# Presentation: 182769

## Presentation For:

***Mergers and Acquisitions of Financial Institutions Conference ***

- Private and Confidential
- November 30, 2007

**Brian R. Sterling**
**Principal**
**Co-Head of Investment Banking**

## GENERAL INFORMATION AND LIMITATIONS

- New York – Atlanta - Boston - Chicago - San Francisco

**This presentation, and the oral or video presentation that supplements it, have been developed by and are proprietary to Sandler O'Neill + Partners, L.P. and were prepared exclusively for the benefit and internal use of the recipient. Neither the printed presentation nor the oral or video presentation that supplements it, nor any of their contents, may be reproduced, distributed or used for any other purpose without the prior written consent of Sandler O'Neill + Partners, L.P.**
**The analyses contained herein rely upon information obtained from the recipient or from public sources, the accuracy of which has not been verified, and cannot be assured, by Sandler O'Neill + Partners, L.P.  Moreover, many of the projections and financial analyses herein are based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results.  Finally, the printed presentation is incomplete without the oral or video presentation that supplements it.**
**Sandler O’Neill + Partners, L.P. prohibits employees from offering, directly or indirectly, favorable research, a specific rating or a specific price target, or offering or threatening to change research, a rating or a price target to a company as consideration or inducement for the receipt of business or compensation.  The Firm also prohibits research analysts from being compensated for their involvement in, or based upon, specific investment banking transactions.**
**Sandler O'Neill + Partners, L.P. is a limited partnership, the sole general partner of which is Sandler O'Neill + Partners Corp., a New York corporation.  Sandler O'Neill + Partners, L.P. is a registered broker-dealer and a member of the Financial Industry Regulatory Authority.  Sandler O'Neill Mortgage Finance Corp. is a indirect subsidiary of Sandler O'Neill + Partners Corp. **
**This material is protected under applicable copyright laws and does not carry any rights of publication or disclosure. **

## Industry Trends

*General Market Overview*

- Credit markets are restoring risk premiums, but in a disorderly fashion.  Equity markets are revaluing to economic reality:
- Both equity and credit markets will remain volatile until leverage returns to more measured levels
- Financial stocks have and will lead market cycles, and most often confirm broader equity market moves
- Banks are facing another credit loss cycle
- Subprime is only the obvious first stress point
- Prime delinquency has been rising for as long, and other consumer and commercial credit problems have been surfacing
- Recent housing data signals material price declines
- Consumer confidence is the unknown

## Industry Trends

*Analysis of Challenges*

**Yield Curve**

**Competition**

**Credit**

**System**
**Liquidity**

- A current, but diminishing, challenge
- Should correct in Medium Term
- May correct sooner if other challenges appear (credit or inflation)
- A current challenge
- A permanent factor
- An impending challenge of an indiscernible scope and magnitude
- Typically takes 2-3 years to correct
- An impending challenge
- The available deposit base is largely tapped

## Industry Trends

*Operating Conditions and Pressures*

- Source: FDIC, FFIEC, Bank Holding Company Performance Reports

- A Widening Gap: The Efficiency Ratios between Large and Small Institutions

- Historical Net Interest Margin Levels:  FDIC Insured Commercial Banks

## Industry Trends

*Are Margin Declines Structural or Cyclical?*

- Source: Factset, FDIC, U.S. Federal Reserve

** **
- How much is structural and how much is cyclical?

**U.S. Bank Credit as a % of Household Borrowing**

**10Yr vs. 1Yr Treasury Spread**

**Commercial Bank Net**
**Interest Margin Levels**

**+**

**=**

## Industry Trends

*Increased Concentration or Competition?*

- Source: FDIC

- Despite significant consolidation, there are more branches now than 10 years ago

- Number of Banks
- Number of Branches

- 9,307
- 67,020

- 7,350
- 83,358

-  (21.0%)
- 24.4%

- (2.3%)
- 2.2%

- Total Deposits ($B)
- % held by 50 largest BHCs
- % held by 10 largest BHCs
- % held by 5 largest BHCs
- % held by 3 largest BHCs

