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13. deal due diligence and valuation of marshall ilsley bank
 

13. deal due diligence and valuation of marshall ilsley bank

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    13. deal due diligence and valuation of marshall ilsley bank 13. deal due diligence and valuation of marshall ilsley bank Presentation Transcript

    • DEAL DUE DILIGENCE/VALUATION OF MARSHALL & ILSLEY BANK DEB SAHOO, MBA, ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGAN, ANN ARBOR December 06, 2010
    • TABLEOFCONTENTS Executive Summary Company Snapshot Due Diligence Bank Valuation Recommendations Deal in the News 3 6 8 27 31 34
    • EXECUTIVE SUMMARY
    • BACKGROUND Background – Due Diligence for Steve’s Ross’s Bank Acquisition Effort (Business week, December, 2009)
    • EXECUTIVESUMMARY TARGET : Marshall & Ilsley •Dominant banking franchise in attractive upper-Midwest market •High-quality management and strong franchise, with stable ROE averaging 16% from 2000-2007 •Stable base of low-cost deposits, with 30% share in Milwaukee, and top 5 share in its top 5 markets •Asset Management division ($33B AUM) generating stable profits and cross-selling opportunities •History of successful acquisitions (21 since 1989) •Presence in fragmented and growing Minneapolis market. Option to aggressively expand •Fundamentally undervalued, at 0.7X TBV and 7X normalized earnings COMPANY AND STOCK INFORMATION HQ Location 770 North Water Street Milwaukee, WI 53202 DEAL •$2.2 B private placement, giving SJB Bank 40.3% ownership of M&I •$1.7 B used to repay TARP and $0.5 B used to strengthening capital adequacy •Management underpaid relative to competitors. High management incentive to increase stock price and shareholder returns STOCK INFORMATION Price: $5.49 (Dec 03, 2010) Stock Beta: 1.37 MKT Cap: $2.90B
    • COMPANY SNAPSHOT
    • COMPANYSNAPSHOT Geographic Presence and Banking Portfolio
    • DUE DILIGENCE
    • DUEDILIGENCE Due diligence summary Credit Risk and Deposit Mix Key Points Low Credit Risk Favorable geographic mix Limited exposure to high risk borrowers Steady improvements in NPL Diverse deposit mix Large deposit base Trending away from time deposits toward more stable demand deposits Refocusing on strengths 18% Increase in Commercial Real Estate Lending 40% Decrease in Construction and Development Lending Top 20 relationships only account for 5% of M&I Loan portfolio, limiting exposure to idiosyncratic risk Steady Fee Income generated by Wealth Management Business Peer comparison M&I reduced non performing loans by 32%, outperforming peers
    • DUEDILIGENCE Concentrated presence in high-employment states Unemployment (not seasonally adjusted)
    • DUEDILIGENCE Credit Risk Profile - Total Loan Portfolio • TOTAL LOANS at Sept, 2010: $39.7B LOANS BY ASSET CLASS LOANS BY GEOGRAPHY •Stressed AZ & FL loan portfolio, company focusing on return to core Midwestern market
    • DUEDILIGENCE Credit Risk Profile - Loan Concentration and Change in NPL • Top 20 relationships only account for 5% of M&I Loan portfolio, limiting exposure to idiosyncratic risk •M&I reduced non performing loans by 32%, outperforming peers LOAN Concentration $39.7B as of Sept 2010 % Change in Non Performing Loans, 3Q10 vs. 2Q09
    • DUEDILIGENCE Credit Risk Profile - NPL Portfolio • TOTAL NON PERFORMING LOANS at Sept, 2010: $1.6B NPL BY ASSET CLASS NPL BY GEOGRAPHY
    • DUEDILIGENCE Credit Risk Profile - 6 Month Trends in Loan Portfolio • 18% Increase in Commercial Real Estate Lending •40% Decrease in Construction and Development Lending 0% 5% 10% 15% 20% 25% 30% 35% Comm.Lending Res. RE Comm. RE C&D Consumer Loan Portfolio (%) March 2010 September 2010
