Incorporating M&A into the Strategic Planning Process January 27, 2015 7:30 – 8:15 a.m.

Craig Mancinotti Managing Director & Principal

Rick Maroney Managing Director & Principal

The Strategic Planning Process “Directors Direct and Managers Manage”

I. Overview: “Right-Size” your Planning Process

� Planning process for $100M, $500M and $1B banks

� Annual review and preparation is industry “Best Practice”

� Role of Directors/Role of Management

� To use or not to use a Facilitator

II. Start with a Board Planning Retreat

� Use a pre-meeting planning questionnaire

� Sample Questionnaire (Exhibit A)

� Level of Preparation = Level of Effectiveness

� Should senior management attend?

� Purpose: Identify critical strategic issues and achieve Board consensus on those issues

� Sample Agenda (Exhibit B)

� Post-meeting written summary

III. Preparing the Strategic Plan Document

� Management’s responsibility

� Team approach (CEO and senior management group)

� Sample Table of Contents (Exhibit C)

� Perspectives on “Vision” and “Mission Statements”

� “Key Strategic Priorities” should be framed based on Board consensus

� Financial projections/targets are not a substitute for rigorous annual budgeting process

� Solicit input from all employees to develop “Functional Area Tactical Action Plans”

� Monitor quarterly and update annually

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Incorporating M&A into the Strategic Plan Getting Started

� Evaluate scalability of your current strategic plan � Critically assess “stress points” in organizational chart � Identify any regulatory issues that could impede a deal � Discuss position on certain social issues (board seats, C-Level management positions) � Assess financial capacity (cash, stock, target size) � Determine geographic reach – how far are we willing to go and effectively manage the

acquisition � Consider an M&A policy

M&A Policy – Sample Table of Contents

� Granting of authority � Who? – CEO, M&A Committee � What? – Make contact; submit LOI

� Target parameters – size, geography, other � Financial results – EPS impact, TBV dilution and payback period, IRR � Due diligence team

� Internal team – operations, credit, risk, department heads � Loan review � Financial advisors � Legal advisors

Proactive Steps

� Identify targets within defined geographic area and size limitations (whole banks, branches)

� Prioritize targets with board or M&A committee; quarterly review of performance/events � Model one or two targets with public information � Identify probable social issues with priority targets � Discuss contact plan for each priority target (CEO, board member) � Contact professionals to describe M&A interest (investment bankers, lawyers,

accountants) � Line up professional team with contingency plans for conflicts

Preliminary M&A Analysis

� See Exhibit D for sample Table of Contents and Target and Market Evaluation � Prioritize and evaluate markets based on economic, demographic and competitive factors � Consider identifying:

� Branch targets � Strategic merger candidates � Priority acquisition targets (optimal size and markets) � Secondary acquisition targets (smaller, less attractive markets)

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EXHIBIT A

First Bank Anytown, USA PLANNING QUESTIONNAIRE In Preparation for Strategic Planning Process

S.W.O.T Analysis

1. List the three greatest Strengths of the Bank A.

B.

C.

2. List the three greatest Weaknesses of the Bank A.

B.

C.

3. List the three greatest Opportunities for the Bank A.

B.

C.

4. List the three greatest Threats facing the Bank

A.

B.

C.

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EXHIBIT A (continued)

First Bank Anytown, USA PLANNING QUESTIONNAIRE In Preparation for Strategic Planning Process

Identification of Critical Strategic Issues

List the most important Strategic Issues facing the Bank. The term “Strategic Issue” means any fundamental issue the organization has to address to achieve its mission and move towards its desired future. 1.

2.

3.

4.

5.

Please return your completed questionnaire electronically to:

Craig J. Mancinotti Managing Director and Principal Austin Associates, LLC craig.mancinotti@austinassociates.com

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EXHIBIT B Sample Agenda

First Bank, Anytown, USA

I. Preparing Foundation for Strategic Planning Discussion

A. Economic Conditions and State of the Industry B. Financial Performance Review of Bank and Parent Company C. Peer Group Comparisons D. Market Share Data E. Market Update - Bank Stock Trading Multiples F. Market Update - M&A Environment

II. Questionnaire Results

A. S.W.O.T. B. Key Strategic Issues

III. Key Planning Issues

A. Strategic Direction

• Aging shareholder base

• Sell, Merge or Remain Independent

• Growth Strategy vs. Profitability Focus

• Future Vision

B. Succession Planning

• CEO

• Senior Management

• Board

C. Management Development

• Organization Chart

• What are the bank’s priorities? D. Organic Growth

• Limited growth markets

• Strategies to achieve growth

• De novo branching E. Geographic Expansion

• Define the geographic market area for expansion

• Strategic Mergers?

