Notes from the Ambassador Bank Vault
November 9, 2015
Mergers & Acquisitions: A Look At Community Banks
“I’ll Drink Your Health/Share Your Wealth”
Investment Thesis
“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere, you
must run twice as fast as that.” – Lewis Carroll, Alice in Wonderland
Consolidation activity is robust across the United States as slow revenue growth, greater technology and
cyber-security requirements, tougher regulations, succession issues, and edgy shareholder activists spur
community bankers to consider selling. It also appears that institutions which have long-considered
selling have more reason to act as higher deal premiums are justified by buyers with stronger currencies.
(Banks are sold, not bought.) Buyers are motivated by a desire to gain or defend market share, the
potential to achieve economies of scale, and opportunities to gain core deposits cheaply. Due to the law of
numbers, transformational deals will be limited as smaller institutions far exceed larger ones.
Although deal volume could be restrained by managements’ desire to remain independent for reasons other
than maximizing shareholder value, the slow-growth economy favors more activity. Credit issues are
generally nonthreatening and capital market conditions are reasonably good. Unlike banks with asset
quality issues, those with serious interest rate risk can be more readily sold as mark-to-market adjustments
usually solve the problem.
Absolute levels of interest rates are much lower, but the shape of today’s yield curve resembles the
slope from 2004. The Fed raised rates in June 2004, which represented the first rate increase in four years.
At that time, the Fed cited recent evidence that the economy was continuing to expand at a solid pace.
We opine that if the Fed were to raise short-term interest rates in the near-future, longer-term interest rates will
not rise commensurately. We, therefore, believe banks will face the same hurdles as before. When the curve
flattened in early 2005 and then inverted by mid-2006, net interest margins compressed and eventually
credit soured from pristine levels as banks tried to boost earnings through higher-yielding, but dicey loans
and investment securities. Please see Figure 8. History may not repeat itself, but merger and
acquisition activity picked up considerably when the yield curve inverted in 2005-2006.
Contacts:
Rick Weiss
Matt Resch
Rob Pachence
Karl Ostby
Dave Danielson
610.724.7133
rweiss@ambfg.com
610.351.1633
mresch@ambfg.com
610.351.1633
rpachence@ambfg.com
312.466.7646
kostby@ambfg.com
240.424.4083
ddanielson@ambfg.com
1|Page
Highlights

According to SNL Financial, there were 236 bank and thrift deal announcements from January 1, 2015,
through October 31, 2015, compared with approximately the same number of deals for the same 2014
period.

High profile deals announced in 2015 include: Key Bancorp (NYSE: KEY)/First Niagara (NASDAQ:
FNFG), Royal Bank of Canada (RY: TSX)/City National (NYSE: CYN) (completed November 2), and
New York Community (NYSE: NYCB)/Astoria Financial (NYSE: AF). Also, after a long delay, M&T
Bank Corp. (NYSE: MTB) completed its acquisition of Hudson City Bancorp.

The United States banking market has grown more concentrated due to consolidation. The top ten
banks have a combined United States deposit market share of 54% and Bank of America (NYSE: BAC),
Citigroup, Inc. (NYSE: C), JP Morgan (NYSE: JPM), and Wells Fargo (NYSE: WFC) have a combined
nationwide deposit share of 35%, respectively.

As of October 31, 2015, there were approximately 1,000 publicly-traded banks and thrifts with assets
greater than $100 million, 52 banks and thrifts with total assets between $10 and $50 billion, and 26
banks and thrifts with assets between $7.5 and $10 billion.

Smaller institutions can combine to achieve economies of scale, including the latitude to raise loans-toone borrower limits. For instance, two Wisconsin-based companies - Nicolet Bancshares, Inc.
(NASDAQ: NCBS) and Baylake Corp. (NASDAQ: BYLK) – recently announced a merger-of-equals
(MOE). There should be more of this type of transaction as MOEs are often attractive strategically and
financially. That said, they rarely occur due mainly to social considerations.

