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Sunday, 28 September 2014 22:00

Founders Financial sought suitors after seeing potential in bank’s sale price

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While directors at Grand Rapids-based Founders Financial had planned to remain independent, they re-evaluated those plans when an Ann Arbor bank netted “the highest valuation multiples seen for an acquisition of a Michigan bank” in many years, according to a filing with the SEC. That ultimately kicked off the process in which Founders Financial agreed to be acquired by Old National Bancorp in July. While directors at Grand Rapids-based Founders Financial had planned to remain independent, they re-evaluated those plans when an Ann Arbor bank netted “the highest valuation multiples seen for an acquisition of a Michigan bank” in many years, according to a filing with the SEC. That ultimately kicked off the process in which Founders Financial agreed to be acquired by Old National Bancorp in July. COURTESY PHOTO

Grand Rapids-based Founders Financial Corp. had always expected Founders Bank & Trust to remain an independent community bank, but a key deal for an Ann Arbor lender in January convinced directors to re-evaluate their plans.

After seeing the premium that United Bancorp Inc. received from Old National Bancorp in a $173 million deal, directors at Founders Financial wondered whether the bank could secure a strong price if it were to sell as well, according to a recent filing with federal banking regulators.

On the heels of the Old National/United deal, they initiated a process to explore their own options, which led to Founders Financial seeking bids from potential suitors.

The process culminated with the $88.2 million cash-and-stock deal announced in late July with the Evansville, Ind.-based Old National, which has offices in Michigan, Indiana, Kentucky and Illinois and more than $10.4 billion in assets.

After already evaluating whether remaining independent was the way to go, directors at Founders Financial viewed the transaction between Old National and United Bancorp as a precedent for a similar deal for their shareholders. The Ann Arbor deal featured “the highest valuation multiples seen for an acquisition of a Michigan bank for many years,” states a Sept. 8 filing with the U.S. Securities and Exchange Commission that outlines the deal between Founders Financial and Old National and how it came together.

“United was well known to Founders’ management and, although larger, was viewed as a fairly comparable bank, and this transaction was viewed as an indication of the approximate valuation Founders’ shareholders could realize if

Founders chose to pursue a merger,” the SEC filing states.

On the day before Founders Financial’s directors approved a merger agreement, the corporation’s stock was valued at $13.87 per share. The total purchase price, at the time, equated to $83.08 per share, an amount that’s 213 percent of its tangible book value and 17.67 times Founders Financial’s per-share earnings for the previous 12 months.

“The time was just right,” Founders Financial CEO Laurie Beard said in an interview the day the two banks announced the deal.

Founders Financial was formed in 1991 with an original capital investment of $3.8 million.

Under the terms of the acquisition, shareholders at the privately held Founders Financial — the parent company of Founders Bank & Trust — would receive 3.25 shares of Old National stock, plus $38 in cash for each of their shares. The deal, targeted to close in the first half of 2015, is subject to approval from regulators and Founders Financial shareholders.

Beard said a shareholder vote could come in late October.

The acquisition would expand Old National’s Michigan presence and introduce the brand to the Grand Rapids market, where Founders Financial has four Founders Bank & Trust offices. Old National entered Michigan a year ago by buying 20 former Bank of America offices in the southern part of the state and followed it up with the acquisition of United Bancorp, doubling its presence in Michigan to 36 offices.

Old National’s acquisition of United Bancorp and the proposed deal for Founders follows a growth and acquisition strategy to move into larger, higher growth markets in the Midwest. In addition to the Founders Financial deal, Old National also has an acquisition pending in Lafayette, Ind.

Executives have said that Michigan is a key growth target for Old National.

“We feel like we’re in good spots. We’d like to grow and begin to show that organic growth with our acquisitions (and are) looking forward to seeing what we can do in Michigan and points thereof,” CFO Chris Wolking said during an investor presentation at this month’s RBC Capital Markets 2014 Financial Institutions Conference.

In its Sept. 12 application seeking approval from the federal Office of the Comptroller of the Currency for the acquisition, Old National noted that it can bring to Founders Financial “an enhanced range of consumer services and deposit accounts.” That includes an insurance unit and a higher legal lending limit “to better meet the lending needs of its corporate customers and to compete for larger commercial customers” in the Grand Rapids area.

