Austin Associates Webinar Series. Evaluating Your Strategic Alternatives. September 22, 2016

Transcription

1 Austin Associates Webinar Series Evaluating Your Strategic Alternatives September 22, 2016.

2 WEBINAR INSTRUCTIONS September 22, 2016 All participants will be muted during the webinar. All participant names are anonymous to other webinar participants. If you have any questions, they should be typed into your GoToWebinar participant control panel. If you get disconnected, you can either call back via the telephone call-in option or you can use the voice-over-ip option from your participant control panel on your computer and follow the instructions. If you are having technical difficulty during the presentation, please call Lisa Cordier This webinar is being recorded for distribution and will be available on the Austin Associates website ( You will be able to download the presentation from our website after we complete the webinar. 1

3 PRESENTERS Managing Directors of Investment Banking Craig Mancinotti - Joined the firm in 1982 and comanages the firm s investment banking and strategic consulting divisions. Received a Bachelor s degree in Business Administration and an MBA from the University of Toledo. Served as an instructor at the Stonier Graduate School of Banking and the Bank Administration Institute School. Served for ten years as a director of a $400 million Midwest community bank. Annual speaker at Acquire or Be Acquired conferences. Licensed rep of IBS (a registered broker dealer) and holds Series 63 and 79 (Investment Banking) licenses. Craig Mancinotti Managing Director & Principal Investment Banking & Consulting Craig.Mancinotti@austinassociates.com Rick Maroney - Joined the firm in 1984 and comanages the firm s investment banking and strategic consulting divisions. Received a Bachelor s degree in Business Administration and an MBA from the University of Toledo. Served as an instructor at the Stonier Graduate School of Banking. Annual speaker at Acquire or Be Acquired conferences. Licensed rep of IBS (a registered broker dealer) and holds Series 63 and 79 (Investment Banking) licenses. Rick Maroney Managing Director & Principal Investment Banking & Consulting rmaroney@austinassociates.com 2

4 AUSTIN ASSOCIATES OVERVIEW Consulting and Investment Bankers to Community Banks Community bank advisors for more than 40 years Specialized services through multiple practice areas Investment Banking Strategic Consulting Financial Management Technology Solutions Owners are consultants/managers Over 200 bank/thrift clients in 2015 from 28 states Nationally-ranked leader in community bank M&A for 3 decades 3

5 M&A EXPERIENCE Top Financial Advisors in Whole Bank Deals ALL U.S. DEALS ( YTD 2016) ALL U.S. DEALS (2015) Announced Announced Overall Number Deal Value Overall Number Deal Value Rank Advisory Firm of Deals ($M) Rank Advisory Firm of Deals ($M) 1 Keefe, Bruyette & Woods 359 $51, Sandler O'Neill & Partners, L.P. 61 $17, Sandler O'Neill & Partners, L.P. 356 $81, Keefe, Bruyette & Woods 39 $3, Raymond James & Associates, Inc. 117 $5, FIG Partners, LLC 20 $1, Hovde Group, LLC 99 $4, Hovde Group, LLC 19 $ Sheshunoff & Co. Investment Banking 62 $1, Raymond James & Associates, Inc. 17 $ FIG Partners, LLC 61 $2,758.5 T-6 Austin Associates, LLC 12 $647.4 T-7 Capital Corporation, LLC 60 $380.6 T-6 D.A. Davidson & Co. 12 $375.9 T-7 D.A. Davidson & Co. 60 $2, Austin Associates, LLC 57 $1,579.2 ALL U.S. DEALS (YTD 2016) 10 Commerce Street Capital, LLC 42 $1,324.4 Announced 11 RBC Capital Markets, LLC 41 $18,519.7 Overall Number Deal Value 12 J.P. Morgan Securities LLC 40 $87,633.3 Rank Advisory Firm of Deals ($M) 13 FinPro, Inc. 39 $ Sandler O'Neill & Partners, L.P. 29 $13,060.4 T-14 Boenning & Scattergood, Inc. 37 $1, Keefe, Bruyette & Woods 27 $4,638.8 T-14 INTL FCStone Financial Inc. 37 $2, Hovde Group, LLC 11 $158.3 T-16 KPMG LLP 36 $ Raymond James & Associates, Inc. 10 $865.7 T-16 Professional Bank Services Inc. 36 $ D.A. Davidson & Co. 9 $ DD&F Consulting Group 33 $1,033.2 T-6 Austin Associates, LLC 7 $ Piper Jaffray & Co. 30 $1,566.6 T-6 Piper Jaffray & Co. 7 $427.6 T-20 Banks Street Partners, LLC 29 $1,287.8 T-6 Boenning & Scattergood, Inc. 7 $177.8 T-20 Monroe Financial Partners, Inc. 29 $701.0 T-9 FIG Partners, LLC 6 $136.9 T-9 Banks Street Partners, LLC 6 $129.4 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Data through 08/31/2016. More than 100 firms reported in S&P's M&A Advisory rankings. Some deal values not reported and rankings exclude terminated deals. 4

