3. • Loans focus on construction, farm and family
•Deposit makeup focuses on demand deposits and NOW
•Branches in Northern California near Sacramento
•Both loan portfolios have weight in Family and CommRE
•Acquisition would give the buyer access to markets in Northern California
•They have large income focused in RE loans that carry them
•They are a fee bank
• They are a spread bank- Loan Yield- deposit cost
2
Q4 ‘15 Deposit Port. Composition ($000)
Q4 ‘15 Loan Portfolio Composition ($000)
YTD Income Statement Overview ($000)
First Northern Community Bancorp
Headquarters: Dixon, California
Public: FNRN
4. 3
Branch Map
First Northern Community Bancorp
Headquarters: Dixon, California
Public: FNRN
IS THIS AN OVERLAP, AN
EXTENSION, ETC? WHY?
This would be an extension.
Although the bank First
Foundation Inc. is acquiring
is headquartered within
California, it is located in an
area that that First
Foundation does not have
presence in. This is a good
strategic move for First
Foundation
WHY WOULD THE GREATER
SAN FRANCISCO /
SACREMENTO / NORTHERN
CA BE A POTENTIALLY
GOOD MARKET TO ENTER?
WHY WOULD IT BE A BAD
MARKETPLACE TO ENTER?
There are several advantages
of having more locations in
the state of California. The
expansion into the greater
San Francisco/ Sacramento
area and Northern California
will be a good market to enter
because of the nature of
these areas. These areas are
large developed cities with
people who have a great deal
of disposable income.
First Foundation Inc.
First Northern Community Bancorp
5. Summary Financial Information
Financial Highlights
Financial Results Through December 31, 2015Non-Interest Income Detail ($000)
Non-Interest Expense Detail ($000)
Total Borrowings as of 12/31/15
4
(In Millions)
Loans and Leases: 615,104
Loan loss allowance
Fixed Assets: 7,011
OREO: 0
Other Assets: 28,098
Total Assets: 1,044,625
Total Deposits: 948,114
Other Borrowed Money: 0
Other Liabilities: 10,662
Total Equity: 85,849
Loan/Deposit Ratio (Loans / Deposits): 0.65
ROA (Net income / Assets): 0.0066
ROE (Net income/ Equity): 0.08
Efficiency Ratio ((NonInterest Expense – Amortization of Intang and
Goodwill) / (NonInterest Income + Net Interest Income)): 0.714
TCE Ratio (Tangible Common Equity/Tangible Common Assets): 0.0822
•The target company has no
borrowed money. The company
would need borrowings if it
doesn't’t have deposits. It is a bank
so the company will need
borrowings.
8. Conclusions
8
• Write several bullet points that serve as your conclusion/summary of the target
organization; do not focus as much on the proforma company; try to summarize the
Target as a standalone organization…what are the pros…what are the cons…is it a good
fit? Is the Target doing well financially, operationally, structurally?
• Target company has no borrowing money = no debt outstanding
• Good strategic expansion to First Foundation’s current business. This
gives the company an opportunity to expand further into the California
market
• The Target company has decreasing non-performing assets. Low number of
defaults on loans for the company is another attractive side.
• The target company has higher yields on loans on leases than the buying
company. Buying company can turn more profitable.
• The company’s ROE is almost 8%, a good ROI for a bank and means it is a
healthy company
• The target company also has decreasing non-current loans. The company’s
loans are generating better interest rates and stated payments.
10. Base Case Assumptions
Combination Analysis
Transaction Assumptions
10
• Write a series of bullet points that describe the assumptions used in your modeling
(consideration structure, cost savings, cost savings phases, loan mark, merger costs,
opportunity costs, pricing as a premium of target’s current stock price, CDI assumptions
etc.…use 4/22/16 as the last date for all historical data needed (stock prices, 10 year US
Treasury yields, etc)
• In the consideration tab, it was assumed that it was going to be bought with 100% stock
• Buyer closing price as of 04/22/16 is $22.50
• Seller closing price as of 04/22/16 is $7.72
• Share price premium is 15%
• The 10 year US treasury yield as of 04/22/16 was 1.89%
• Opportunity cost was calculated by adding the 10 year US treasury yield as of 04/22/16
plus 100bp, which equals to 2.89%
• The loan mark was equal 150% of the target’s non-performing assets as of 12/3/15
• The New CDI is assumed to be 1%
• Tax rate given was 28.2%
• Merger related cost was stated at 3%
• The % for interim goodwill was 90%
• The cost savings was 20% 15%, 75%, and 100% for Year 1, Year 2, and Year 3 Savings
Phase (respectively)
11. • Stated in Proforma BS, the accretion is 3%, which allow growth through the acquisition
• The BV/Share value with the acquisition will increase: proforma adjusted value is $17.39
• The TBV/Share also increased to $16.51
• Also, there will be a 4M increased in shares outstanding, which totals to 20.2M shares
outstanding
• What are the potential cost savings? What are the synergies in operations? What
possibilities exist?
•They will be able to save money by closing branches that are not profitable or do not need
to be running as well as letting go of some employees
• Use the most effective technological and efficient system for the new company
comprised of the two
• Synergies are not going to show immediately but with the restructuring of the company
and by hiring new management the synergies will start to show since acquiring the
target provides a lot of value for the buying company.
