How to Profit on a Distressed Transaction

Transcription

1 How to Profit on a Distressed Transaction March 28, 2013 Jeff K. Davis, CFA Mercer Capital

2 About the Speaker Jeff K. Davis, CFA Jeff K. Davis is the Managing Director of Mercer Capital s Financial Institutions Group. Prior to rejoining Mercer Capital, Davis spent 13 years as a sell-side analyst providing coverage of publicly traded banks and specialty finance companies to institutional investors evaluating common equity and fixed income investment opportunities. Jeff was most recently Managing Director of Guggenheim Securities, LLC, and was previously head of the Financial Institutions Group at FTN Equity Capital Markets. While at Mercer Capital in the 1990s, Jeff led the firm s financial institutions practice, providing valuation and transaction advisory services. Jeff is a speaker at industry gatherings, including SNL Financial/University of Virginia s annual analyst training seminar, the ABA, various state banking meetings as well as security industry gatherings. Additionally, he regularly makes presentations to boards of directors and executive management teams. He is a periodic guest on CNBC, Bloomberg TV and Bloomberg Radio and is quoted in the American Banker, the Wall Street Journal, Reuters, Forbes and other media outlets. Presently, he is an editorial contributor to SNL Financial. About Mercer Capital Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements, transactional advisory services, and other strategic decisions. Mercer Capital Experience Nationwide client base Clients range from smaller community banks with assets less than $50 million to the largest U.S. depositories Clients range from the rural to the metropolitan, the troubled to the most successful, and the simplest in terms of capital structure to the most complex More than 1,000 valuation opinions rendered for depositories Services for Depository Institutions Mercer Capital pairs analytical rigor with industry knowledge to deliver unique insight into issues facing depositories. These insights underpin the valuation analyses that are at the heart of Mercer Capital s services to depository institutions. Bank valuation Financial reporting for banks Goodwill impairment testing Litigation support Loan portfolio valuation Tax compliance Transaction advisory Contact a Mercer Capital professional at to discuss your needs in confidence.

3 Mercer Capital s 2013 Webinar Series How to Profit on a Distressed Transaction Do not let other peoples problems become your problem Chris Mercer 2 1

4 M&A Pricing Tiered by Asset Quality Median Price / Earnings (x) Median Price / TBV (%) Median Core Deposit Premium (%) Median NPAs / Median ROA NPAs less than 2.5% % 0.43% 0.70% 84 85% NPAs 2.5% - 5.0% % 3.35% 0.30% 10 10% NPAs greater than 5.0% nm % 5.72% 0.1% 5 5% NPAs less than 2.5% % 0.49% -0.1% 34 57% NPAs 2.5% - 5.0% % 3.34% -0.74% 14 23% NPAs greater than 5.0% nm % 9.50% -3.94% 12 20% NPAs less than 2.5% % 0.85% 0.52% 45 45% NPAs 2.5% - 5.0% % 3.59% -0.22% 24 24% NPAs greater than 5.0% % 7.78% -1.85% 32 32% NPAs less than 2.5% % 1.12% 0.48% 30 41% NPAs 2.5% - 5.0% % 3.89% 0.37% 13 18% NPAs greater than 5.0% %.71% -0.81% 30 41% NPAs less than 2.5% % 0.89% 0.78% 2 52% NPAs 2.5% - 5.0% % 3.4% 0.44% 2 22% NPAs greater than 5.0% % 8.45% -0.40% 32 27% Overall Total / Median % 3.4% 0.27% 474 NPAs less than 2.5% % 0.7% 0.1% 25 5% NPAs 2.5% - 5.0% % 3.4% 0.34% 91 19% NPAs greater than 5.0% % 7.91% -0.0% % Number of Transactions Source: Mercer Capital and SNL Financial, LC 3 Credit Migration Positive Announce Date Seller Credit Mark Cycle Loss YE07 5.0% May-10 South Financial 13.0% 24.0% 4.5% Oct-10 Wilmington Trust 13.0% 17.0% Dec-10 Marshall & Ilsley 12.1% 21.1% Dec-10 Whitney.0% 13.2% Jun-11 RBC Bank (USA) 11.2% NA Jan-11 Sterling Bancshares 12.0% 15.7% Aug-12 Hudson City 1.5% NA 0.5% Sep-12 Citizens Republic.8% 19.1% 0.0% Sep-12 West Coast Bancorp 5.0% 19.1% Jan-13 Virginia Commerce 4.0% 11.5% Feb-13 First M&F 5.4% 14.8% Noncurrent Loans as a % of Total Loans and Leases 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% $1-10B $M-$1B Source: FDIC and SNL Financial 4 2

5 Key Question: Why Troubled? Asset quality Capital need within the bank Regulatory orders Parent capital structure Combination of above Directionally is the bank headed up, down or sideways? 5 Troubled Bank Considerations Positive Negative Potentially very high return Something can be rectified reduce classifieds, boost capital Usual cost saves/ op leverage, market share gain or market extension Greater leverage to a rebounding economy Tax benefits subject to limitation Even if asset marks are ok, has franchise value been lost? Low return if all issues are not known and accounted for Greater execution risks More taxing of management Potentially greater negative leverage to an economic downturn 3