• Acquisitions?

• Specific “Target” opportunity – review financial modeling

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EXHIBIT B (continued) ______________________________________________________________________________

F. Financial Performance

• Balance sheet growth expectations

• Most important metrics for financial performance evaluation?

• What level of performance is acceptable to the Board?

• Capital Policy/Dividend Policy G. Products and Services

• Comparison of products/services versus the competition

• What are the bank’s deficiencies?

• What are the bank’s priorities?

• Impact of technology

• Fee-based business lines: Trust, Investments, Insurance, Mortgage Banking

H. Marketing/Culture

• Self-assessment

• Do we have a strong sales culture?

• What is the bank’s Marketing Plan? I. Open Discussion

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EXHIBIT C

First Bank Anytown, USA 2015 – 2017 STRATEGIC PLAN

Table of Contents _______________________________________________________________________________________________

A. Introduction – Background and History ............................................................................................... 1

B. Vision ................................................................................................................................................... 2

C. Mission Statement ................................................................................................................................ 2

D. Internal Situation Analysis ................................................................................................................... 3

E. S.W.O.T. .............................................................................................................................................. 5

F. Key Strategic Priorities ........................................................................................................................ 6

1. Remain Focused on Existing Target Markets 2. Recruit, Attract and Retain Qualified, Experienced Staff 3. “Best Practices” Enterprise Risk Management (“ERM”) Program 4. Offer Competitive Products and Services 5. Expand Marketing Program 6. Continue to Improve Mortgage Banking Performance 7. Organic Growth Goals: Increase Assets by $50 million per year from 2015-2017 8. De Novo Branching Strategy 9. Prudently Pursue Advances in Technology 10. Maintenance of Credit Quality 11. Capital: Targeted Tier 1 Leverage Ratio of 9.00 Percent 12. Mergers and Acquisitions 13. Financial Performance Goal of 1.00 Percent Return on Average Assets

G. Financial Forecast – 2015-2017 ........................................................................................................ 12

Exhibit 1: Strategic Plan Financial Forecast ....................................................................................... Tab 1

Exhibit 2: Functional Area Tactical Action Plans .............................................................................. Tab 2

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EXHIBIT C (continued)

Functional Area Tactical Action Plans

Attached as Exhibit 2 to this Strategic Plan is a matrix of key functional area tactical action plans, including the following:

A. Accounting/Financial Management/Budgeting B. Lending C. Retail/Deposit Gathering D. Marketing E. Operations F. Technology G. Human Resources/Staffing H. Products and Services I. Facilities/Geographic Locations J. Credit Administration K. Compliance L. Miscellaneous

Management has developed specific goals, action plans and deadlines for each identified priority, and has assigned individual responsibility to ensure accountability. Management will provide Strategic Plan

progress reports to the Board in February, May, August and November regarding the status of planning priorities and action plans. Management may review and update the plan at more frequent intervals at its discretion.

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EXHIBIT D

First Bank Anytown, USA Geographic Expansion Strategy

Table of Contents

Section Tables

Expansion Area and Market Data 1 1.1 – 1.8

Branch Divestiture Targets 2 2 – 2.8

Merger Candidates ($250 - $500 mil) 3 3 – 3.11

Primary Acquisition Targets ($50 - $250 mil) 4 4 – 4.20

Secondary Acquisition Targets (< $50 mil) 5 5

M&A Transaction Data 6 6.1 – 6.6

Capital Capacity Analysis 7 7.1

Sample Analysis of Acquiring ABC Bank 8 8.1 – 8.5

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FIRST BANK Target Evaluation

Main

County Total County

County/ Seat Top Tier Assets Market LTM NPAs/

Bank Name City State (Y/N) Holding Company (000) Rank (1) % Rank (2) % Rank (2) ROAA Assets

