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Austin Associates, LLC 2012 Webinar Series
Winning Strategies for Successful Community Banks
Thursday, March 15, 2012Webinar 11:00 a.m. – 11:45 a.m.
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Presenters
Craig MancinottiManaging Director & PrincipalAustin Associates, LLC
Rick Maroney Managing Director & PrincipalAustin Associates, LLC
www.austinassociates.com
3
Austin Associates’ Practice Areas
Investment Banking
Strategic Consulting
Financial Management
Risk Management and Compliance
Technology Solutions
Insurance and Financial Services
www.austinassociates.com
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The New Normal: Keys for Successful Banks
Bank Director Magazine(4Q 2011, Volume 21, Number 4)
Strategy
Capital
Risk Management
Leadership
5
Publicly Traded Banks & ThriftsSummary Stock Performance
Asset Size
Number of
Companies
Total Assets ($Mils)
LTM ROAA
LTM ROAE
NPAs / Total
AssetsPrice /
TBVPS
Price / LTM EPS
> $1 Billion 330 $2,458.3 0.72% 6.35% 1.80% 118% 13.6
< $1 Billion 755 $300.1 0.44% 4.11% 2.15% 71% 12.7
Total 1,085 $490.2 0.51% 4.81% 1.99% 81% 13.1
Publicly Traded Banks & Thrifts
Note: Based on core earnings, if available. Pricing data as of 02/29/2012. Note: Excludes M&A targets and those companies without current pricing multiples.
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Capital LevelsMedian Tier 1 Leverage Ratio
Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.
Source: SNL Financial
7.00%
8.00%
9.00%
10.00%
11.00%
> $1 Billion 8.17% 8.46% 8.57% 8.59% 8.56% 8.72% 8.61% 8.74% 8.91% 9.25% 9.66%
< $1 Billion 9.61% 9.54% 9.62% 9.79% 10.00% 10.17% 10.19% 9.83% 9.60% 9.58% 9.84%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y
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Asset QualityMedian Nonperforming Assets / Total Assets
Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only). Includes companies having reported 12/31/11 assets. Nonperforming assets excludes U.S. guaranteed portion of past due loans and other real estate owned (OREO) covered by loss-sharing agreements with the FDICSource: SNL Financial
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
> $1 Billion 0.50% 0.51% 0.44% 0.36% 0.31% 0.33% 0.61% 1.32% 2.20% 2.08% 1.82%
< $1 Billion 0.47% 0.48% 0.45% 0.38% 0.35% 0.37% 0.50% 0.94% 1.39% 1.49% 1.43%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y
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Earnings & ProfitabilityMedian Return on Average Assets
0.00%
0.30%
0.60%
0.90%
1.20%
1.50%
> $1 Billion 1.08% 1.24% 1.19% 1.14% 1.12% 1.06% 0.90% 0.50% 0.36% 0.57% 0.71%
< $1 Billion 0.99% 1.07% 1.02% 1.01% 1.03% 1.00% 0.91% 0.67% 0.50% 0.61% 0.70%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y
Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.
Source: SNL Financial
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Earnings & ProfitabilityMedian Pre-Tax Pre-Provision / Average Assets
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
> $1 Billion 1.89% 2.10% 1.94% 1.84% 1.81% 1.69% 1.51% 1.38% 1.28% 1.41% 1.36%
< $1 Billion 1.50% 1.61% 1.49% 1.48% 1.50% 1.42% 1.31% 1.18% 1.05% 1.12% 1.11%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Y
Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets.
Note: Pre-Tax Pre-Provision defined as follows: Net Interest Income + Non Interest Income – Non Interest ExpenseSource: SNL Financial
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Earnings & ProfitabilityTotal Revenue Growth
0.0%
40.0%
80.0%
120.0%
160.0%
200.0%
> $1 Billion 10.1% 25.9% 31.9% 42.0% 59.7% 71.2% 80.7% 95.1% 104.7% 117.3% 119.4%
< $1 Billion 4.3% 15.1% 18.9% 24.7% 30.8% 33.3% 36.4% 43.6% 49.3% 55.6% 58.4%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: Median results of all bank holding companies, commercial banks, savings banks, and savings institutions (top-tier consolidated only).Includes companies having reported 12/31/11 assets. Total Revenue = Net Interest Income + Non Interest Income
Source: SNL Financial
2001Y – 2011Y C.A.G.R.