6 EVALUATING STRATEGIC ALTERNATIVES Holistic Consideration of All Relevant Factors Bank Performance Management Talent / Depth/ Breadth Economy Local / National Industry Trends Shareholder Needs & Wants Technology Competition Banks & Non-Banks Regulatory Considerations 5

7 EVALUATING YOUR STRATEGIC ALTERNATIVES Discussion Topics Industry Update and Performance Trends 2016 Outlook and Emerging Issues Factors Driving Consolidation Key Financial Metrics that Drive Shareholder Value Shareholder Liquidity ~ Minority Interest versus Control Level Value Effectively Engaging the Board of Directors in Strategic Planning Identifying and Achieving Consensus on Critical Planning Issues Making a Fully-Informed Decision to Buy, Sell, Merge or Remain Independent 6

8 HISTORICAL NET INTEREST MARGIN Data From 1991 June 30, % 4.00% 3.50% 3.00% 2.50% Net Interest Margin Historic Average ( ) Historic Average ( ) Historic Average ( YTD 2016) Source: S&P Global Market Intelligence, a division of S&P Global. Note: Net Interest Margin is based on weighted aggregate data and based on stated net interest income in each period. 7

9 BANKING INDUSTRY STATISTICS Net Interest Margin and Total Revenue Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. Total Revenue = Net Interest Income (FTE if available) + Noninterest Income. 8

10 BANKING INDUSTRY STATISTICS PTPP and Efficiency Ratio Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. PTPP = Net Interest Income (FTE if available) + Noninterest Income Noninterest Expense. 9

11 BANKING INDUSTRY STATISTICS Asset Quality Data Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. NPAs = 90+ Day Past Due Loans, Nonaccrual Loans and OREO. Excludes restructured and government guaranteed loan balances. 10

12 BANKING INDUSTRY STATISTICS ROAA and ROAE Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. 11

13 BANKING INDUSTRY STATISTICS Capital Ratios Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. 12

14 BANKING INDUSTRY STATISTICS Key Ratios for U.S. Banks & Thrifts Source: S&P Global Market Intelligence, a division of S&P Global. Note: Results are based on median statistics for all banks and thrifts. All U.S. Banks - for the LTM period ending June 30, 2016 < $200 Million $200 - $500 Mil $500 Mil - $1 Bil $1 - $10 Bil > $10 Billion Number of Charters 3,037 1, % of Charters 51% 27% 11% 10% 2% % of Assets Held 2% 3% 3% 10% 82% ROAA 0.72% 0.87% 0.89% 0.91% 0.95% ROAE 6.27% 7.89% 8.21% 8.45% 8.39% ROATCE 6.44% 8.12% 8.63% 9.44% 10.68% PTPP / Average Assets 1.05% 1.27% 1.30% 1.41% 1.55% Efficiency Ratio (FTE) 71.6% 67.4% 67.1% 63.9% 61.3% Revenue (FTE) Growth Rate 3.0% 5.0% 6.0% 7.1% 5.4% Loan Growth Rate 4.4% 7.0% 7.9% 11.4% 8.8% Expense Growth 2.5% 4.0% 4.9% 5.7% 4.7% Revenue / FTE Employee ($000) $163.8 $180.4 $193.9 $227.3 $292.9 PTPP / FTE Employee ($000) $42.7 $53.4 $59.7 $75.2 $111.1 Tier 1 Leverage Ratio 10.85% 10.24% 10.13% 9.69% 9.55% Total Risk-Based Capital Ratio 18.00% 15.54% 14.67% 13.56% 13.62% 13