6 National, GA, FL, IL and TX Bank Profile US $M - $1B Georgia Florida Illinois Texas YE12 YE11 YE12 YE11 YE12 YE11 YE12 YE11 YE12 YE11 Pre-Tax ROA 0.81% 0.78% 0.2% 0.22% 0.33% 0.03% 0.85% 0.78% 1.15% 1.12% NPLs / Loans 2.4% 3.1% 3.% 4.% 3.4% 4.% 1.% 1.9% 0.% 0.7% NPLs + Past Due / Loans 3.5% 4.4% 5.8% 7.1% 4.3%.0% 3.0% 3.3% 1.8% 1.9% Net Charge-Offs (%) 0.3% 0.88% 0.75% 1.18% 0.74% 1.23% 0.30% 0.40% 0.11% 0.1% Leverage Ratio 10.3% 10.1% 9.9% 9.1% 9.4% 8.9% 9.5% 9.4% 9.7% 9.% C&D / Risk-Based Capital na na 48% 54% 37% 4% 12% 14% 29% 30% Income- & Owner CRE / RBC na na 193% 209% 2% 282% 99% 102% 114% 11% 4,21 4, Number of Banks Source: FDIC 7 Assisted vs. Non-Assisted Deals Number of Deals Whole Bank/Thrift Non-Assisted Deals Source: Mercer Capital and SNL Financial, LC YTD 2013 FDIC-Assisted Whole Bank Deals 8 4

7 Problem Bank Universe FDIC "Problem" Banks 1, , , , Number of Institutions , , , , , Aggregate ($Millions) 800, , Number of Problem Banks Total ($M) Source: Mercer Capital and FDIC Quarterly Banking Profiles 9 U.S. Bank Capital Profile Bank Median of Decile (%) Decile Based on Leverage Ratio Leverage Ratio Total RiskBased Ratio Texas Ratio NPAs / Loans + OREO 2012 ROA Number of Banks 1st nd rd th th th th th th th Source: SNL Financial 10 5

8 Parent Capital Structure Issues Significant number of stranded parent companies Parent has used debt, TruPS, TARP, etc. to create equity in the subsidiary bank double leverage Bank equity may be positive, but parent common is not Difficulty compounds if there is a need for new capital Asset marks / NPA disposal calculus DTA / NOL retention subject to 382 limitations Pricing/ownership % for new capital to generate an acceptable IRR 11 U.S. Large BHC Capital Profile Bank Holding Company Median of Decile (%) Decile Based on TCE / Tangible TCE / TA 1st Double TruPs / Tier 1 Leverage Ratio Capital TruPs / Total Risk-Based Capital 2012 ROA Number of BHCs filing Y-9C nd rd th th th th th th th Source: SNL Financial 12

9 U.S. Small BHC Capital Profile Small Parent Holding Company Median of Decile (%) Decile Based on TCE / Tangible Cons. Tang. Com. Equity / Double TruPs / Equity + Tang. Cons Leverage Ratio TruPs TruPs / Cons ROA Number of BHCs filing Y-9SP 1st nd rd th th th th th th th Source: SNL Financial 13 Parent Capital Structure Issues ~1,800 banks & thrifts issued $38B of pooled TruPS Per Fitch 341 deferring trust preferred issues YE12; 215 defaulted ($.5B); 284 issues redeemed since 1Q10 Most deferrals were in ; default event after 5 years 4Q12 saw 5 new deferrals and 14 cures, 5 via lifting of regulatory enforcement action 50 cures in 2012 vs. 41 in TARP deferrals ($2.4B) in Feb 2013 vs. 131 in Nov 2012; one new deferral; 18 cures, 9 via TARP auction exit 14 7

10 Parent Capital Structure Issues Difficult to negotiate with creditors, especially TruPS in pools If a senior creditor exists (e.g., lender to a holding company secured with the bank s shares), then it may be a less complex situation, but not necessarily salvageable If bankruptcy reorganization via Chapter 11, then pre-packaged via agreement with senior creditors (e.g., CIT Group in 3Q09) or sale of the bank via section 33 Limited 33 transaction history in the sector, but five-year TruPS deferral limit implies much possible by Parent Capital Structure Issues Process is important stalking horse bidder, etc. TruPS indenture precludes selling substantially all assets (fraudulent conveyance)... BBX and BBT had to revise their Nov 2011 deal to satisfy Parent creditors have rights recovery for TruPS rose after holders pushed Talmer on pricing and process for First Place Bank Gradually healing sector and real estate markets implies fewer contentious circumstances by the time the 5-year mark occurs 1 8

