two to four times
better than the average NPA’s/Assets of all targets sold during each discrete year
analyzed over the ten year timeframe
Nationally (%)
P/TBV Top 10%
P/TBV - Total
NPA's/Assets Top 10%
NPA's/Assets - Total
10 Year
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg
347.0 358.0 404.9 387.8 437.5 414.6 310.3 207.2 226.8 194.5
363.2
187.5 215.6 224.8 228.7 244.5 230.2 170.0 114.1 119.7 108.6
204.1
0.94
1.16
0.45
0.99
0.48
1.05
0.29
0.86
0.53
0.76
0.75
1.09
0.44
1.93
3.72
4.00
1.43
4.61
1.77
5.59
0.78
1.88
♦
From this table, it is clear that superior asset quality will help to achieve strategic
relevance
♦
More than any other factor considered, superior asset quality will help your bank
“stand out” and improve your strategic relevance to potential acquirers
♦
Conclusion – clean up your asset quality yourself! A buyer will discount your
credit issues significantly deeper than the actual work-out costs will be
_____
Source: SNL Financial
P/TBV and NPAs/Assets reflect averages for each year
Excludes Government Assisted Deals
55
The “Best” Deals For Sellers – 2002 Through 2011 – Companies
With Strong Financial Performance Demand A Better Price
♦
Strong companies sell for a better price – the data bears this out
Nationally (%)
Avg ROAA for Industry
Median ROAA for Industry
Avg ROAA - Top 10%
Avg ROAA - Total Targets
2002
0.77
0.93
2003
0.65
0.91
2004
0.43
0.94
2005
0.77
0.96
2006
0.62
0.89
2007 2008 2009 2010
0.44 (0.32) (0.60) (0.08)
0.71 0.31 0.15 0.37
0.95
0.72
1.19
0.77
1.05
0.82
1.16
0.89
1.27
0.96
0.79
0.84
2011
0.34
0.64
0.43 (0.20) 0.55 0.51
(0.17) (4.43) (1.60) (1.35)
♦
Not surprisingly, buyers reward strong earners
♦
Selling from a position of strength is preferred – sounds easy to say, harder to
execute
Nationally (P/TBV %)
<0 bp ROAA
0-25 bp ROAA
25-40 bp ROAA
40-60 bp ROAA
>60 bp ROAA
_____
Source: SNL Financial
Industry represents all public banks and thrifts
P/TBV reflects averages for each year
Excludes Government Assisted Deals
2002
133.2
147.4
199.0
177.9
204.6
2003
155.3
159.1
165.4
211.0
232.9
2004
156.0
166.0
165.8
246.2
239.9
2005
189.9
170.0
207.4
222.2
241.1
2006
192.5
180.9
217.4
213.9
260.4
2007
169.7
190.1
196.5
235.2
247.1
2008
120.4
140.4
142.7
186.3
200.5
2009
99.8
121.1
135.3
152.3
146.8
2010
96.3
120.4
116.9
147.2
150.4
2011
76.1
111.9
125.8
125.9
134.4
56
The “Best” Deals For Sellers – 2002 Through 2011 – Credible
Buyers
♦
From earlier data, we learned that the most active acquirers of banks tend to be
banks between $1 billion and $5 billion (credible buyers), and on average, their
sweet spot tends to be buying someone who is approximately 20% of their size
♦
Drilling down into the top 10% list, we noted that only 53% of the deals were in
states where the % of credible buyers was higher than 7% of all its financial
institutions
♦
Conclusion – higher pricing may be achieved due to scarcity of the target,
geography or other factors rather than through a high percentage of credible buyers
♦
Predicting Market Consolidation – Example
PA vs. MN - Who Has More Credible Buyers?
45,000,000
Total Assets ($000)
40,000,000
21 out of 206
Institutions in
State
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
8 out of 370
Institutions in
State
10,000,000
5,000,000
0
-
PA
MN
_____
Source: SNL Financial
States with credible buyers defined as having over 7% of its institutions be between $1-5B in Total Assets
57
Summary Thoughts On M&A And Strategic Relevance
♦
Many self-obvious points are supported by the data – strong companies tend to be
rewarded
♦
Urban/suburban area banks are more favored by buyers and command higher
premiums
♦
In times of economic expansion, growth areas such as the Southeast and Southwest
command higher seller prices
♦
In times of economic contraction, slower-growth areas that did not overbuild
leading into the recession (Northeast) tend to out-perform on seller pricing
♦
Clean up your credit issues before others do it for you at a steeper discount
♦
Achieving the next size plateau may be the surest way to increase relevance
58
What Do Institutional Investors And Private Equity
Have To Say About Relevance To Investors?