> $1 Billion = 7.3%
< $1 Billion = 4.3%
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Evaluating Strategic Alternatives is a Strategic Planning Process
Effective Strategic Planning for community banks
General Process
1. Solicit input from Board and Key Officers
2. S.W.O.T./Strategic Priorities Questionnaire
3. Evaluate condition and performance of Bank
4. Evaluate market opportunities/limitations
5. Board planning meeting to reach consensus
6. Develop written Strategic Plan document
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First Step: Solicit Input from Board and Key Officers
Start the process with a Confidential Questionnaire
S.W.O.T. Analysis: List 3 Greatest1. Strengths2. Weaknesses3. Opportunities4. Threats
List 5 most important Strategic Planning Priorities
Use Questionnaire Results to Develop Agenda for Strategic Planning Session
Consider using Facilitator
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Review Condition and Performance of Bank
Objective evaluation of balance sheet and income statement
Comparison to relevant peer group
Growth, loan mix, deposit mix, liquidity, asset quality, capital, etc.
Wide range of profitability metrics: “Understand why you earn what you earn”
Identify areas for potential improvement
Understand the impact on your Strategic Planning
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Evaluate Market Opportunities/Limitations
Population Trends
Unemployment
Income Statistics
Housing Market
Major Employers/Industries
Economic Development
Deposit Market Share Analysis
Key Market Opportunities
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Sample Agenda
Market Update: Equity markets, M&A, Regulatory, Economic
Bank Performance Review and Peer Comparison Questionnaire Results Core Strategy: Growth vs. Profitability Expansion Opportunities: De Novo/Acquisition Capital Planning: Alternatives to increase capital Fee Based Business Lines: Trust, Insurance, other Management Succession Establishing Long-term Financial Goals
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After the Planning Meeting…
Prepare written summary of planning meeting
This summary should outline the “consensus” views of the Board
Management is “directed” to develop a written strategic planning document consistent with the Board’s consensus views
The “Strategic Plan” should be ratified by the Board
Review progress Quarterly at Board Meetings
Update the Strategic Plan annually
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Successful Strategies - Case Studies
#1 Balanced Growth and Profitability: Merchants National Bank, Hillsboro, OH
#2 Growth Strategy: Waterford Bank, Toledo, OH
#3 Troubled Bank Capital Raise: Anonymous
#4 Clean Bank Capital Raise: Hills Bancorp, Hills, IA
#5 Deleverage: First Security Bank, Bozeman, MT
#6 Troubled Bank Acquisition: CrossFirst Holdings, Overland Park, KS
#7 Clean Bank Acquisition: Any Bank, USA
#8 Sale: Mainline Bancorp, Inc., Ebensburg, PA
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Case #1: Balanced StrategyCompany Profile
Company: Merchants Bancorp, Incorporated
Bank Sub: Merchants National Bank, Hillsboro, OH
SEC Reporting: No (Deregistered in 2005)
Traded: Private
Assets: $572 million
TARP Outstanding: No
Year Est.: 1879
# of Offices: 12
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Case #1: Balanced StrategyBranch Map – Merchants National Bank
Active Branches of Merchants National Bank
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Case #1: Balanced StrategyKey Strategies – Merchants National Bank
Capital - effective capital management
Growth – opportunistic acquisition
Growth - successful branching strategy
Expenses – efficient operations
People - the right structure and leadership
Translates into strong profitability and enhanced shareholder value
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Case #1: Balanced StrategyStrategic Initiatives – Merchants Bancorp
2003 – repurchased $7M of common stock from a family interest (11%) with internal funds
2005 – completed “going-private” reverse stock split transaction to deregister from the SEC
2009 – acquired CB Bancorp, Higginsport, OH ($111M in assets); a portion of the funding came from the issuance of subordinated debentures to directors
Ongoing stock repurchase program
Established 6 de novo branches since 1990 (8 total offices) – county seat strategy
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Case #1: Balanced StrategyThe Results – Merchants Bancorp, Inc. 2002 – 2011 Performance
% of Avg. Assets Average Range
Net Interest Income 3.99% 3.83% - 4.34%
Non Interest Income 0.49% 0.41% - 0.53%
Non Interest Expense 2.37% 2.07% - 2.68%
Pre-Tax Pre-Provision 1.97% 1.55% - 2.37%
Net Income (ROAA) 1.20% 0.97% - 1.53%
Since 2002, 7.0% CAGR in total revenue
Since 2002, 160% return (book value appreciation plus cash dividends)
2010 – ranked by SNL Financial as one of the top 100 “best performing community banks” ($500M to $5B)
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Case #2: Growth StrategyCompany Profile
Company: Waterford Bancorp, Inc.
