Community Bank Performance and Value Trends Curtis Carpenter - - PowerPoint PPT Presentation

The Leader in Community Bank Mergers and Acquisitions

Community Bank Performance and Value Trends

Over 250 Transactions in the Past 20 Years:

Curtis Carpenter Sheshunoff & Co Investment Banking June 13, 2016

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Industry Update:

The New Normal is Here, but is it Good Enough for Your Shareholders?

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JP Morgan 13.5% Bank of America 12.2% Citigroup 10.3% Wells Fargo 10.1% Greater than 10B 100 Companies 38.2% 1B-10B 585 Companies 9.0% 100MM-1B 3,565 Companies 6.2% 0-100M 1,652 Companies 0.5%

Page 3

Asset Distribution Among Banks and Thrifts

Total Industry Assets = $17.9 Trillion

Top 4 Banks: $8.3T in Assets 46.1% of Industry Assets

March 31, 2016 Data Consolidated by HC Excludes any bank larger than $1 billion in assets with a deposits to assets ratio of less than 20%

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15-Year Trend in Number of Banks (2000 to 2015)

Note: Banks and Thrifts in the United States excluding Holding Companies. Number of institutions based upon data from SNL Financial, LC as of February 26, 2016 and does not fully reconcile with FDIC data releases due in part to how merger activity is recorded.

Page 5

Bank/Thrift Count by State 2007 vs. 2015

• 42%
• 45%
• 25%
• 16%
• 39%
• 28%
• 16%
• 34%
• 43%
• 20%
• 23%
• 29%
• 19%
• 17%
• 19%
• 33%
• 16%
• 19%
• 40%
• 37%
• 54%
• 64%
• 20%
• 29%
• 26%
• 20%
• 26%
• 17%
• 16%
• 16%
• 23%
• 19%
• 21%
• 21%
• 25%
• 30%
• 24%
• 16%
• 38%
• 10%
• 15%
• 24%
• 20%
• 18%
• 11%
• 21%
• 31%
• 20%
• 33%
• 27%

Moderate Severe

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15-Year Trend in Number of Banks (2000 to 2015)

Note: Banks and Thrifts in the United States excluding Holding Companies. Number of institutions based upon data from SNL Financial, LC as of February 26, 2016 and does not fully reconcile with FDIC data releases due in part to how merger activity is recorded.

Page 7

Bank and Thrift ROA – Change since financial crisis

The median bank in 2016Q1 earns 0.15% less on average assets

35% Tax Rate Applied to S-Corps

Page 8

Bank and Thrift Equity/Assets – Change since crisis

The median bank in 2016Q1 holds 0.93% more equity to assets

35% Tax Rate Applied to S-Corps

Page 9

Bank and Thrift ROE - Change since financial crisis

The median bank in 2016Q1 earns 2% less

• n average equity

35% Tax Rate Applied to S-Corps

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LTM Better/ 2006 3/31/2016 Worse Loans/ Deposits 83.3 78.5

• 5.7%

% of average assets: Net Interest Income 3.76 3.35

• 10.9%

Non-Interest Income 0.62 0.55

• 11.3%

Non-Interest Expense 2.98 2.85

• 4.4%

Bank and Thrift Financials – Change since crisis

Source: Federal Reserve; Treasury constant maturity monthly average of daily rates Note: Median level

Page 11

Net Noninterest Expense by Size

Page 11

Median Data, % of Average Assets, LTM March 31, 2016 Consolidated HC

Difference of 1.06% Fees Expenses Net Expense Page 11 Fees Expenses Net Expense Fees Expenses Net Expense Fees Expenses Net Expense Fees Expenses Net Expense

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5% 20% 46% 29%

Losing Money 0% to .50% ROAA 50% to 1.00% ROAA > 1.00% ROAA

Page 12

Bank and Thrift ROAAs

% of the industry by bank

35% Tax Rate Applied to S-Corps LTM March 31, 2016

Page 12

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Page 13

Bank and Thrift Return on Equity

(4 Qtr moving average since 1995)

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Page 14

Loan to Deposits Impact on Net Interest Margin

Year-to-Date 2016 through March

Loans/Deposits 60% - 80% 1,868 Institutions Loans/Deposits > 80% 2,896 Institutions Loans/Deposits < 60% 1,311 Institutions