59
Investors Weigh In On Strategic Relevance – Institutional Investors
♦
We polled numerous institutional investors who focus on micro-cap community
bank stocks
♦
The following comments represent the composite of those discussions
♦
We have received commentary on how to remain “relevant” in the following areas:
♦
ASSET QUALITY
•
At least 2 sequential quarters of stable or improving trends
• Institutional investors are getting more concerned about investing in troubled situations
−
Timeline for asset recovery is longer than investment horizon
−
Continued asset migration – black hole?
−
Was the economy or management the problem?
60
Investors Weigh In On Strategic Relevance – Institutional Investors
(cont.)
♦
MARKET VALUATION
•
Returns are a function of 5 factors: entry point, growth, dividends, exit point and time
horizon
• With industry growth stalled and exit multiples uncertain, institutional investors are
more focused today on entry points
• Focus on lack of liquidity has caused time horizons to widen and asset sizes to increase
• At the same time, large-cap bank stocks, which typically trade at large premiums to
micro-cap stocks, are depressed, causing institutional investors to favor these names
over small and micro-cap stocks due to favored liquidity
Median P/TBV of All Publicly Traded Banks and Thrifts
1990
1995
2000
2005
2010 2011Q3
$0-$250M
$250-$500M
$500M-$1B
$1-$5B
$5-$20B
>$20B
_____
Source: SNL Financial
55.43
54.64
59.42
64.50
78.29
99.57
106.93
123.97
137.89
148.97
184.20
199.98
95.28
120.64
116.37
150.04
238.87
273.18
140.49
170.19
181.40
234.44
268.48
296.25
65.75
77.94
82.49
115.29
156.89
154.47
63.08
70.17
72.56
89.85
108.62
107.43
61
Investors Weigh In On Strategic Relevance – Institutional Investors
(cont.)
♦
GROWTH
•
Organic growth has always been the mantra
• Institutional investors are increasingly skeptical of ability to achieve growth when the
“pie” isn't growing
Total Loans ($000)
8,000,000,000
7,000,000,000
6,000,000,000
5,000,000,000
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011Q3
•
Strategic growth is viewed by institutional investors as the most viable option today
• Capital is available and willing for opportunities where size and scale are achieved
• However, they may prefer a “say” in the price paid for the target
_____
Source: SNL Financial
62
Investors Weigh In On Strategic Relevance – Institutional Investors
(cont.)
♦
LEADERSHIP / MANAGEMENT
•
Extensive due diligence of management and Board
• Credit teams may be interviewed as well
• Varied Board backgrounds important
• Track record of management
♦
EXIT STRATEGY
•
Lack of liquidity has caused institutional investors to widen time horizons from 12-18
months to 3 years
• But, asset size has increased to generally be banks greater than $1 Billion, with some
interest at $500 million and larger for “stories”
• In year’s past, liquidity event in 5 years always included some potential for sale
• Today, institutional investors have lowered both probability and pricing (150-175% of
TBV in 5-7 years) of a sale as an exit
•
As a result, more focused than ever on getting to size and scale to be SEC registrant,
nationally listed and, ultimately, index-eligible
63
Investors Weigh In On Strategic Relevance – A Private Equity
Perspective
♦
Patriot Partners – community-bank
focused PEG with 13 investments in
the sector
♦
$300 Million Fund I; pending $400
Million Fund II
♦
“Sweet spot” is banks $750 Million $3 Billion in assets
♦
ROE trumps ROA
Location of Patriot’s Investments
•
Can bank generate consistent double-digit returns?
• Mid-teens ROE and higher may be a stretch due to decreased industry leverage
♦
Efficiency Ratio – low 60’s or lower
♦
Credit Quality – 4% NPA’s or lower; 35 bps forecasted NCO’s, LLP in 1.5% range
♦
DDA’s – still a critical part of funding mix
♦
Cautious on overreliance of real estate lending – C&I is good, BUT…you must
have the management to understand it
Source: SNL Financial
64
Investors Weigh In On Strategic Relevance – A Private Equity
Perspective (cont.)
♦
Can a small bank AFFORD the talent
it needs to be relevant?
♦
Growth demographics of the markets
served DO matter…
♦
Historically patient de novo investors
are losing patience – liquidity
becoming paramount
♦
Shareholder–focused companies
should perform annual Buy/Hold/Sell
analysis
Location of Patriot’s Investments
•
“Hold” does not mean “wait for better days”
• A rising tide lifts all ships – need to differentiate!