Improved asset quality through the September 2015 quarter should increase confidence among potential
buyers that they are not “buying problems”. Companies with superior asset quality or at least those that
exhibit signs that the credit has improved are more desirable merger candidates.

Effective cyber-security is a major concern and entails much more than a one-time technology upgrade.
Management and staff must exercise proper corporate governance and prove to regulators that complex
operational risk issues are under control. Board of Directors should discuss security issues on a regular
basis.

Banks of all sizes need to upgrade risk management systems, which will weigh down efficiency ratios and
earnings in the short-run. Companies that invest in technology and enhanced management systems
should seek strategic partnerships to realize economies of scale. One of the bigger cost elements
related to compliance is staffing, and smaller banks, in particular, are more apt to sell as they often lack
the critical mass of interest-earning assets and/or other revenue drivers to offset fixed costs.

Despite more widespread shareholder activism, consolidation activity could be restrained by
managements’ desire to remain independent for social and other reasons, rather than strictly adhering to
the discipline of maximizing shareholder value.
2|Page
Table of Contents
Investment Thesis ........................................................................................................................................ 1
Highlights .................................................................................................................................................... 2
Valuation Summary ..................................................................................................................................... 3
M&A Thesis ................................................................................................................................................ 6
Valuation Summary
Based on anecdotal evidence, it appears that there is a disparity regarding pricing expectations between
buyers and sellers. Investors often assess deals based on tangible book value; and not necessarily earnings.
It appears that potential buyers have balked at rich book value valuations and longer earn-back periods, even
if deals are accretive to earnings.
As of October 31, 2015, the median price-to-trailing 12 month earnings and price-to-tangible book multiples
for banks and thrifts with assets between $500 million and $15 billion nationally were 14.9x and 126%,
respectively. Many of the stock prices of those banks and thrifts are based on tangible book value, rather
than earnings.
On a national scale, the stock price performance of acquirers was generally strong over the past 24
months or so. From the time that deals were announced in 2013, 2014, and 2015, stock prices of the
buyers have increased by medians of 11.4% and 13.2% for bank and thrift acquisitions, respectively, as of
Oct ober, 31, 2015 . We generally attribute such performance to t h e o v e r a l l m a r k e t a n d deals that
were reasonably valued and made sense strategically. We opine that low premium deals afford higher price
potential on a combined basis because management does not need to extract cost savings that hurt, rather
than help, long-term profitability.
The stock prices, however, of both Key Bancorp and New York Community suffered after announcing the
acquisitions of First Niagara and Astoria, respectively. The First Niagara and Astoria deals represented
the largest and third largest acquisitions announced in 2015, respectively. Although both deals were
viewed as good strategic fits, investors appeared concerned with the tangible book value dilution, relatively
long earn-back period, and suspension of the buyback regarding the Key/First Niagara deal. It appears that
the market was concerned with New York Community’s dividend cut and the implications of the company
being deemed a systemically important institution (“SIFI”). Key’s stock price dropped 7.2% the day after
the deal was announced and shares of New York Community fell 13.6% over the first two days following