15 2016 OUTLOOK AND EMERGING ISSUES Factors Impacting the Industry Brexit poses risk to U.S. financial stability Fintech rises in prominence Commercial real estate concerns Community bank performance headwinds The beginning of the last wave of bank consolidation 14

16 BREXIT POSES RISK TO U.S. STABILITY Treasury Department OFR Report, American Banker, July 25, 2016 Office of Financial Research, independent arm of U.S. Treasury United Kingdom voted June 23 to leave the European Union Surprised financial markets and negative shock to investor confidence Introduced uncertainty about rules governing the U.K. s investment, financing and trade relations with Europe and rest of world Interconnectivity with U.K. and Europe poses risk to U.S. financial stability in the event of adverse outcome U.S. companies have substantial direct counterparty exposure Contagion Risk Market liquidity is a hard-to-predict market behavior traditional metrics have proven unreliable in stress environments 15

17 FINTECH RISES IN PROMINENCE Disruptive Technologies affecting the Financial Services Industry $49.7 billion was invested globally on Fintech in the last five years and the pace is accelerating Fintech ecosystem includes: o o o o o Payment processing POS technology is going mobile Marketplace lending and retail banking Fintech start-ups are stepping between banks and their customers Wealth management advisors are being replaced by robo-advisors Insurance selling insurance without the use of agents Blockchain disintermediating financial transactions using global computer network rather than 3 rd party or centralized authority (over 40 of the world s largest banks are already testing Blockchain applications) Source: BI Intelligence 16

18 REGULATORY CONCERN OVER CRE EXPOSURE Construction and Development Loans 100% bucket Source: S&P Global Market Intelligence, a division of S&P Global. *Includes commercial banks, savings banks and S&L s (all data from regulatory filings). 17

19 REGULATORY CONCERN OVER CRE EXPOSURE CRE Guidance Loans 300% bucket Source: S&P Global Market Intelligence, a division of S&P Global. *Includes commercial banks, savings banks and S&L s (all data from regulatory filings). 18

20 COMMUNITY BANK HEADWINDS Source: SNL Financial, July 25, 2016 Lower-for-longer interest rate environment negative rates around the world and Brexit uncertainty will keep rates low and further pressure net interest margins Rising credit costs credit quality will normalize in the coming years Weak loan growth FY2016 growth estimated at 1.8% and even weaker in following years Regulatory scrutiny over CRE lending 19

21 THE LAST WAVE OF CONSOLIDATION Austin Associates, LLC Forecast 1980: 19,000 FDIC-insured charters 1990: 15,000 charters 2000: 10,000 charters 2016: 6,000 charters Industry is consolidating at 3.5% to 5.0% rate per year and De Novo charter activity is virtually non-existent De Novo banks lack a credible investment thesis in current environment Forecast of 3,000 FDIC-insured charters in 10 years Extremely limited market for small, rural independent banks by

22 Additions and Eliminations CONSOLIDATION TRENDS Since Low Barriers to Entry High Barriers to Entry 12, ,000 0 (250) 8,000 6,000 4,000 Total Number of Charters (500) *In 1980, there were 18,762 FDIC insured institutions compared to 15,158 in 1990* 2,000 (750) Mergers (533) (417) (332) (273) (319) (310) (342) (321) (293) (179) (197) (196) (208) (232) (273) (304) (115) Failed (7) (4) (11) (3) (4) 0 0 (3) (25) (140) (157) (92) (51) (24) (18) (8) (3) New Charter Total 9,904 9,614 9,354 9,181 8,976 8,833 8,680 8,534 8,305 8,012 7,658 7,357 7,083 6,812 6,509 6,182 6,058 Y-Y % Chg. -3.1% -2.9% -2.7% -1.8% -2.2% -1.6% -1.7% -1.7% -2.7% -3.5% -4.4% -3.9% -3.7% -3.8% -4.4% -5.0% -2.0% 0 Source: All data from FDIC s Statistics At A Glance data through June 30, 2016 (year-over-year % change based on 6-month change and has not been annualized) 21