Source: SNL Financial
65
Institutional Investors – “In Their Own Words”
♦
“While we are not generally selling
out positions in banks with assets less
than $1 billion, we are not adding to
them”
Views these current investments as
“lottery tickets”
Financial Sector Weighting Of The S&P 500
25
20
15
Percent (% )
♦
10
♦
“The investment thesis (roll-up
strategy for recapitalized banks)
gained momentum two years ago -but the M&A wave never
materialized making much of this
capital dead weight in our investment
portfolio”
“ ‘Show me the deal first’ is the new mantra”
5
0
1990
♦
Source: Seeking Alpha and Fidelity Investments Research
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
2011
66
Why Are Investors Acting This Way? When The Crisis Hit,
Volume Increased Dramatically…
Source: SNL Financial
67
…Resulting In Decreased Prices And Increased Price Volatility
4,000
Nasdaq Bank Index 3-Month Trailing Volatility Graph
90.00%
80.00%
3,500
70.00%
3,000
60.00%
2,500
50.00%
2,000
40.00%
1,500
Price
Volatility
30.00%
1,000
500
0
Source: SNL Financial
20.00%
10.00%
0.00%
68
What Do I Do If I’m Not Relevant To Investors Or M&A Acquirers?
69
So, What Do You Do If You Are Not Relevant Today?
70
Establishing / Re-Establishing Relevance – What Can I Do?
220.0
Can I stack the odds in my favor?
•
Consider the importance of achieving certain
size thresholds, as achieving various asset
plateaus increases the exit possibilities
• Consider expansion toward more urban
markets, as valuations become more favorable
• If a thrift, consider shifting/transforming
business strategy
♦
200.0
180.0
Price/Tangible Book Value (%)
♦
160.0
140.0
120.0
Banks
Thrifts
100.0
80.0
60.0
40.0
Maximizing organic growth
•
Do I have the TALENT to exploit either type of growth opportunity?
• What niches do I understand?
• What niche opportunities exist in my market?
♦
Consider strategic growth
•
Ask the same questions – Do I have the TALENT to execute?
• What is the market presenting right now?
• “Opportunity never knocks the morning after a good night’s sleep”
♦
BUT…
_____
Source: SNL Financial
71
Establishing / Re-Establishing Relevance – What Can I Do?
While All Of These Strategic Options Sound Good
In Theory, They Are Very Difficult To Execute
As A Result, We Believe Banks With Less Than $1
Billion In Assets Should Seriously Consider InMarket Combinations With Similarly Sized
Institutions
72
BRIDGE OVER TROUBLED WATER
– In-Market Combinations Of Similar Sized Banks –
73
Merger Of Equals – Time To Dust Off The Playbook
♦
For many $50 - $500 million banks, the prospects of achieving adequate liquidity
for investors appears to be years over the horizon
♦
However, sale multiples today are low, so perhaps an MOE can provide a “bridge”
to a more relevant size and scale
♦
This may provide the first “step” of a two-step process to achieve liquidity, but is a
step in the right direction
Potential MOE - Deals Where the Target is 40-60% of the Proforma Company
1990-1995 1995-2000 2000-2005 2005-Present
Number of Potential MOE's
% of All Deals
_____
Source: SNL Financial
93
5.0%
154
7.2%
84
6.7%
90
6.2%
74
A Quick Case Study – A Transaction Can Accelerate Relevance
Present Day
Total/Earning Assets
Margin
ALLL
Net
Non-Int Income
G&A Expense
Net
Taxes @ 35%
Net Income
ROA
$ 700,000
3.50 $ 24,500
(0.20)
(1,400)
3.30
23,100
0.40
2,800
(2.30)
(16,100)
1.40
9,800
(0.49)
(3,430)
0.91 $
6,370
0.91%
700,000
3.20 $
22,400
(0.15)
(1,050)
3.05
21,350
0.35
2,450
(2.38)
(16,660)
1.02
7,140
(0.36)
(2,499)
0.66 $
4,641
0.66%
Future
Target
Bank
763,000
24,416
(1,145)
23,272
2,671
(18,159)
7,783
(2,724)
5,059
0.66%
Cost
Savings
30%
Pro Forma
Combined
1,463,000
46,816
(2,195)
44,622
5,121
5,448
(29,372)
5,448
20,370
(1,907)
(7,130)
3,541
13,241
0.91%
♦
The anticipated impact of the current environment on a $700 million bank would reduce net
income by approximately $1.7M. The bank could acquire an in or near market target and recover