• Is it strategically compelling and why/why not? Does the pro forma company change
business models from the original buyer model? Do yields increase, do costs of interest
bearing deposits increase? Either, both, neither?
• The deal is compelling because there are high yields that will increase at the same time
as the cost of interest bearing deposits decreases
• Is it financially attractive and why/why not? Look at TBV dilution, look at EPS accretion,
and payback periods…
•If you look at this financially the deal does look attractive. This is because the TBV and
EPS accretion are positive numbers. Even though there is an initial investment the payback
periods for the company are low meaning the investment will show returns in a short period
11
Transaction Logic
12. Pro Forma Income Statement
13
• When is the deal accretive to
GAAP EPS (what year, if ever in
our 5 year horizon)?
•The deal is accretive to GAAP EPS
from the beginning period starting
at 2.4% in 2016 and continuously
increasing
• What are the cost saves, what is
the phase schedule for them, and
where will the savings come
from?
•If we look at the assumptions, the
cost savings is 20%. In Year 1 the
after tax cost savings is positive. In
Year 2 and in preceding years the
after tax cost savings increased
drastically which shows that the
savings exceeded over 4M at Year
3.
• What are the one-time
merger/restructuring costs of the
deal? What types of things
would those go to?
•The one-time restructuring costs
of the deal are coming from the
technology system, new
management and the severance
costs.
Assumes a 100% stock / 0% cash purchase at 15% Stock Premium as of 4/22/16,
with closing date as of 6/30/2016
The pretax merger costs are not included in the EPS values above; however, the opportunity cost of the pretax merger costs is included as a part of the “Opportunity Cost of Cash” line item
13. Pro Forma Balance Sheet
14
•The transaction is
accretive to TCE by 300bp
• Book Value / Share increases by
$17.39 per share
• TBV / Share increases by $16.51
• Take your TBV dilution (TBV per
share of Buyer – TBV of Pro
Forma per share) divide this by
your 2018 Pro Forma EPS
accretion ($/share) to get your
earn back period…what is the
earn back period…why was 2018’s
EPS accretion used as opposed to
an earlier year?
•The earn back period is -1.8 which
shows that the proforma TBV per
Share is greater than the buyers.
This means that is it will be
accretive to TBV
Assumes a 100% stock / 0% cash purchase at 15% Stock Premium as of 4/22/16,
with closing date as of 6/30/2016
14. Pro Forma Loan and Deposit Composition
15
SNL Financial
Based on EOP Regulatory Filing Balances, as of 12/31/15
Total Loans: $1.79Bn; Yield: 4.02%
Total Deposits: $1.52Bn; Cost: 0.55%
Total Deposits: $1.52Bn; Cost: 0.55%
Total Deposits: $2.47Bn
Weighted Average Cost: 0.37%
Total Deposits: $2.47Bn
Weighted Average Cost: 0.37%
Buyer Seller ProForma
Total Loans: $1.5Bn; Yield: 5.20%
Total Deposits: $0.95Bn; Cost: 0.19%
% NonInterest Bearing: 33.05%
Total Loans: $3.29Bn
Weighted Average Yield: 4.61%
15. Contribution Analysis
16
Assumes a 100% stock / 0% cash purchase at 15% Stock Premium as of 4/22/16,
with closing date as of 6/30/2016
Include a Contribution Analysis for Loans, Assets, Deposits, Borrowings, Net Income 2018
(which would serve as a stabilized, combined company), Total Pro FormaShare Count
Write a brief synopsis (3-4 bullet points) below your table discussing whether the deal is a
good deal or a bad deal based on the above contribution analysis
• If this acquisition goes through this is a good deal because the numbers show increasing
values
• The target does not have any borrowings so the buyer does not have to assume anything
here.
• The deal is very attractive because the Net Income will increase to $27, 452
16. Pro Forma Internal Rate of Return
17
Assumes a 100% stock / 0% cash purchase at 15% Stock Premium as of 4/22/16,
with closing date as of 6/30/2016
Use the in-class IRR format (you will need to make it look pretty) to determine the IRR of the
deal…what is the IRR representative of? How should we use it?
• IRR is high: Investors will see attractiveness
• IRR will allow investors to compare to alternative deals or investments based on the
yields
• The IRR also allows management to see which projects are more worthwhile in
comparison in the NPV. IRR is usually preferred for choosing a project over NPV if it is
high enough
17. Sensitivity of Consideration Structure
17
Assumes a 100% stock / 0% cash purchase at 15% Stock Premium as of 4/22/16,
with closing date as of 6/30/2016
Re-run the deal as 50% stock / 50% cash and 100% cash (0% stock)…
What happens to TBV per share across the three scenarios, EPS, Earnback period, see
slide 14? Put together a table with the three consideration structures above the top and the
BV Accretion (Dilution), TBV Accretion (Dilution), Resulting TCE Ratio, EPS, Earnback
period along the side axis…
Based on these above factors, how should the deal be structured (from a consideration
structure) to make the most sense for the buyer and why?
*Based on these above factors the deal should be kept the way it is structured
currently. It should be kept the same because it is the most accretive the way it
is now. When the deal was 50/50 split and 100% cash the deal was dilutive. The
deal is the most accretive now because is uses 100% stock.