23 COMMUNITY BANK M&A Factors Driving Consolidation Lack of liquidity of stock at fair value ~ what is fair? Management succession ~ talent recruitment and retention NIM pressure low rate environment Slow organic loan growth and outlook for growth Slow organic revenue growth Compliance and regulatory costs are increasing Increased capital requirements and expectations! Scale has never been more important Battle fatigue These factors are causing more and more community banks to consider sale or merger 22

24 COMMUNITY BANK M&A Understanding the M&A Environment Pricing has stabilized, following steady improvement from depths of financial crisis Improved asset quality reduced credit marks Large gap in financial performance and trading multiples between banks over $1 billion and under $1 billion Buyers are (for the most part) maintaining financial discipline; TBVPS dilution and earnback metrics are imposing a ceiling on deal pricing Better performing banks are considering sale; the new normal pricing is more widely accepted Strategic mergers are more viable than at any time in history 23

25 ANNUAL M&A VOLUME & PRICING Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global data through August 31, (YTD 2016 # of deals have been annualized for average calculation) 24

26 M&A PRICING STATS Current Market Update: 2015 August 31, 2016 Total Tangible NPAs/ Average Average Median Assets Equity/ LTM LTM Total Price/ Price/ Price/ Deals By Seller's Assets # ($000) Assets ROAA ROAE Assets Book Tg Book LTM EPS > 1.0 Billion 44 $2,004, % 0.86% 8.03% 1.04% 168% 181% 19.8 $500 Million - $1.0 Billion 39 $647, % 0.75% 6.78% 1.28% 152% 159% 21.8 $100 - $500 Million 200 $196, % 0.62% 5.75% 1.34% 131% 131% 21.1 < $100 Million 157 $49, % 0.42% 3.69% 0.68% 112% 113% 20.8 Deals by Seller's ROAE > 10% 71 $278, % 1.17% 11.87% 0.94% 172% 169% % - 10% 166 $195, % 0.74% 6.78% 0.95% 144% 150% % - 5% 124 $116, % 0.32% 2.95% 1.05% 121% 125% 37.2 < 0% 67 $77, % -0.55% -6.59% 3.29% 88% 90% NM Deals by Seller's NPAs/Total Assets < 1% 194 $111, % 0.66% 6.13% 0.35% 147% 152% % - 3% 141 $186, % 0.65% 5.78% 1.73% 141% 142% % - 5% 41 $140, % 0.26% 2.75% 3.79% 119% 124% 27.3 > 5% 32 $122, % -0.43% -8.65% 7.34% 86% 87% 17.5 Deals by Region Mid Atlantic 47 $295, % 0.60% 5.37% 1.23% 131% 140% 21.6 Midwest 188 $90, % 0.62% 5.37% 0.93% 133% 133% 18.3 Northeast 17 $379, % 0.38% 3.77% 1.30% 131% 138% 38.0 Southeast 93 $263, % 0.63% 6.26% 1.92% 141% 143% 19.7 Southwest 54 $121, % 0.66% 6.14% 0.42% 152% 159% 22.1 West 44 $153, % 0.55% 4.88% 1.10% 132% 138% 23.3 All Bank & Thrift Deals 444 $143, % 0.60% 5.48% 1.13% 136% 140% 20.3 Source: S&P Global Market Intelligence, a division of S&P Global. YTD 2016 data through August 31, Note: Based on median statistics. S-Corporation selling companies have been adjusted to C-Corporation status using a 34% tax rate. 25

27 M&A WINNERS: SURVIVAL OF THE FITTEST Stock Deals Stratified by Buyers Price/Tangible Book Multiple Source: S&P Global Market Intelligence, a division of S&P Global. Includes transactions since 2013 for U.S. transactions > $25 Million, where buyer is publicly-traded (with reported price/tangible book value day prior to announcement date) and stock was part of the deal consideration. (256 deals) 26

28 BANK & THRIFT EQUITY VALUES Publicly-Traded Banks & Thrifts Since 2000 Source: S&P Global Market Intelligence, a division of S&P Global. Note: Earnings based on core performance, if available. Excludes M&A targets and acquired/defunct companies. 27

