Thursday, September 28, 2006

BMO to Buy First National Bank & Trust

BMO Capital Markets, 28 September 2006

Details & Analysis

Harris Bank, BMO’'s U.S. operation, announced yesterday that it has entered into an agreement to acquire First National Bank & Trust, a privately held bank with 32 branches in and around Indianapolis. The purchase price is US$290 million, and we believe it marks the first meaningful thrust for Harris into a new geographic market since the bank was purchased in 1984.

The transaction price is 24.8x last 12-month earnings and 2.7x tangible book value. BMO management has indicated that there are various tax implications (including the deduction of the purchase price premium) and unusual items in the bank’s past 12-month earnings which, when incorporated, produce takeover multiples of 22.5x earnings and 2.3x tangible book value. Management also indicated that exclusive of one-time items (a US$20 million charge), the deal is modestly accretive in the first year. We estimate that the accretion is less than $0.02 per BMO share. We provide some summary metrics on the acquisition in the table below.

From our perspective, this deal is interesting in that it is somewhat different from previous deals done by Harris. The acquisition moves the bank out of its stronghold of Chicagoland. FNB has 10 branches in Indianapolis and the majority of the rest are north and north-west of the city in MSAs such as Kokomo and Terre Haute. In considering the FNB footprint (and inclusive of Indianapolis), we would estimate deposit market share to be between 2% and 3%.

Another difference of this deal is that FNB has faced its share of problems over the past couple of years. The entity has lost deposit market share in all regions over the past year, and revenues appear to have been essentially flat over the past three years. BMO management indicated that it believes recent restructuring activities and head count reductions over the past 12 months (which resulted in a loss in the third quarter of last year) position the company well for the future. Earnings in the past three quarters have been quite stable.

Despite these subtle differences, this deal is certainly in line with the bank’s slow, steady approach to building its U.S. retail banking footprint. Assuming that the problems are behind it, and backed by the Harris brand and product lineup, this is a good deal for the bank to start its geographic build out.

Forecasts & Valuation

Given the modest scale of the impact of this deal, our forecasts are unchanged. We continue to believe that BMO shares are reasonably valued. The shares trade in line with the bank group despite BMO’s below-average ROE, due to the defensive nature of the bank.


The Globe and Mail, Sinclair Stewart, 28 September 2006

Bank of Montreal took another modest step in its cautious U.S. expansion strategy yesterday, acquiring an Indiana retail bank for U$290-million in a move to help it branch out beyond its home base in Chicago.

BMO is buying First National Bank & Trust, an Indianapolis-based outfit with 32 branches and $920-million in deposits.

It is the first deal that BMO's U.S. subsidiary has made under Ellen Costello, who replaced Frank Techar as head of Harris Bankcorp. this summer after a senior management shuffle at the parent in Toronto.

BMO said the purchase will increase its U.S. branch network by about 15 per cent to 233, more than halfway to its goal of between 350 and 400 locations in the U.S. Midwest. The bank's previous significant U.S. acquisition, made two years ago, was also in northwestern Indiana. In the fall of 2004, the bank snapped up Mercantile Bancorp. Inc. for just under $200-million to gain its first branch foothold in the state.

Analyst Jason Bilodeau at UBS Securities Canada Inc. noted First National has "struggled" with its operations, and cautioned that while the Indiana market is attractive, it is still challenging for foreign banks.

The Indianapolis area has 1.7 million residents, a population that would rank among the largest cities in Canada. It is also a relatively well-off service economy, with low levels of unemployment and better than average household income.

BMO chief operating officer Bill Downe, who is to replace Tony Comper as the bank's CEO next spring, said First National has improved over the past three or four years. However, he said BMO has an opportunity to gain a "lift" by introducing better customer service systems and folding in the bank's wealth management offerings as a complement. "We are quite satisfied that the bank is in really good shape," he said in an interview.

Almost two years ago, BMO said it had laid the proper foundations for an accelerated push into U.S. retail banking. At the time, chief financial officer Karen Maidment said the bank was preparing to step up the pace of acquisitions and consider deals of $2-billion or more.

Yet that has failed to materialize. There has been no flurry of deals, let alone a sizable purchase that could instantly transform the bank's presence in the Chicago area.