this loss through G&A cost savings
♦
Assuming a Target bank with similar operating metrics, the total cost savings needed to restore the
combined operations to pre economic and financial impact ROA is approximately $5.4 million
♦
Said differently, the bank would need to acquire a $763 million bank having similar metrics and
realize a 30% cost savings in order to break even
♦
Combined cost will be reduced, pre-enhancement revenue will increase and substantial additional
leverage will result
75
Exchange Ratio Determination
Sample of Summary Analyses
♦
The relative contribution by each of Bank A and Bank B, based on contribution
analysis or other factors, of relevant balance sheet and income statement metrics
set forth below, can be used to adjust the pro forma ownership of Newco based
on these relative contributions and derive an adjusted implied exchange ratio
Contribution ($000)
Bank A
Market Capitalization
Total Assets
Total Net Loans
Total Deposits
Core Deposits
Common Equity
Tangible Equity
Tangible Common Equity
Adjusted Tangible Common Equity
Net Interest Income (LTM ended 6-30)
Non-Interest Income (LTM ended 6-30)
Net Interest Margin (LTM ended 6-30) (%)
Note: Table is for demonstration purposes only
$
$
$
$
$
$
$
$
$
$
$
3,100,000
110,000
90,000
80,000
70,000
60,000
70,000
50,000
40,000
3,000
2,000
2.50
Bank B
$
$
$
$
$
$
$
$
$
$
$
3,000,000
100,000
80,000
70,000
60,000
50,000
60,000
40,000
30,000
2,000
1,000
3.00
Contribution (% )
Pro Forma
$ 6,100,000
$ 210,000
$ 170,000
$ 150,000
$ 130,000
$ 110,000
$ 130,000
$
90,000
$
70,000
$
5,000
$
3,000
2.80
Bank A
50.82%
52.38%
52.94%
53.33%
53.85%
54.55%
53.85%
55.56%
57.14%
60.00%
66.67%
52.38%
Bank B
49.18%
47.62%
47.06%
46.67%
46.15%
45.45%
46.15%
44.44%
42.86%
40.00%
33.33%
47.62%
Implied
Exchange
Ratio
(Bank A)
1.03
1.10
1.13
1.14
1.17
1.20
1.17
1.25
1.33
1.50
2.00
1.10
Implied
Exchange
Ratio
(Bank B)
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
76
Example Reconciliation Of Adjustable Tangible Book Value
BANK A
Inputs for Adjusted Tangible Book Value Pricing
Expected rate for NPA's + loans 90+ past-due
Reserve portion to increase tangible book value
Share valuation as a % of adjusted tangible book value
Bank B
100%
100%
100%
100%
100%
100%
$41,500
($4,000)
($500)
$37,000
$35,000
$0
($3,000)
$32,000
2,584,738
3,245,811
$14.31
$9.86
Asset Quality Coverage
NPAs & Loans 90+ Days Past Due (Bank, BHC only) ($000)
Total Reserves ($000)
Unreserved NPA and Loans 90+ Past-due
$1,000
$4,000
($3,000)
$5,000
$3,000
$2,000
Adjusted Asset Quality Coverage for ATBV Calculation
NPAs & Loans 90+ Days Past Due (Bank, BHC only) ($000)
Expected rate for NPA's + loans 90+ past-due
Adjustment to Tangible Book Value
B
$1,000
100%
$1,000
$5,000
100%
$5,000
C
$4,000
100%
$4,000
$3,000
100%
$3,000
A
$37,000
$32,000
B
C
($1,000)
$4,000
$40,000
($5,000)
$3,000
$30,000
$15.48
$9.24
Demonstration of Adjusted Tangible Book Value (ATBV) Calculation
Tangible Book Value Calculation
Total Equity
Preferred Equity
Goodwill and Intangible Assets
Tangible Book Value
A
Shares Outstanding
Tangible Book Value per Common Share
Total Reserves ($000)
Reserve portion to increase tangible book value
Adjustment to Tangible Book Value
Adjusted Tangible Book Value Calculation
Tangible Book Value
Adjustments for:
NPAs + 90 day past dues
Reserves
Adjusted Tangible Book Value (ATBV)
Adjusted Tangible Book Value per Share
77
Strategic Growth – Becoming An SEC Registrant Isn’t Enough
♦
In order to achieve “real” liquidity, ultimately a company should be focused on
achieving the market capitalization to become index-eligible
Become ’34
Act Filer
♦
Become Listed on
National Exchange
Follow-on
Offering
Qualify for
inclusion in
Russell
Increase in
Market
Cap, ADTV
and Overall
Liquidity
Becoming an SEC registrant is for two reasons only – investor transparency and
access to capital
•
If you don’t need to capital, why take on the increased costs associated with registration?