29 BANK & THRIFT EQUITY VALUES Current Pricing as of 08/31/2016 Total Tangible LTM LTM NPAs/ Average Average Price/ 1-year % With # Assets Equity/ Core Core Total Price/ Price/ LTM Core Price LTM Price By Assets Companies ($000) Assets ROAA ROAE Assets Book Tg Book EPS Change Increase > $5.0 Billion 129 $12,292, % 1.03% 8.69% 0.53% 141% 183% % 79.1% $1.0 - $5.0 Billion 223 $1,799, % 0.91% 8.84% 0.56% 126% 141% % 82.1% $500 Million - $1.0 Billion 174 $678, % 0.79% 7.71% 0.48% 106% 112% % 83.9% $300 - $500 Million 156 $386, % 0.75% 7.44% 0.33% 98% 100% % 71.8% $100 - $300 Million 214 $195, % 0.64% 6.15% 0.19% 93% 95% % 61.2% < $100 Million 33 $80, % 0.19% 1.39% 0.42% 77% 77% % 66.7% By LTM Core ROAE > 10% 198 $1,235, % 1.17% 11.45% 0.46% 139% 153% % 82.8% 5% - 10% 474 $827, % 0.83% 7.86% 0.51% 109% 124% % 79.3% 0% - 5% 158 $336, % 0.39% 3.58% 0.66% 93% 96% % 67.1% < 0% 34 $136, % -0.37% -2.98% 1.45% 90% 91% NM 2.7% 47.1% NPAs/Total Assets < 1% 720 $667, % 0.87% 8.10% 0.32% 115% 129% % 74.4% 1% - 3% 177 $533, % 0.74% 7.00% 1.48% 99% 106% % 79.1% 3% - 5% 19 $149, % 0.45% 3.95% 3.55% 77% 80% % 68.4% > 5% 7 $219, % 0.19% 0.94% 6.42% 60% 63% % 28.6% By Region Mid Atlantic 211 $697, % 0.72% 7.20% 0.52% 108% 121% % 68.2% Midwest 238 $592, % 0.92% 8.45% 0.49% 108% 118% % 83.6% Northeast 52 $955, % 0.67% 6.32% 0.45% 114% 131% % 69.2% Southeast 206 $601, % 0.80% 7.57% 0.66% 109% 123% % 77.7% Southwest 49 $1,583, % 0.95% 8.19% 0.58% 126% 144% % 59.2% West 174 $545, % 0.91% 8.25% 0.24% 115% 126% % 73.6% All Banks & Thrifts 930 $618, % 0.83% 7.87% 0.47% 111% 123% % 74.8% Note: NPAs exclude restructured loans and U.S. Government Guaranteed Loans. *Excludes M&A targets and companies without current pricing/financial information. Based on median statistics unless noted otherwise. 28

30 EVALUATING STRATEGIC ALTERNATIVES First Step is Your Strategic Plan Evaluating your strategic alternatives is an extension of strategic planning A Strategic Plan should be a road map for management and an accountability tool for the board Directors should determine general direction and overall risk appetite (and of course evaluate strategic alternatives that vary from your plan) Management needs to drive the plan with tone at the top set by CEO and buy-in from all senior management Your current strategic plan is the benchmark against which all other alternatives are evaluated 29

31 EVALUATING STRATEGIC ALTERNATIVES Structured Planning Process in order to Achieve Fully Informed Decisions Start the process with a Confidential Questionnaire S.W.O.T. Analysis Identify most important strategic planning priorities Develop Agenda for the planning session using questionnaire results The planning process should address (at a minimum): o Strengths and opportunities to leverage and capitalize on o Weaknesses and threats to correct or minimize o Expected financial results and overall risk o Specific strategies, action plans and timelines to achieve the above Consider using a facilitator 30

32 EVALUATING STRATEGIC ALTERNATIVES Business Model, Scale and Execution Drives Value Business Model Markets Core funding Loan mix / niche Revenue sources Execution Management talent Process / systems Managing risk (ERM) Scale Size Market share Delivery channels Capital ROAA EPS growth ROE Performance & Value Cash dividends Stock price Franchise value 31