Page 14

73bp

Page 15

Publicly Traded Bank Stocks:

A Bumpy Ride to Start the Year

Page 16

• 30.0%
• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0% Cumulative Index Price Change (%)

SNL U.S. Bank $1B-$5B SNL U.S. Bank $5B-$10B SNL U.S. Bank > $10B SNL Southwest U.S. Bank

Index Performance 2015 through May 27, 2016

Big banks down 5.1%

As of May 27, 2016

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Publicly Traded Banks and Thrifts

Greater than $2 Billion in Assets Median Price to Tangible Book and Price/Earnings as of May 27, 2016

10 68 75 41 9 5 13.3x 15.0x 15.5x 17.4x 18.7x 21.2x 0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 10 20 30 40 50 60 70 80 <1.0x 1.0 - 1.5x 1.5 - 2.0x 2.0 - 2.5x 2.5 - 3.0x >3.0x Price/ LTM Earnings Number of Institutions Number of Institutions Price to LTM Earnings

Page 18

Comparison of Median ROAA and 4-year Asset CAGR

Price to Tangible Book

Publicly Traded Banks and Thrifts

Greater than $2 Billion in Assets

As of May 27, 2016

0.58 0.82 0.98 1.07 1.30 1.14 6 10 14 20 5

5 10 15 20 25 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 <1.0x 1.0 - 1.5x 1.5 - 2.0x 2.0 - 2.5x 2.5 - 3.0x >3.0x ROAA % 4-year Asset CAGR %

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2.0x – 2.5x Tg Book 2.5x – 3.0x Tg Book

Publicly Traded Banks and Thrifts > $2 Billion

Price-to-Tangible Book Locations

3.0x – 4.0x Tg Book As of May 3, 2016

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As of May 27, 2016

Bank Stock Valuation in Relation to Market Cap

97% 104% 125% 145% 162% 180% 166% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% < $50 Million $50-100 Million $100-200 Million $200-500 Million $500M-1 Billion $1-5 Billion > $5 Billion PRICE/ TG. BOOK MARKET CAP

Median Price/TBV % by Market Capitalization

Page 21

M&A Review: Deal Volume is Steady and the Median Deal Price is Rising

Page 22

National Bank and Thrift Volume

Deal Volume by Month

23 27 32 16 18 38 20 30 21 22 23 23 22 24 27 18 18 35 29 21 19 22 23 22 17

5 10 15 20 25 30 35 40

May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16

# Transactions

# of Deals

Data as of May 30, 2016

Page 23

Total Merger Activity

Data as of May 30, 2016

250

299 285 144 110 181 150 221 225 284 282 103 3 25 140 157 92 51 24 18 8 3 50 100 150 200 250 300 350 400 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Number of Deals

• Est. 2016 Total Deals

Healthy Deals Failed Banks

Page 24

Total Georgia Merger Activity

Data as of June 1, 2016

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Transaction Volume Compared to Assets Acquired

Data as of May 30, 2016

299 285 144 110 181 150 221 225 284 283 $472 $369 $1,374 $46 $167 $196 $137 $111 $146 $188 $61

$148

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

50 100 150 200 250 300 350 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Target Assets (Billions) # of Transactions Announced # of Transactions Annualized Transactions Target Assets ($B) Annualized Assets

250

Page 26

Merger Activity by Quarter

Median Target Asset Size

Data as of May 30, 2016 $122 $141 $155 $240 $127 $182 65 69 63 85 64 39 10 20 30 40 50 60 70 80 90 100

$0 $100 $200 $300 $400 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16

# of Transactions Announced Median Target Asset Size ($MM)

Median Target Assets ($MM) # of Transactions

Page 27

Median Buyer and Target Asset Comparison

Note: Buyer Total Assets of NA assumed to be under $1B Data as of May 30, 2016 9.3x 6.7x 5.8x 5.8x 6.0x 5.7x 6.3x 6.5x 7.3x 5.6x 6.8x 43% 38% 27% 17% 24% 34% 38% 46% 49% 43% 45% 0% 10% 20% 30% 40% 50% 60% 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % of Buyers > $1B in Assets Median Buyer Asset Size/Median Target Asset Size Median Buyer Assets/ Median Target Assets % of Buyers > $1.0B in Assets (%)