1 N $221,749 13 12.8% 2 / 11 100.0% 1 / 1 0.76% 0.48%

2 Y $213,914 20 57.8% 1 / 5 64.8% 1 / 5 0.95% 5.52%

3 N $175,905 16 3.8% 9 / 13 46.5% 2 / 2 0.51% 7.41%

4 Y $169,219 26 33.0% 2 / 6 49.5% 1 / 5 0.91% 1.62%

5 Y $143,419 9 6.6% 7 / 17 7.9% 6 / 17 0.82% 0.74%

6 N $131,166 22 19.5% 2 / 5 37.7% 2 / 3 1.14% 1.84%

7 N $127,249 6 4.7% 8 / 22 5.4% 6 / 12 1.51% 1.74%

8 Y $118,959 2 3.1% 10 / 21 8.3% 4 / 7 0.77% 3.99%

9 Y $114,832 23 30.6% 2 / 5 30.7% 2 / 5 0.93% 0.69%

10 N $111,981 6 4.4% 9 / 22 12.3% 4 / 12 0.83% 1.36%

11 N $100,604 10 13.1% 2 / 11 46.9% 1 / 3 -0.53% 1.25%

12 N $92,876 22 18.2% 3 / 5 54.9% 1 / 3 0.35% 3.04%

13 N $85,478 12 10.2% 5 / 8 100.0% 1 / 1 0.69% 0.20%

14 Y $82,183 24 20.9% 3 / 5 39.5% 1 / 5 0.43% 3.75%

15 Y $81,116 5 3.5% 9 / 19 5.3% 7 / 13 0.67% 0.09%

16 Y $63,430 25 57.0% 1 / 3 75.6% 1 / 2 0.26% 0.23%

17 N $56,802 16 7.0% 5 / 13 100.0% 1 / 1 1.86% 0.39%

18 N $56,708 14 7.7% 5 / 10 62.6% 1 / 2 0.90% 0.13%

19 Y $51,551 23 12.5% 4 / 5 12.6% 4 / 5 0.90% 0.80%

20 N $32,044 3 1.3% 9 / 16 14.1% 4 / 6 -0.42% 0.92%

21 N $31,736 13 2.6% 9 / 12 100.0% 1 / 1 0.01% 4.26%

22 N $67,452 19 12.2% 3 / 9 46.5% 1 / 3 0.18% 1.15%

Note: Financial data for targets as of ____.

(1) Out of __ selected counties. Based on composite market and banking analysis ranking.

(2) Main county and city market share rankings exclude institutions reporting zero deposits.

EXHIBIT D (Continued)

Main County Main City

Market Share Market Share

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FIRST BANK Branch Cluster Target Evaluation

Total Total

Assets # of Deposits

Company Name City ST ($000) Branches ($000) Cities of Selected Branches (Note)

1 $2,439,494,000 4 $198,693 City A* (2), City B* (1), City C (1)

2 $353,415,000 6 $171,038 City D (2), City E (1), City F (1), City G (1), City H (1)

3 $325,156,480 4 $155,250 City I* (2), City J* (1), City K (1)

4 $304,547,667 5 $236,462 City L* (1), City M* (1), City N* (2), City O* (1)

5 $123,360,351 No Branch Cluster(s) Identified

6 $103,028,520 3 $73,973 City P* (2), City Q (1)

7 $90,858,779 No Branch Cluster(s) Identified

8 $56,113,687 6 $225,632 City R* (2), City S* (3), City T* (1)

9 $23,534,261 No Branch Cluster(s) Identified

10 $6,640,473 No Branch Cluster(s) Identified

11 $6,274,575 2 $48,219 City U* (1), City V* (1)

12 $6,087,390 3 $77,381 City W* (2), City X* (1)

13 $2,771,055 4 $119,362 City W* (4)

14 $1,143,248 No Branch Cluster(s) Identified

15 $757,716 No Branch Cluster(s) Identified

16 $505,860 1 $26,970 City X* (1)

Note: * designates county seats.

Branch Cluster(s) Information

EXHIBIT D (Continued)

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FIRST BANK Summary Composite Ranking Results - By County and including County Seat

County

Market

Rank

Banking

Rank

Composite

Rank City

Market

Rank

Banking

Rank

Composite

Rank

County 1 2 1 1 City 1 1 18 6

County 2 1 10 2 City 2 6 6 4

County 3 6 3 3 City 3 3 1 1

County 4 4 8 4 City 4 5 17 9

County 5 5 7 5 City 5 7 3 3

County 6 3 13 6 City 6 13 26 20

County 7 6 12 7 City 7 2 8 2

County 8 8 9 8 City 8 4 11 5

County 9 11 6 9 City 9 10 5 7

County 10 9 14 10 City 10 9 10 8

County 11 18 2 11 City 11 22 2 12

County 12 17 4 12 City 12 14 4 11

County 13 12 18 13 City 13 8 14 10

County 14 16 11 14 City 14 15 7 13

County 15 15 15 15 City 15 17 9 14

County 16 13 20 16 City 16 12 15 15

County 17 10 24 17 City 17 11 24 17

County 18 19 16 18 City 18 16 13 16

County 19 14 23 19 City 19 23 21 24

County 20 20 19 20 City 20 19 19 19

County 21 26 5 21 City 21 25 12 22

County 22 23 17 22 City 22 24 25 26

County 23 21 22 23 City 23 20 15 18

County 24 24 21 24 City 24 26 20 25

County 25 22 25 25 City 25 21 23 23

County 26 25 26 26 City 26 18 22 21

County Ranking Data County Seat Data (for County Listed)

EXHIBIT D (Continued)

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