33 FINANCIAL METRICS THAT DRIVE VALUE Key Performance Indicators 1. Profitability Return on Avg. Assets (ROAA) Return on Avg. Equity (ROAE) Efficiency Ratio Pre-Tax Pre-Provision/Avg. Assets (PTPP) 2. Growth Loan Growth Core Deposit Growth Revenue Growth EPS Growth 3. Asset Quality Net Charge-offs/Avg. Loans (NCO s) Nonperforming Assets/Assets (NPA s) ALLL/Loans Classified Assets/Assets (not publicly available) 4. Balance Sheet Loans/Assets Loan Mix Deposit Mix 32

34 EVALUATING STRATEGIC ALTERNATIVES The Value Assessment Your Strategic Plan will produce financial results that should drive value Value can be determined in a number of ways: o Net present value of future earnings/cash flows o Risk profile of your company and strategies will determine appropriate discount rate o Expected multiple of future earnings and/or book value o Characteristics of your company (growth, markets, lines of business, etc.) will determine range of expected multiples Even a well developed plan and perfect execution may not unlock the value for your shareholders 33

35 MINORITY INTEREST vs. CONTROL LEVEL VALUE Levels of Value 34

36 LACK OF LIQUIDITY OF STOCK AT FAIR VALUE A Key Risk Factor Private companies and small public/sec companies do not have meaningful shareholder liquidity While the Board s fiduciary duty to facilitate shareholder liquidity can be debated, there is a practical responsibility to facilitate stock liquidity at a reasonable valuation Your shareholder list may be a ticking time bomb Have you performed a shareholder census ~ age distribution? There are several practical means of addressing this issue 35

37 STRATEGIES TO INCREASE SHAREHOLDER LIQUIDITY No Silver Bullet Requires Constant Management Share repurchase program ~ capital and earnings capacity, without impairing cash dividend (capital planning exercise) Negotiated block repurchases ~ can the board pick and choose? Tender offer Periodic independent stock valuations (annual, semi-annual, quarterly) Shareholder communication initiative For thinly traded stocks, investor communication has become more critical to current and potential shareholders Board of Director Fiduciary Duty ~ consult with legal counsel 36

38 EVALUATING STRATEGIC ALTERNATIVES Strategies to Evaluate in Comparison to Your Strategic Plan Independence implementing your strategic plan, including o Organic growth strategy current and new markets, LPOs, etc. o Lines of business evaluation o Branch system - long-term growth and profitability o Proactive acquisition strategy Internal management and operational resources Geographic reach Financial capacity capital, stock value and liquidity Potential impact on strategic plan, risk profile and financial results 37

39 EVALUATING STRATEGIC ALTERNATIVES Strategies to Evaluate in Comparison to Your Strategic Plan (continued) Strategic Mergers - requires buy-in on the basic concept o Proportional ownership based on relative value contribution o Combined board often based on ownership split o Defining the positions and roles of C-level management o Myriad of other nonfinancial issues are negotiated Bank and company headquarters Name of resulting company and bank Salary and benefits comparison Operational systems Best practices of other areas 38

40 EVALUATING STRATEGIC ALTERNATIVES Strategies to Evaluate in Comparison to Your Strategic Plan (continued) Sale - requires careful assessment of the: o Expected results of current strategic plan both on stock value and future franchise value (assess current and future control premium) o Risks and threats to strategic plan (economy, succession, profitability pressures, etc.) o Shareholder needs (succession, liquidity, dividends) o Sale process timing, prospective buyers, confidentiality, etc. o Potential impact on other constituents (communities, customers, employees) 39

41 CASE STUDY Evaluating Your Strategic Alternatives ABC Bank (the name has been changed to protect the investment banker!!) Midwestern-based; about $150 million in assets Niche small business strategy; Metro market Struggled through financial crisis; net losses and balance sheet reduction Fully-recovered; virtually no NPAs, Net loan recoveries, Adequate ALLL Return to profitability Growth resumed BUT low core earnings Stated position: Not for Sale but would listen to an offer Received an indication of interest in writing Now what? 40

42 CASE STUDY ABC BANK Engagement Letter specifically focused I. ABC BANK continuing as independent bank Financial performance trends including peer review Core operating earnings capacity Fair Market Value as going concern Evaluation of capital position to support growth strategy II. Sale/Merger with XYZ-BHC or other third party Control level Fair Market Value of ABC Financial terms of XYZ-BHC indication of interest Evaluation of XYZ-BHC financial performance and trading activity XYZ-BHC capacity-to-pay and pro forma merger analysis Identification and analysis of alternative Buyer-Candidates III. Strategic Alternatives Reject offer and remain independent Pursue negotiated transaction with XYZ-BHC Engage in expanded marketing process with XYZ-BHC and other parties 41