Bank Sub: Waterford Bank, NA, Toledo, Ohio
SEC Reporting: No
Traded: Private
Assets: $360 million
Date Est.: August 29, 2007
# of Offices: 1
ATMs: None
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Case #2: Growth StrategyBranch Map – Waterford Bank
Active Branch Proposed Branch
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Case #2: Growth StrategyDe Novo Bank Matures – Waterford Bank
De Novo bank opened August 2007
Niche market – small business, professionals, high net worth
Highly customized, exceptional service; Experienced employees
No trust, No investment products, No insurance
Created mortgage banking division in 3rd year
Keys to success – management, connected directors and access to capital
4th Anniversary – all financial goals exceeded
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Case #2: Growth StrategyStrategic Plan Development – Waterford Bank
Solicited Input from all directors and employees
S.W.O.T. Analysis
Questionnaires: 5 Most Critical Planning Priorities
Consensus: “Stay Focused”
Primary Strategic Objectives
1. Operate as a “High Performance Bank”
2. Culture of “Best Practices”
3. Deliver “Superior Shareholder Returns”
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Case #2: Growth StrategyStrategic Planning Priorities - Waterford
1. Remain focused on existing target markets
2. Recruit, attract and retain experienced staff
3. Enhance Enterprise Risk Management (“ERM”)
4. Offer competitive products and services
5. Expand mortgage banking division
6. Open new branch and expand main office
7. Consider targeted stock offering to new branch customer prospects
8. Prudently pursue advances in technology
9. Maintain credit quality
10. “Targeted” Tier 1 Leverage Ratio of 9.0%
11. Organic Growth: $65 million in 2012, $70 million/year 2013-2015
12. ROA of 1.00% by 2013
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Case #3: Troubled Bank Capital RaiseCompany Profile (Note)
Company: XYZ Bancorp
Bank Sub: XYZ Bank
SEC Reporting: Yes
Traded: NASDAQ
Assets: < $ 1 billion
TARP Outstanding: No
Note: Given the timing of the proposed transaction the identity of this company could not be disclosed
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Case #3: Troubled Bank Capital RaiseCompany Profile Summary
Strong core deposit base
Attractive market
Aggressive expense reduction program
Significant credit losses the past 4 years
Consent Order in place
Nonperforming levels improving but elevated
PTPP earnings still at depressed levels
Stock trades at deep discount to book
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Case #3: Troubled Bank Capital RaiseThe Strategy
Raise $10 -15M of common to achieve IMCRs
Approach local investors (non-shareholders) for $5-8M of offering
Rights offering for $5-10M
Approach institutional investors for balance
The “story” must be developed to address asset quality, earnings and valuation proposition
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Case #4: Clean Bank Capital RaiseCompany Profile Summary
Company: Hills Bancorporation, Hills, Iowa
Bank Sub: Hills Bank and Trust Company
SEC Reporting: Yes
Traded: OTC
Assets: $2.0 billion
ROAA: 2011 – 1.37%; 5 yr avg. – 1.08%
ROAE: 2011 – 13.4%; 5 yr. avg. – 11.3%
Capital Ratios: (1) Tier 1 - 9.80%Total Risk Based - 14.31%
(1) Consolidated ratios before offering
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Case #4: Clean Bank Capital RaiseThe Strategy
Raise up to $30 million in a public offering
Priced at $63.00 per share or approximately 138% of TBV and 10.0 x EPS
Use of Proceeds (as stated in S-3 filing)(i) further capitalize the Bank;
(ii) periodic stock repurchases to create liquidity for stock;
(iii) working capital and other general corporate purposes; and
(iv) potential acquisition opportunities, although there are no current plans or specific targets for any such acquisition.
Results: Sold $26 million in 3 months to existing stockholders and a limited number of new shareholders
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Case #5: Deleveraging StrategyCompany Profile
Company: Inter-Mountain Bancorp, Inc.