- $2,781
- 59.6%
- 30.1%
- 19.2%
- 13.2%

- 98.8%

- 7.1%

- $5,530
- 68.6%
- 45.2%
- 36.1%
- 26.4%

- 6/30/1997

- 6/30/2007

- % CAGR

- % Change

## Industry Trends

*Credit Spread Trends*

- Source: Bloomberg LP

- AAA
- Spreads

- BBB
- Spreads

- Trust Preferred
- Pools

- 24
- Months Ago

- Today

- 12
- Months Ago

- 6
- Months Ago

- August

- 190

- 250+

- 175

- 130

- 300

- 90

- 175+

- 115

- 120

- 170

- 60

- 125+

- 75

- 85

- 145

## Industry Trends

*Credit Quality Trends*

- Note: Includes banks and thrifts nationwide covered by Sandler O’Neill Equity Research
- Source: SNL Financial and Sandler O’Neill

## Industry Trends

*Prior Growth Rates and Our Near-Term Outlook *

- 1 Includes all public banks and thrifts nationwide with assets greater than $500 million
- 2 Sander O’Neill’s estimates for the banking industry
- Source: SNL Financial; Sandler O’Neill

- Finally some slope back in the yield curve
- Wider spreads, getting paid for taking risk again
- Is credit quality a concern or a crisis?
**However**, a recession cancels all bets

|  | Actual 2005
Growth1 | Actual 2006
Growth1 | Original Projected 2007 Growth2 | Actual YTD 
2007 Growth1 | Revised Projected 2007 Growth2 | Projected 2008 Growth2 |
| --- | --- | --- | --- | --- | --- | --- |
| Revenues: | 11% | 7% | 8% | 4% | 3% | 5% |
| Provisions | 0% | 4% | 15% | 22% | 25% | 33% |
| Non-Interest Expenses: | 10% | 9% | 7% | 8% | 7% | 5% |
| Net Income: | 13% | 6% | 5% | (1%) | (3%) | 2% |
| EPS: | 11% | 5% | 6% | (2%) | (3%) | 2% |

## Merger Market Overview

*M&A Outlook*

- We expect M&A activity to be modest in 2008 given the market’s intolerance for risk
- Few large transactions so far in 2007, the same is expected for 2008
- The only big players are foreign banks
- A fair amount of merger-of-equals discussions going on, low premium strategic deals
- Merger and acquisition activity should be uneven, dominated by larger community banks
- Franchises in growth markets (big or small) will continue to enjoy above average premiums
- Further franchise rationalization....branch sales, business line clarification
- Many “busted” deals or failed auctions that are not publicized
-  Far more sellers than buyers in the market

## Merger Market Overview

*Valuation Trends*

- 1 Multiples are medians from the respective groups  2 Small and Mid Cap Bank Index includes banks with market caps between $300M and $5.0B; Large Cap Bank Index includes banks with market caps greater than $20B
- 3 Bank M&A Index includes all bank acquisitions in specified half with announced transaction value.  NM, NA and negative P/Es are excluded
- Source: FactSet and SNL Financial

## Merger Market Overview

*Trends in M&A Transaction Multiples*

- 1 Includes all nationwide bank and thrift deals with announced deal value greater than $15 million
- Note: Transaction multiples represent median values.  Dollar in millions
- Source: SNL Financial

## Merger Market Overview

*M&A Activity Since January 1, 2006- Very Few Big Deals Recently*

- 1 Does not include transactions for which the deal value was not disclosed
- Note: Transaction multiples represent median values.  Dollars in millions
- Source: SNL Financial

## Merger Market Overview

*Acquisition Strategies*

- Large Banks
- Prefer de novos
- Opportunistic buys
- Acquire unique, attractive markets, customers or product capabilities
- Market selective
- Foreign banks
- Mid-Sized and Small Banks
- Use stronger P/Es
- Generate cost saves
- Create scale
- Remain relevant
- MOEs
- Non-Traditional Buyers
- Non-depository financial services companies
- Financial Sponsors
- Foreign Buyers

## Merger Market Overview

*MOE Opportunities*

- Management and boards of directors will pursue strategic mergers as a means to increase long-term franchise and shareholder value while postponing a full premium sale

- Advantages

- Disadvantages

- Ability to keep best of both franchises and realize efficiencies
- Provides shareholders with greater liquidity through larger shareholder base and increased market capitalization
- Keep current employees and maintain relationships
- Key Roles for Board of Directors and Management going forward