43 CASE STUDY ABC BANK Report of Financial Advisor 1. Current Banking Environment Challenges and Opportunities 2. Post-Crisis Strategy Troubled assets down from peak of $XX million to $X million ( ) MOU/Regulatory compliance Balance sheet deleveraging loans down from $XXX million in 09 to $XX million 3. Financial Performance Operating losses during crisis; currently operating at modest profit NOL carryforward Leverage ratio about 9.0% forecast shows $XX million of annual net loan growth profit forecast $, $ and $ 4. Prospective Opportunity Consider raising capital Excellent management team in place; Poised for growth Not under compulsion to sell 42

44 CASE STUDY ABC BANK Report of Financial Advisor (continued) 5. Business Bank Strategy Loan mix includes good diversification including C&I, owner-occupied and non-oo CRE, 1-4 family residential and consumer loans Staffing mirrors stated strategy Net loan growth of $XX million in 2015 first year-over-year increase since 20XX 6. Favorable Local Market Economic/Demographic Characteristics Local market historical and projected population growth rates outpace county and state figures Median HHI $ ; Exceeds state median by $ Positive market employment data 7. Competitive Environment Highly competitive market for banking services Local market deposits exceed $XX billion XX banks and thrifts with XXX physical offices 43

45 CASE STUDY ABC BANK Report of Financial Advisor (continued) 8. ABC BANK Peer Screen Criterion Headquartered in MSA Commercial bank with assets between $XXX and $XXX million XX banks as of 12/31/15 9. Financial Observations Median PTPP earnings of %; compared to ACB BANK of % Peer 75 th percentile ROA of only %; ROE of only % of XX Peer banks reported net loss in 2015 Median NPA ratio of % versus % for ABC BANK Median Tier 1 leverage ratio of % versus % for ABC BANK Peer growth rate slightly negative from 20XX to 2015 Similar revenue profile, with low margins and low fee income; total revenue to assets % for Peers versus % for ABC BANK during 2015 ROA of 1.0% is not realistic in current environment; Assuming revenue/assets of 3.5%, overhead/assets would need to be 2.0% to generate 1.0% ROA this assumes pristine asset quality 44

46 CASE STUDY ABC BANK Report of Financial Advisor (continued) 10. Valuation Results Fair market value of a minority interest Control level fair market value Indications of value developed using income and market approaches 11. Factors Driving Community Bank Consolidation 12. Understanding the Bank M&A Environment 13. Potential Buyer-Candidates Criteria List and map Conclusion that numerous prospective buyers would favorably impact valuation 45

47 CASE STUDY ABC BANK Report of Financial Advisor (continued) 14. Evaluation of XYZ-BHC Indication of Interest Proposed financial and non-financial terms (cash and stock proposed terms) Financial capacity of XYZ-BHC Financial performance versus Peers Reasonableness of XYZ-BHC stock valuation (stock portion of consideration) Pro forma acquisition modeling Conclusion that stated pricing level in indication of interest would be fair Conclusion that successful strategic plan execution could result in higher valuation at future date 15. Strategic Alternatives Reject offer and remain independent Pursue negotiated transaction with XYZ-BHC Engage in expanded marketing process with XYZ-BHC and other parties 46

48 EVALUATING STRATEGIC ALTERNATIVES Holistic Consideration of All Relevant Factors Bank Performance Management Talent / Depth/ Breadth Economy Local / National Industry Trends Shareholder Needs & Wants Technology Competition Banks & Non-Banks Regulatory Considerations 47

49 EVALUATING YOUR STRATEGIC ALTERNATIVES Thank you for joining us today! We would appreciate hearing from you. If you have questions or comments regarding today s webinar, or if you would like to discuss how Austin Associates can assist your bank with any aspect of strategic planning or M&A, please contact us. Craig Mancinotti Managing Director & Principal Investment Banking & Strategic Consulting Craig.mancinotti@austinassociates.com Rick Maroney Managing Director & Principal Investment Banking & Strategic Consulting rmaroney@austinassociates.com