• You can increase the transparency without the requirement to be transparent
♦
Becoming an SEC registrant without a follow-on offering to bring in institutional
shareholders will do virtually nothing to increase your average daily trading volume
78
SEC Registration – Not A Panacea For Investor Liquidity
Exchange
Bank 1 NASDAQ
Bank 2 NYSE Amex
Bank 3 OTCBB
Bank 4 NASDAQ
Bank 5 NYSE Amex
Bank 6 NASDAQ
Bank 7 NASDAQ
Bank 8 NYSE Amex
Bank 9 NASDAQ
Bank 10 NASDAQ
Total Market
SEC
Assets
Cap.
State Registration ($000)
($M)
CA
LA
CA
SC
NY
PA
MO
CT
KS
VT
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
928,171
793,203
766,653
758,106
733,015
720,817
672,677
618,958
580,208
545,790
55.6
71.4
41.0
24.0
49.1
26.9
16.8
39.3
50.0
83.8
Public Total Shares
Float Outstanding
75,005
44,000
37,292
19,206
41,000
31,805
12,500
37,345
32,900
55,092
Insider
(%)
16,991,495
2,062,040
9,116,316
3,473,613
4,106,933
3,483,121
2,683,351
1,688,731
2,780,453
4,457,204
6.89
40.15
12.74
14.92
5.71
13.02
19.94
12.09
25.10
28.09
Avg Weekly
Institutional
#
Dividend
Volume/Shares
Investors Institutional Dividend Payout Price/TBV ADTV Outstanding
Yield
(%)
(52wk)
(%)
Investors
Ratio
(%)
35.13
12.52
1.75
25.68
31.41
1.24
8.08
12.76
8.83
4.86
22
18
2
10
17
6
8
12
6
12
3.67
4.16
0.00
0.00
3.35
2.59
0.00
4.81
4.02
5.32
36.36
41.74
NM
NM
31.01
20.41
NM
52.83
50.00
91.74
64.3
93.6
62.5
52.9
82.8
65.1
44.3
97.1
113.0
216.4
15,096
2,410
1,769
1,903
1,992
1,448
2,206
890
820
1,185
♦
Low institutional ownership creates a lack of real float, despite these companies
incurring the costs associated with SEC registration
♦
If you’ve “got it,” you need to “use it”!
_____
Source: SNL Financial
Includes selected banks
0.44
0.58
0.10
0.27
0.24
0.21
0.41
0.26
0.15
0.13
79
Summary – Parting Thoughts – Banking and Golf??
♦
While many factors ultimately impact “relevance”, ultimately we believe it comes
down to:
•
♦
Shooting the lowest score – Generating the best returns for shareholders
In this environment, we think this may be achieved by:
•
Driving it further – increase efficiency by leveraging technology
• Keeping it in the fairway – while some folks can still “score well” by blazing their own
trail, we don’t think this landscape (regulatory, economic, investor) is rewarding those
companies that don’t play the %’s and stay in tried and true operating models
• Know the course conditions – mastery of the external conditions
• Trust your swing – Be organizationally self-aware, and don’t try to be all things to all
people if you don’t have the talent
•
Take Dead Aim (apologies to Harvey Pennick) – Focus on what drives shareholder
value creation, and block out everything else
•
And above all else…..
• Listen to your caddy – Your strategic advisor!
80
Q&A
81
Disclosure Statement
This presentation is not considered complete without the accompanying oral presentation made by
Griffin Financial Group (“Griffin”).
Any projections or recommendations contained herein involve many assumptions regarding trends,
company-specific operating characteristics, financial market perceptions and the general state of the
economy as well as internal factors within management control, such as capital investment. As such,
any projections contained herein represent only one of an infinite number of outcomes and should not
be construed as the only possible outcome.
The information contained in this presentation and attached exhibits have been obtained from sources
that are believed to be reliable. Griffin makes no representations or warranties as to the accuracy or
completeness of the information herein.
All terms and conditions contained herein are based upon current market conditions and are estimates
based upon prevailing market rates. Any or all estimates may or may not change as market conditions
dictate. As such, any or all terms and conditions presented herein are preliminary in nature and should
not be construed, either in whole or in part, as a commitment to perform or provide any specific
services. Any and all services that may be provided by Griffin or any other entity referred to in this
discussion outline will be contingent upon the signing of a proposal or contract.
82