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Median Target Pricing vs. ROAA Performance

Data as of May 30, 2016 0.94% 0.85% 0.49%

• 0.81%
• 0.48%
• 0.06%

0.36% 0.55% 0.55% 0.62% 0.67% 2.27x 2.16x 1.65x 1.19x 1.20x 1.10x 1.15x 1.23x 1.35x 1.41x 1.31x

• 1.0%
• 0.8%
• 0.6%
• 0.4%
• 0.2%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 0.0x 0.3x 0.5x 0.8x 1.0x 1.3x 1.5x 1.8x 2.0x 2.3x 2.5x

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Median Target ROAA (%) Median Price to Tangible Book Value (x)

Median Target ROAA Median Price/Tg BV (x)

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Georgia Merger Activity by Year

Median Price/Tangible Equity and Median Target ROAA

Data as of June 1, 2016

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Bank and Thrift Deal Count by Pricing

Announced Since May 1, 2015

Data as of May 30, 2016

25 49 59 29 16 11

10 20 30 40 50 60

Less than Tg Book Tg Book to 1.25x 1.25x to 1.50x 1.50x to 1.75x 1.75x to 2.00x More than 2.00x

Price to Tangible Book Value

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Data as of May 30, 2016

Trends in Transactions > 2x Tangible Book Value

127 31 4 4 2 8 6 18 16 1

25 50 75 100 125 150

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2000 to 2006 Yearly Average of 116 Transactions Per Year > 2x Tangible Book Value

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Bank and Thrift Deal Activity Map Since May 1, 2015

Higher Pricing Multiple Activity (Based on Price to Tangible Book)

> 2.0x Tg Book 1.50x – 1.75x Tg Book 1.75x – 2.0x Tg Book As of May 30, 2016

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Rural M&A Transactions (2012 – 2016)

Data as of May 30, 2016 Note: Targets not headquartered in an MSA per SNL Financial

2012 2013 2014 2015 2016

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Branch Sales: Median Premium to Deposits

Data as of May 30, 2016

6.6% 6.0% 7.3% 7.0% 7.8% 5.0% 3.3% 3.5% 3.2% 2.2% 2.3% 2.3% 2.6% 3.0%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Median Premium/Deposits

Median Premium/Deposits

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Pricing Limitations on Buyers – Intangible Assets

Intangible Assets

Purchase Price Minus Seller’s Tangible Equity

Reduce Regulatory Capital Ratios Reduce Tangible Book Value Per Share Cured Over Time By EPS Accretion

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Who Can Afford to Pay a High Price? Cash Buyer

Must be Substantially Larger than Target (i.e. 10x or more) Experiences Immediate Tangible Book Value Dilution Enjoys Immediate EPS Accretion (often significant)

Stock Buyer

Must Have High- Trading Value Stock but can be Closer in Size Intangibles from Purchase are Offset by Stock Issue Price EPS Accretion is Muted by New Shares Issued

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Making Sense of the Data: What does this Imply about the Value of Banks in My Market?

Page 38

How are Prices for Banks Reported?

Page 39

Examples of Multiple of 8% Adjusted Tangible Book

WSFS Financial buying Alliance Bancorp Pennsylvania March 2015 Alliance $421M Total Assets 15.8%

• Tang. Equity to

Assets Price to book 1.36x Price to 8% adjusted tangible book 1.80x Community Bank Shares buying First Financial Indiana April 2014 First Financial $859M Total Assets 3.8%

• Tang. Equity to

Assets Price to book 1.34x Price to 8% adjusted tangible book 1.06x

About the Same Big Difference

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Four Categories of Merger Transactions Involving Healthy Sellers

MOE between banks of similar size seeking efficiencies Solid bank with low loan/deposit ratio in rural area Quality earner with high loan/deposit ratio near metro area Larger bank in metro area sells to publicly traded buyer

1.00x to 1.20x Adjusted Book 1.20x to 1.50x Adjusted Book 1.50x to 1.90x Adjusted Book 1.90x Adjusted Book and Up

Bank and Thrift Transactions Announced Since January 1, 2014

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Median Total Assets of Sellers by Price Group