- Management overlap
- Little to no premium
- Must explain why best alternative vs. sale

-  Comparably-sized institutions with complementary needs
-  Similar management styles and goals
-  Complementary markets served
-  Addition of complementary products enable potential revenue enhancements
-  Diverse shareholder base
-  Potential cost saves are realized

- Successful MOE’s

## Merger Market Overview

*Foreign Buyers*

- Foreign banks will continue to explore US acquisitions
- Extremely weak US dollar
- Limited opportunities in Europe
- Significant consolidation opportunities in the United States

- Compass (AL) - $10.2bn
- State National (TX) - $480.8mm
- Texas Regional (TX) - $2.2bn

- Alabama National (AL) - $1.7bn
- FLAG Financial (GA) - $456.8mm
- Admiralty Bancorp, Inc. (FL) - $149.7mm

- Commerce Bancorp, Inc. (NJ) - $9.2bn
- Banknorth Inc. (ME) - $7.0bn

- Ozaukee Bank (WI) - $190.0mm
- Merchants & Manufacturers Bancorp. (WI) - $136.9mm
- First National Bank & Trust Co. (IN) - $290mm

- Commercial Federal Corp. (NE) - $1.3bn
- USDB Bancorp (CA) - $245.0mm
- Community First Bankshares (ND) - $1.2bn

- Mid-State Bancshares (CA) - $850.0mm
- Central Coast Bancorp (CA) - $371.4mm
- VIB Corp. (CA) - $212.7mm

- GreatBanc, Inc. (IL) - $180mm
- Charter One Financial (OH) - $10.5bn
- Thistle Group Holdings (PA) - $147.3mm

- 20% stake in Sovereign Bancorp, Inc. (PA) - $2.4bn

## Issues to Consider

*Issues To Consider For A Buyer*

- Can acquisitions achieve the following for you?
- Accretive to earnings
- Accelerate earnings and growth
- Add higher margin earnings
- Opportunity for consolidation/rationalization of expenses
- Accretive to franchise value
- Consolidation of market share in current market
- Expansion of franchise into attractive markets
- Addition of new business lines
- Can you make acquisitions?
- Availability of attractive acquisition candidates
- Capacity to pay
- Attractiveness to sellers
- Reputation
- Social issues
- Value of stock

## Issues to Consider

*Issues To Consider For A Seller: Timing*

- When your growth prospects are at or below industry levels
- Before the number of sellers exceeds demand and depresses pricing
- When you cannot protect your market from competitors and remain a viable business without continuing to alter product / business mix
- When M&A premiums and desire to do deals are high
- There is no other choice

- If your earnings are growing faster than buyers
- If your stock is so depressed that a buyer will not pay you a fair value
- If you have some unique problem that would create unquantifiable value diminution

- When is it Time to Sell?

- When Should You Not Sell?

## Issues to Consider

*Issues To Consider For A Seller: Valuation/Pricing in a Sale Event*

- Value / Price

- Social Issues

- Price vs. Valuation Metrics
- Price vs. Stand-Alone Opportunities

- Board Seats
- Management Roles
- Employee Retention and Opportunities
- Community Impact

- Buyer’s Currency

- Buyer’s Ability to Close

- Cash / Stock Mix
- Value of Buyer’s Stock
- Liquidity / Float

- Deal Experience
- Regulatory Relationship
- Current Capacity

## Issues to Consider

- Value of sale is fixed

- If at least 40% of payment is in stock, stock portion of payment is received tax-free by selling shareholders until sold; cash portion of payment is taxed
- Making an investment decision in the buyer

- Stock is received tax-free by selling shareholders until sold
- Making an investment decision in the buyer

**Payment Alternatives**

**100% Cash Purchase**

**Cash and Stock Purchase**

**100% Stock Purchase**

*Payment Alternatives*

## Issues to Consider

*A New Set of Issues For A New Environment*

- Capital
- Do you have enough?
- If not, can you source it externally?
- Regulatory Status
- Are you able to get a deal approved?
- Will there be restrictions on your operations?
- Are there ongoing costs to comply?
- Credit
- How will it impact value?
- How will it impact capital levels?
- How much management time and focus will it demand?