Bank Sub: First Security Bank, Bozeman, MT
SEC Reporting: No
Traded: Private: S Corporation - Shareholder Agreement with transfer restrictions
Assets: $566 million at 12/31/11
Year Est.: 1919
# of Offices: 9
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Case #5: Deleveraging StrategyBranch Map
Active Branches of Inter-Mountain Bancorp, Inc.
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Case #5: Deleveraging StrategyMarket Leading Bank Hits Speed Bumps First Security Bank acquired 3 banks since 2000 (West
Yellowstone, Three Forks and Fort Benton); acquired an insurance agency in 2001; acquired a bank branch in 2001; and established 2 de novo branches (Big Sky in 2005 and Bozeman in 2006)
Assets increased from $443 to $604 mm from 2005 to 2010
Net income ranged from $10.0 to $10.2 mm from 2005 to 2007; PTPP earnings over 2.00%
NPAs increased from $4.0 to $27.7 million from 2007 to 2010
Earnings decline in 2008 and 2009, and First Security Bank reports $5.7 million loss during 2010, PTPP declines to 1.17%
Bank enters into MOU in September 2010
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Case #5: Deleveraging StrategyStrategic Plan Development
2-Year Planning Horizon – 2011 and 2012
Solicited Input from all directors and key officers
S.W.O.T. Analysis and Questionnaire to identify critical planning priorities
Strategic Alternatives Considered:
1. Sell – no buyers; high NPAs; create more value by fixing problems; board owns 50% plus
2. Raise Equity – low stock price; dilution concerns
3. Deleverage Balance Sheet
37
Case #5: Deleveraging StrategyStrategic Planning Priorities
1. Full compliance with MOU is the “highest” priority
2. Organizational realignment; establish CCO position and Branch President/CLO position; needed to separate credit decision from sales
3. Develop written Capital Plan; achieve Tier 1 leverage ratio of 9.0%; Capital Plan adopted in January 2011; Holding company to borrow $5 million and downstream to bank as equity
4. Engage in a “Moderate Balance Sheet Reduction” strategy; reduce assets by $50 million in 2011; reduce CRE concentration; no branching or acquisitions
5. Develop financial metrics to measure condition and performance of bank: (1) capital; (2) asset quality; (3) earnings; (4) liquidity; (5) interest rate risk; (6) growth; and (7) diversification.
6. Review and update written management succession plan
7. Revise board agenda; enhance board package; improve meeting efficiency; commensurate with size and complexity of bank
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Case #5: Deleveraging StrategyBank Level Financial Forecast – Inter-Mountain
Actual
2011 2012 2011
Assets $552,323 $562,382 $565,802
Net Income $2,724 $4,103 $3,855
Tangible Equity $51,861 $54,323 $53,866
ROA 0.47% 0.74% 0.68%
NCOs $4,004 $2,420 $2,812
NPAs $22,574
Forecasted
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Case #6: Troubled Bank Acquisition (Note)
Company Profile - Buyer
Company: CrossFirst Holdings, LLC
Bank Sub: CrossFirst Bank, Overland Park, KS
SEC Reporting: No
Traded: Private
Assets: $247 Million
Year Est.: 2007
# of Offices: 1
Deal Closing: June 30, 2010
Note: This case study was presented at the 2012 Acquire or Be Acquired Conference by Bob Monroe of Stinson Morrison Hecker LLP
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Case #6: Troubled Bank AcquisitionCompany Profile - Seller
Company: Leawood Bancshares, Inc.
Bank Sub: Town & Country Bank
SEC Reporting: No
Traded: Private
Assets: $92 Million
Year Est.: 2001
# of Offices: 1
Deal Closing: June 30, 2010
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Case #6: Troubled Bank AcquisitionBranch Map
CrossFirst Bank Town & Country Bank
42
Case #6: Troubled Bank AcquisitionDeal Profile
Town & Country troubled because of significant asset quality issues
Buyer desires to limit risk from Town & Country troubled loan portfolio
Town & Country’s $65 million loan portfolio has $5.3 million of non-performing loans and the collectability of $15 million concerns Buyer
Seller has no ability to retain troubled assets
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Case #6: Troubled Bank AcquisitionDeal Terms Buyer issues equity units to Seller (Buyer entity is an LLC) Seller contributes all stock of Town & Country to Buyer Seller entity must hold all equity units for 2 years and
cannot distribute to its shareholders Buyer retains Town & County as free-standing bank
(changes name to CFBank) Value of deal is subject to performance of underlying
assets of Town & Country; number of equity units can increase or decrease to zero based on complex formula.