The deal with Old National came about months after directors at Founders Financial considered whether to remain as an independent bank. In the current increasingly difficult environment, community banks operate with a growing federal regulatory burden and related compliance costs, require extensive technology investments, and face heightened competition.

On top of that was the relative lack of liquidity for the corporation’s shares, which in 2012 and 2013 recorded less than 40 transactions that were “generally small,” according to the SEC filing.

“Throughout Founders’ history, the board of directors viewed the general lack of liquidity in Founders’ stock as a key strategic weakness to the independence strategy,” the document states. “Strategic alternatives to create shareholder liquidity were believed to be relatively limited.”

At the same time, M&A activity involving community banks was beginning to pick up. The deals had valuation multiples that “had generally been unavailable since before the beginning of the financial crisis,” meaning Founders Financial could get a good asking price.

“In combination, during 2013, all of these factors led the board of directors to serious consideration of whether the present independence strategy should be retained, or modified to seek a strategic partnership through the acquisition of Founders,” states the regulatory filing.

The decision by Founders Financial’s board of directors to examine their strategy to remain independent in the wake of the Old National/United Bancorp deal is a natural occurrence at many banks, said Rob Bondy, a partner at Plante Moran PLLC in Grand Rapids.

One bank merger will quite often spur conversations in the boardrooms of other banks about their future, Bondy said.

“Most boards, each time a deal is done, pause and evaluate,” he said. “They use that to kind of reflect on their own position. ‘Should we buy? Should we sell?’”

In the last year, Michigan has seen four mergers or proposed mergers of significance in the banking industry. In addition to Founders Financial, they include the June deal between Mercantile Bank Corp. and Firstbank Corp., plus the Old National/United Bancorp transaction and Chemical Financial Corp.’s proposed deal for Northwestern Bancorp in Traverse City.

Given the present industry dynamics, Bondy suspects the Michigan market may see another two to five deals over the next 18 months.

“There are a lot of headwinds in the industry,” he said. “Without a doubt, there will be more deals.”

Bank directors at Founders Financial had periodically examined the question of whether to remain independent and in mid-2013 looked at strategic options prepared by Detroit area investment bank Donnelly Penman & Partners Inc. based on the M&A landscape for community banks. In February, after the Old National/United Bancorp deal in Ann Arbor, directors asked Donnelly Penman for an updated presentation.

The Feb. 7 presentation included an analysis of the bank’s strategic position and identified 12 potential partners.

On Feb. 19, directors met with their legal counsel at Warner Norcross & Judd LLP to discuss the process for a merger and their fiduciary and legal obligations. During the meeting, the board of directors “unanimously determined that it would be in the best interests of Founders and its shareholders to explore and consider alternatives to Founders’ previously determined and announced strategy of remaining independent while continuing that strategy during the period of this consideration,” states the form S-4 filing with the SEC.

The board also authorized hiring Donnelly Penman to act as its financial adviser and formed a committee of outside directors “to evaluate and advise the board of directors regarding strategic alternatives available to Founders.”

In mid-April, Donnelly Penman presented the committee a summary that identified six possible partners. The board of directors gave Donnelly Penman the green light to contact the six, all of which subsequently “expressed interest in a possible transaction.”

After reviewing letters of interest in early June, the committee decided to proceed with discussions with three of the six, including Old National. The regulatory filing did not identify the other two banks by name.

The committee met during late June with representatives from each potential merger partner. Members then met July 2 to discuss their observations and conclusions about each. The full board of directors also met that day to discuss the bidding process and directed Donnelly Penman to instruct the three remaining banks to raise the amount of cash involved in their proposals to “a level closer to 50 percent.”

One of the banks dropped out of the process the next day, leaving Old National and another bank still in the race, according to the SEC filing.

Old National and the other bank submitted revised proposals July 8, triggering a series of telephone conversations over the next two days. On July 10, the Founders Financial board of directors directed Donnelly Penman to work out a deal exclusively with Old National.

“At the end of this process, Old National’s proposal represented the highest value to Founders’ shareholders with clear separation between the value of Old National’s proposal and the value of the proposal of Potential Merger Partner #2,” the SEC filing states.

Directors approved a final merger agreement July 25, a Friday. The two banks publicly announced the deal the following Monday morning, on July 28.

Beard at the time called Old National “a great fit all the way around” and said the bank’s “values, culture and vision perfectly aligned with Founders Bank.”

“Things all came together in a way that we couldn’t imagine a better partner,” Beard said.


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