    • DUEDILIGENCE Credit Risk Profile - Steady Improvements in NPL Inflows of non performing loans stabilizing Percentage of Non-performing loans decreasing Loan loss reserves reaching adequate levels
    • DUEDILIGENCE Credit Risk Profile - Construction and Development (C&D) Exposure • Construction and Development (C&D) Loan Portfolio shrinking Total C&D Loan = $3.6B (9.1% of total loans) Total C&D Non performing loans = $529M (33% of total NPLs) C&D Loans have decreased by $6.8B (65%) vs. 1Q08 M&I slowly de-stressing loan portfolio as it strengthen its balance sheet TOTAL C&D LOAN: $3.6B NON PERFORMING C&D LOAN: $529M
    • DUEDILIGENCE Credit Risk Profile - Commercial Real Estate Loans Exposure • CRE Loan of $13B (33% of total loan) • 40% of commercial real estate are owner occupied • CRE Non performing loans make up ~30% of NPLs ($483MM) TOTAL CRE LOANS: $13B NON PERFORMING CRE LOANS: $483M
    • DUEDILIGENCE Bank Deposit Mix • Funding Mix Strengthens Balance Sheet •Solid Deposit Growth, Decrease in Time Deposits (Hot Money) •Loans to Deposit Ratio down from 132 % to 104% in just over two years Growth Vs. Prior Year Loans/Deposits
    • DUEDILIGENCE Composition of MI’s Consolidated Average Deposits (2008 -2009) • Overall increase of $1.6 billion or a 3.4% of credit balances •Non Interest Balances and Interest Balances increased by 26.8% and 52.3% respectively •M & I increased rates to attract more balances which impacts net interest margin $7,429.50 $4,946.70 $10,462.70 $17,212.50 $563.90 Non Interest Bearing Interest Bearing Money Market Time Foreign
    • DUEDILIGENCE Revenue Mix Non-Interest and Fee Income Mix •Ability to generate income despite challenging environment •Fee Income is driven by Wealth Management Business (Not impacted by Financial Regulations) Total Revenue (2004 – 2009) 9/09 YTD – 9/10 YTD Revenue Growth
    • DUEDILIGENCE Net Interest Margin • Ability to generate income despite challenging environment • Shift in average deposit mix resulted on a positive impact on net interest margin •General economic conditions affected net interest margins Net Interest Margin (3Q08 – 3Q10)
    • DUEDILIGENCE Expense Comparison • One of the most expense disciplined banks in the industry Non – Interest Expense/ Average Assets (9/10 TYD) PEER BANKS ASBC: Associated Banc Corp MTB: M&T Bank Corp. CMA: Comerica Inc. HBAN: Huntington Bankshares Inc. SNV: Synovus Financial Corp. KEY: Key Corp. ZION: Zions Bancorporation STI: SunTrust Bank FITB: Fifth Third Bankcorp BBT: BB&T Corp. RF: Regions Financial Corp. FHN: First Horizon National Corp.
    • DUEDILIGENCE Peer Leading Tangible Common Equity (TCE) Ratio • Funding Mix Strong TCE/TA ratio amongst peers. •Tier 1 regulatory capital ratio was 11.11% or $2.5B billion in excess of the Federal Reserve Board’s requirements TCE/TA Adequate Tier 1 Capital Ratio
    • DUEDILIGENCE Tier-I Capital
    • DUEDILIGENCE Compensation Summary •M&I Executives Underpaid Relative Peers Because of TARP Overhang Name Title 2006 (USD) 2007 (USD) 2008 (USD) 2009 (USD) Comments Greig, Paul Executive Chairman, Chief Executive Officer, President, Member of Executive Committee, Chairman of FirstMerit Bank N A, Chief Executive Officer of FirstMerit Bank N A and President of FirstMerit Bank N A 1,024,169 1,710,828 1,716,861 1,094,334 Paid back TARP in '09 As Reported Total compensation 2,205,723 3,360,676 4,854,513 5,907,300 Gusmus, Frank J. President of FTN Financial and President of FTN Financial - Bank - - 1,039,846 2,612,118 Owes 866 millionto TARP As Reported Total compensation - - 1,524,509 4,252,808 Beideman, Paul S. (Prior) Former Chief Executive Officer of Associated Bank National Association, Director of Associate Trust Company, Director of Associate Bank and Chairman of Corporate Development Committee 1,333,815 1,442,308 1,072,307 900,000 Owes TARP 525 million, most direct M&I competitor As Reported Total compensation 1,801,958 2,460,741 2,776,841 2,416,079 Gershen, Richard Scott Executive Vice President of Wealth Management Services Division for City National Bank and Director of Wealth Management Services Division for City National Bank - - - 1,198,333 Repaid TARP in early '10