Bank and Thrift Transactions Announced Since January 1, 2014

122 153 231 387 422 915

• 100

200 300 400 500 600 700 800 900 1,000 <1.0x 1.00x - 1.25x 1.25x - 1.50x 1.50x - 1.75x 1.75x - 2.00x >2.00x Total Assets ($MMs) Price to 8% Adjusted Tangible Book

As of December 31, 2015

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Median Total Assets of Buyers by Price Group

Bank and Thrift Transactions Announced Since January 1, 2014

607 1,201 1,345 2,430 2,663 7,540

• 1,000

2,000 3,000 4,000 5,000 6,000 7,000 8,000 <1.00x 1.00x - 1.25x 1.25x - 1.50x 1.50x - 1.75x 1.75x - 2.00x > 2.00x Total Assets ($MMs) Price to 8% Adjusted Tangible Book

As of December 31, 2015

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Price to Earnings vs. ROA of Seller by Price Group

Bank and Thrift Transactions Announced Since January 1, 2014

0.16 0.39 0.52 0.69 0.75 0.90

18.7 24.7 23.7 21.4 22.8 22.2

• 0.10

0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 0.0 4.0 8.0 12.0 16.0 20.0 24.0 28.0 <1.0x 1.00x - 1.25x 1.25x - 1.50x 1.50x - 1.75x 1.75x - 2.00x >2.00x ROAA % Price/ Earnings x

Seller ROAA Deal P/E

As of December 31, 2015

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Median Deposit Premium Paid by Price Group

Bank and Thrift Transactions Announced Since January 1, 2014

• 0.8

1.4 3.9 6.1 8.0 11.5 (2.0)

• 2.0

4.0 6.0 8.0 10.0 12.0 14.0 <1.00x 1.00x to 1.25x 1.25x to 1.50x 1.50x to 1.75x 1.75x to 2.00x > 2.00x Premium/Deposits % Price to 8% Adjusted Tangible Book

As of December 31, 2015

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10% 24% 32% 48% 44% 55% 40% 24% 17% 9% 12% 10% 50% 52% 52% 43% 44% 34%

> 2.00x 1.75x to 2.00x 1.50x to 1.75x 1.25x to 1.50x 1.00x to 1.25x <1.00x Price to 8% Adjusted Tangible Book

Consideration Paid by Price Group

All Stock All Cash

Bank and Thrift Transactions Announced Since January 1, 2014

Mixture

As of December 31, 2015

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Common M&A Strategies in Today’s Market

 Sell for cash and diversify into another industry  Sell for cash and private stock to a bank with better profitability profile  Sell at today’s price to a public buyer with room to run in their stock  Buy another bank with cash and your own private stock  Stay put but enhance ROE through financial engineering

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Take Cash and Private Stock in a Sale

 Exit multiples are usually lower than those involving a buyer with a higher-value public stock  Loss of control without gaining liquidity for those who take stock  Nontaxable exchange for those who take stock  Combined franchise often earns well over 10% ROE and has more growth potential  Chips are left on the table for a takeout at a higher multiple  Provides liquidity to those who take cash

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Sell at Today’s Price to a Public Buyer

 Hard to overcome optics of selling at “inferior” value  Lose control while waiting for better value from stock appreciation  Nontaxable exchange while waiting for stock of buyer to improve  Even a 10% to 15% market improvement can significantly enhance realized exit multiples  Virtuous Cycle can create outstanding stock momentum  Provides liquidity to all while some may choose to hold stock for a longer period

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Buy Another Bank with Cash and Your Own Stock

 Sometimes difficult to find willing and desirable partners  Limited ability to pay meaningful premiums over book due to creation

• f intangible assets

 Generates equity to the extent stock is exchanged  Your stock is often valued at a premium to book which helps limit intangible assets  Gain the efficiencies afforded by larger size  Enhances ROE through leverage and increased profitability

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Stay Put and Enhance ROE

 Form an ESOP to create liquidity for your stock and a retention tool for employees  Convert to an S-Corp to maximize after-tax earnings  Increase cash dividends to provide current return to shareholders  Establish a share buy-back program to leverage capital and increase EPS and ROE  Take advantage of new rules allowing holding companies to borrow more and significantly leverage equity  Have an open and honest discussion with board/shareholders regarding a realistic expectation for ROE in today’s economy

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