At final settlement, any remaining equity units, if any, will be distributed to Seller shareholders, who then become Members of Buyer
44
Case #6: Troubled Bank AcquisitionSummary – CrossFirst and Town & Country
End of story coming soon
Seller shareholders may receive Units of Buyer, but amount uncertain
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Case #7: Clean Bank AcquisitionBUYER Profile
Company: Any Bank Holding Company
Bank Sub: Any Bank
SEC Reporting: No
Traded: Private
Assets: under $1 Billion
Deal Closing: 2012
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Case #7: Clean Bank AcquisitionSELLER Profile
Company: Any Bank Holding Company
Bank Sub: Any Bank
SEC Reporting: No
Traded: Private
Assets: Smaller than the Buyer
Deal Closing: 2012
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Case #7: Clean Bank AcquisitionTypical Process Seller Advisor Conducts Marketing Process
Never expect to buy a bank for $1 less than someone else is willing to pay….DON’T take it personal
Prepare “Indication of Interest” based on Confidential Information supplied by seller’s advisor
Conduct on-site due diligence
Prepare Final Bid
Negotiate Deal Contract
Secure Regulatory Approval
Closing & Integration
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Case #7: Clean Bank AcquisitionKey Tips for Buyers Proactive M&A Outreach…maybe you can avoid the auction! Don’t underestimate culture “fit” or lack of… Critical Financial Metrics
1. Purchase accounting impact2. Pro Forma Capital ratios3. EPS Dilution/Accretion; Cash EPS Dilution/Accretion4. Tangible Book Value Per Share Dilution/Payback Period5. Internal Rate of Return6. Guideline Transactions Analysis7. Discounted Cash Flow Analysis
Due Diligence: “Goldilocks” Approach
49
Case #8: Sale StrategyCompany Profile
Company: Mainline Bancorp, Inc.
Bank Sub: Mainline National Bank, Ebensburg, PA
SEC Reporting: No
Ticker: MNPA
Exchange: Pink
Assets: $238 million
TARP Outstanding: $4.5 million
Year Est.: 1944
# of Offices: 8
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Case #8: Sale StrategyBranch Map
Active Branches of Mainline National Bank
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Case #8: Sale StrategyStrategic Planning Overview
Slow growth markets
Profitability depressed – margin compression from lack of loan growth, plus OTTI losses
Consent Order issued March 2011
No significant asset quality issues
TARP overhang of $4.5 mil
Stock was illiquid and traded at deep discount to book (< 50% of TBV)
CEO succession issues
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Case #8: Sale StrategyEvaluating Strategic Options
Earn-out of TARP – partial take out of TARP could be feasible by 5th year anniversary
Capital raise – significant dilution and high execution risk
Sell – valuation analysis; assessment of market timing; and assessment of potential buyer-candidates
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Case #8: Sale StrategyImplementation
Retained Austin Associates in May 2011
Marketing process started June 2011
21 institutions contacted; 5 nonbinding offers received
Offers ranged from 80% - 128% of tangible book; (demonstrates the importance of a market check!)
60 day negotiation process
Deal announced September 2011
Deal closed March 9, 2012
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Case #8: Sale StrategyResults
Deal Value ($mils): $21.4Announcement Date 9/14/2011Announced Deal Value per Share $69.00Consideration 60% Stock / 40% CashPrice / Tangible Book 128%Price / LTM Core EPS 28.9Premium to 09/13/11 Trading Price 294%
S&T Bancorp Financials(For the LTM Period Ending June 30, 2011)
Total Assets ($bils) $4.1Core Net Income ($mils) $45.2Core ROAA 1.10%Core ROAE 7.82%
Tangible Equity / Tangible Assets 10.82%NPAs / Total Assets 1.72%
Stock Price (1 Day Prior to Announcement) $16.93Price / Tangible Book 151%Price / LTM Core EPS 12.2
S&T Acquisition of Mainline Bancorp
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Case #8: Pro Forma Branch MapMainline & S&T
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Question and Answer Session
Craig MancinottiManaging Director & PrincipalAustin Associates, LLC
Rick MaroneyManaging Director & PrincipalAustin Associates, LLC
www.austinassociates.com