Mr. Downe, however, said the strategy is "disciplined" rather than cautious.

"As far as the transaction pipeline, we haven't missed any deals because there hasn't been much movement in the market."

Mr. Bilodeau said one of the risks for BMO investors is that the bank will pursue one of these big deals, potentially at a high price in a less familiar market. In a research note, he said he believes Mr. Downe and others will still consider a large acquisition if the right bank materializes, but suggested management appears "appropriately" focused on smaller add-ons.


Bloomberg, Doug Alexander & Sean B. Pasternak, 27 September 2006

Bank of Montreal, Canada's fourth- biggest bank by assets, agreed to buy First National Bank & Trust of Indiana for $290 million, its biggest U.S. bank acquisition in 22 years.

First National has 32 branches in Indianapolis, Kokomo and Terre Haute, with $1.3 billion in assets and $920 million in deposits, Toronto-based Bank of Montreal said today.

"It's right on strategy. We are making serial transactions and this is a nice one," said Bank of Montreal Chief Operating Officer William Downe, in a telephone interview today. ``It just really fits perfectly into the footprint."

The purchase is the first under Ellen Costello, appointed chief executive officer of the Chicago-based Harris Bank unit in July. First National will increase Harris's branch count by about 15 percent to 233 offices. The bank wants to have 350 to 400 branches in the U.S. Midwest within five years.

"This transaction confirms that Bank of Montreal is serious about expanding Harris through the Midwest,'' said Michael Goldberg, an analyst at Desjardins Securities, in a research note today.

Bank of Montreal has invested about C$1.86 billion ($1.67 billion) to buy banks in the U.S. since it entered the market with the purchase of Harris in 1984. The Canadian government has blocked mergers among the country's largest lenders, forcing them to expand in the U.S., Europe and Latin America to increase earnings. Chief Executive Officer Anthony Comper has said he'll spend as much as $2 billion to expand Harris Bank.

Bank of Montreal said U.S. consumer banking profit rose 3.3 percent to C$31 million in the fiscal third quarter. Profit at the unit has grown at less than half the rate of the Canadian consumer bank business over the past two years.

The acquisition, expected to close in January subject to regulatory approvals, may add to earnings in the first year, excluding $20 million in one-time items. The purchase price is 2.2 times the book value of closely held First National, compared with the average price of 2.56 times book value paid for U.S. banks in acquisitions this year.

"We're certainly in a position where we can do more transactions like this with the resources that we have,'' Downe said. He didn't say when he expects the next U.S. acquisition.

"It's a little bit like fishing, you don't know exactly when you're going to get a bite," Downe said.

First National had revenue of $47.7 million last year, little changed from the previous year. Revenue was $28.6 million for the first half of 2006, according to Bank of Montreal.

Canadian Press, 27 September 2006

Aiming at the high-growth Indianapolis market, a Bank of Montreal subsidiary has agreed to pay US$290 million for First National Bank & Trust in the United States.

Chicago-based Harris Financial Corp. will expand its community-focused personal and commercial banking services further into Indiana, Toronto-based Bank of Montreal said Wednesday.

First National Bank & Trust has 32 branches and 33 automated banking machines in Indianapolis and the surrounding communities of Kokomo and Terre Haute.

With US$1.3 billion in assets and US$920 million in deposits, as well as more than US$500 million in trust assets, First National Bank & Trust offers a wide range of retail and commercial banking products, as well as trust, investment and insurance services.

With more than 200 branches and nearly 550 Harris-branded ABMs across Chicago, its suburbs and northwest Indiana, Harris is already the second-largest bank in the Chicago market, based on branches.

After the acquisition, Harris will have 233 branches and will move closer toward its goal to become the leading personal and commercial bank in the U.S. Midwest by building a network of 350 to 400 branches.

"This acquisition provides a base from which we can grow in the important Indianapolis market," said Tony Comper, CEO of Bank of Montreal, or BMO Financial Group.

"Indianapolis is the second-fastest growing market in the U.S. Midwest and, with a population of about 1.7 million, it presents significant opportunities for us as we move toward our ambition of being the leading personal and commercial bank in that region."

The acquisition, subject to approvals from U.S. and Canadian regulators, is expected to be completed in January and be "modestly accretive" to cash earnings per share in the first year.