    • DUEDILIGENCE Compensation Summary Name Title 2006 (USD) 2007 (USD) 2008 (USD) 2009 (USD) Comments Furlong, Mark F. Chairman, Chief Executive Officer, President, Chairman of M&I Marshall & Ilsley Bank, Chief Executive Officer of M&I Marshall & Ilsley Bank, Vice President of M&I Capital Markets Group LLC, Treasurer of M&I Capital Markets Group LLC, Director of M&I Capital Markets Group LLC and Director of Marshall & Ilsley Trust Company 1,384,800 1,066,876 875,000 875,000 Owes 1.7 Billion to TARP Cooper, Bill Chairman and Chief Executive Officer TCF Bank 44,000 44,000 - 1,376,923 Repaid TARP in '09 As Reported Total compensation - - 7,367,302 1,666,698 Simmons, H. H. Chairman, Chief Executive Officer, President, Member of Executive Committee and Chairman of Zions First National Bank 1,500,000 850,000 875,000 875,000 Owes 1.4 Billion to TARP As Reported Total compensation 2,296,100 1,597,961 1,499,926 1,373,352
    • BANK VALUATION
    • BANKVALUATION Industry Comparables • Price/Book near the lowest* in the peer group making it an attractive target
    • BANKVALUATION Stock Prices of Industry Comparables •Tarp overhang and fear of increased asset write downs depressing stock price •Pressure to generate better returns for Shareholders 0 20 40 60 80 100 120 12/4/2007 2/4/2008 4/4/2008 6/4/2008 8/4/2008 10/4/2008 12/4/2008 2/4/2009 4/4/2009 6/4/2009 8/4/2009 10/4/2009 12/4/2009 2/4/2010 4/4/2010 6/4/2010 8/4/2010 10/4/2010 NYSE:MI - Share Pricing NasdaqGS:ZION - Share Pricing NYSE:CYN - Share Pricing NasdaqGS:ASBC - Share Pricing
    • BANKVALUATION Deal Structure • Deal structured as a private Placement of $2.2 B •The infusion of $2.2 B will go towards repaying TARP and improving capital adequacy •Proposed Private Placement will allow M&I to meet Basel III capital requirements without losing deferred tax assets •Risk of further deterioration of capital markets could impact liquidity
    • RECOMMENDATIONS
    • RECOMMENDATIONS Risk & Mitigation RISKS •Increased write downs due to real estate exposure •Macro economic conditions •Profitability constraints related to changes in financial regulation •Failure to achieve regulator approval on deal •Further deterioration in Tier 1 asset ratio MITIGATION •Due diligence deep dive into loan portfolio •Model potential gains resulting from SJB synergies related to real estate
    • RECOMMENDATIONS Realign Business Model - Focus on Consumer and Business Segment BUSINESS-to-BUSINESS (B2B) •Increase pricing and efficiency in select regions •Redefine appetite for commercial real estate BUSINESS-to-CONSUMER (B2C) •Target mass affluent and affluent customers for more complete relationship •Focus mass banking efforts in Wisconsin and Indianapolis FY 2006 FY 2007 FY 2008 FY 2009 Q1 2010 Q2 2010 Q3 10 Q4 10 FY 2010 FY 2011 FY 2012 Operating Efficiency Ratio 51% 56% 57% 68% 63% 67% 69% 70% 67% 72% 65% Source: Credit Suisse Equity Research Report, November 5th, 2010 0% 2% 4% 6% 8% 10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ytd Avg Wisconsin Unemployment Rate lags recession… 6% 7% 8% 9% 10% Jan Feb Mar Apr May Jun Jul Aug Sep Oct ...but is already improving in 2010
    • DEAL IN THE NEWS
    • DEALINTHENEWS M&I Deal Announced Acquisition of M&I by BMO was announced on Dec 17 , 2010
    • DEALINTHENEWS M&I Deal Completed M&I Finally Joined the BMO Family in July 2011