11 Limited History Purchase & Assumption Pre-Packaged Bankruptcy 33 Transactions Nov-11 BBT - Bank Atlantic Apr-09 CIB Marine Oct-10 SKBHC - American West Bank Nov-11 Home Bancshares-Vision Sep-09 CIT Group Apr-11 First Bank Lubbock - Jefferson Bank Aug-12 Home BancShares - Premier Bank Sep-12 Strategic Growth - Mile High Bank Oct-12 Talmer Bancorp - First Place Bank Jan-13 First Bancshares - FNB Baldwin County Jan-13 Western Alliance - Centennial Bank Ongoing Capital Bancorp 12 subsidiaries 17 Bridging Pricing via Contingency Payments Transactions with contingencies remain limited Can be a method to bridge pricing gap and disagreement about the value of select assets Challenges Complexity Who keeps score Dispute resolution mechanism Duration 18 9

12 Bridging Pricing via Contingency Payments Announced in 2009 Total Deal Value ($ million) Capital Contribution Announced in 2010 Number of Transactions % of Total % of Total Median NPAs / Total Deal Value ($ million) Number of Transactions % of Total % of Total Median NPAs / $38 4% 9 15% 3.4% $31 3% 12 12% 4.5% 53 5% 3 5% 1.5% 148 1% 7 7% 5.8% Common Stock % 8 13% 0.7% 1,05 10% 9 9% 4.0% Mixed Consideration % 8 13% 1.8% 7,999 77% 17 17% 3.9% Cash % 28 47% 1.% 772 7% 48 48% 1.7% Unclassified 14 1% 4 7%.% 37 0% 8 8% 0.% $1,028 % 0 % $10,374 % 101 % Contingent Consideration Overall Total / Median Announced in 2011 Total Deal Value ($ million) % of Total Announced in 2012 Number of Transactions % of Total Median NPAs / Total Deal Value ($ million) % of Total Number of Transactions % of Total Median NPAs / Capital Contribution $7 1% 4 5%.8% $21 0% 4 3% 11.0% Contingent Consideration 133 2% 7 10%.2% 350 4% 8 7% 5.0% Common Stock 1,373 20% 11 15% 1.3% 809 9% 13 11% 2.1% Mixed Consideration 1,243 18% 17 23% 1.9% 4,11 48% 34 28% 1.7% Cash 3,959 58% 30 41% 4.7% 3,311 38% 55 4% 1.5% 24 0% 4 5% 1.7% 81 1% 5% 9.2% $,799 % 73 % $8,734 % % Unclassified Overall Total / Median Source: Mercer Capital and SNL Financial, LC 19 Valuation Perspective Value the bank, then net the parent capital structure Mark the balance sheet Earning power valuation (stand-alone and with synergies) DCF valuation (distributable cash flow with/without synergies) Must value based upon the current (zero) rate environment where yields are/headed, not what is hoped for Cost of capital applied should entail a sizable premium given risks (i.e., threshold exceeds the buyer s cost of capital) 20 10

13 Prospective Return Cash Securities Loans Loan Loss Reserve Deferred Tax Asset (net) Total Bank 145 1,000 3,500 (53) 4,593 Deposits Borrowings Trust Preferred Other Liabilities 3, Preferred Common Equity Total Equity Total Liabilities & Equity ,593 Equity / Equity ROA Net Income Dividend to Maintain Terminal Multiple Investor BV Investor Cash Flow Internal Rate of Return Ln Mark LLR to Pro Equity to Pro 5.0% 1.40% Forma 145 1,000 3,325 (47) 4, % Forma 145 1,351 3,325 (47) 4,774 (175) (175) 8.0% 12.0x 91.9% (351) 14.8% 351 3, , (175) (175) (175) ,424 Year 1 4, % Year 2 5, % Year 3 5, % Year 4 5, % Year 5 5, % % Initial 4, % ,775 Dynamic between capital requirement, forward profitability, value and the investor IRR Use of tax asset (not shown) if preserved and utilized can be a significant IRR driver Issues are greatly compounded if parent leverage has to be resolved Investor hurdle rate has to be high to offset risks Is a 15% IRR high? High in a zero-rate environment? 8.0% 21 First Security Group (FSGI) Recap FSGI announces a $90 million recap Feb million $1.50; 9/30/12 was $.55 on 1.8 million shares $5 million rights offering for existing shareholders Parent capital structure - nil TruPS and $33 million of TARP; Treasury TARP for 2% of par; accrued %; Treasury will sell its position to sell its shares to investors Pro-forma company leverage ratio to 8.5% from YE12 ~$50 million DTA (NOL) preserved YE11 most of ~$70 million of net proceeds down-streamed into the bank to replenish capital and cover a $14 million loss on the sale of $3 million of NPAs pro forma YE12 2.5% 22 11

14 Mercer Capital Articles TruPS deferrals set stage for many more 33 reorganizations by Revisiting Carl Icahn's CIT debt and equity trades 23 Final Thoughts #1 value return driver that buyers control is the purchase price Value the bank, not the parent/consolidated entity Return drivers (or detractors)? Profitability improvement Growth Multiple expansion Focus on prospective IRR Profitability x leverage x P/E = P/TBV buyers are acquiring earning power, not capital 24 12

15 Questions? Jeff K. Davis, CFA Mercer Capital 5 Poplar Avenue, Suite 200 Memphis, TN