its deal announcement.
3|Page
Figure 1
300
30
250
25
200
20
150
15
100
10
Price/LTM EPS
Deal: Price/LTM EPS
Price/TBV
2015 (Q3)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
0
2002
50
2001
5
Price/ Tnagible book Value (%)
35
2000
Price to LTM EPS (x)
Median Bank Trading Multiples
Deal: Price/TBV
Note: All publicly traded banks and thrifts.
Source: SNL Financial
Figure 2
300
30
250
25
200
20
150
15
100
10
Price/LTM EPS
Deal: Price/LTM EPS
Price/TBV
2015 (Q3)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
0
2002
50
2001
5
Price to Tangible Book Value (%)
35
2000
Price to LTM EPS (x)
Median Thrift (ex. MHCs) Trading Multiples
Deal: Price/TBV
Note: All publicly traded banks and thrifts.
Source: SNL Financial
4|Page
Figure 3
Number of Bank and Thrift Deals by Year*
350
299
Number of Deals
300
287
270
287
250
222
227
2012
2013
236
182
200
152
148
150
109
100
50
0
2005
2006
2007
2008
2009
2010
2011
2014
2015
(YTD*)
*2015 deal count is inclusive of all deals (non-government assisted) from 1/1/2015 through 10/31/2015
Source: SNL Financial
Figure 4
2015 Deals YTD by Region*
90
85
80
70
60
49
50
36
40
30
28
26
20
12
10
0
Mid Atlantic
Midwest
Northeast
Southeast
Southwest
West
*2015 deal count is inclusive of all deals (non-government assisted) from 1/1/2015 through 10/31/2015
Source: SNL Financial
5|Page
M&A Thesis
Our v i e w is that the U.S . banking industry will continue to consolidate to alleviate irrational
pricing decisions, achieve economies of scale, and satisfy shareholders. Since the mid-1980s, there have
been thousands of acquisitions/mergers as the number of banks decreased from approximately 15,000 to
about 5,550 today. Until the Great Recession, however, start-up banks were often formed to fill a need in the
market as well as provide jobs for displaced bankers. That has changed as only two de novo banks were
organized since 2010 due to both economic and regulatory reasons. Please see Figure 5 regarding the
decline in the number of banks and thrifts. For modeling purposes, we assume the projected decline in
institutions assumes the same decay rate as that from 2008-2014.
Figure 5
Projected Decline in Number of Institutions*
9,000
8,000
7,401 7,284
7,088 6,841
7,000
6,000
6,531 6,292
6,097 5,877
5,643 5,455
5,273 5,097
4,927
5,000
4,000
3,000
2,000
1,279 1,250 1,218 1,171 1,127 1,065
986
935
866
825
786
749
714
2012
2013
2014
2015
2016
2017
2018
1,000
2006
2007
2008
2009
2010
2011
Banks
Thrifts
*2015-2018 based on average annual rate of decline from 2008 -2014. 3.3% for banks and 4.7% for thrifts
Note: Industry wide data
Source: FDIC
Merger and acquisition activity will likely be ubiquitous for the foreseeable future as both potential
buyers and sellers have the means and motivation to enter into strategic partnerships. I n addition to
whole bank acquisitions, we expect banks will be interested in purchasing non-bank financial
companies along with selected branch purchases. We also believe d e a l s will be concentrated in more
active markets across the United States where buyers have a better chance of accelerating earnings
growth. Franchises located in slow growing and rural markets, however, can also be desirable because of
their core deposits.
As shown in Figure 6, there were only eight deals announced in 2015 (to date) which involved a seller with
assets greater than $2 billion. Given the dwindling number of mid-sized banks across the nation, it is logical
to assume that most industry consolidation will occur chiefly among the smaller banks.
6|Page
Figure 6 – Higher Profile 2015 Deals
Seller
State
Announcement
Date
City National Corp
Square 1 Financial
Metro Bancorp
National Penn Bancshares
CA
NC
PA
PA
1/22/2015
3/2/2015
8/4/2015
8/17/2015
32,015,600
3,094,866
3,001,357
9,604,314
Community & Southern
NewBridge Bancorp
Astoria Financial
First Niagara Financial
GA
NC
NY
NY
10/19/2015
10/13/2015
10/29/2015
10/30/2015
3,790,170
2,778,685
15,099,204
39,413,181
Buyer
Seller
Royal Bank of Canada
PacWest Bancorp
F.N.B. Corporation
BB&T Corporation
Bank of the Ozarks, Inc.
Yadkin Financial Corporation
New York Community Bancorp
KeyCorp
Seller
Deal Value
Assets at Announcement
($000s)
($mil)
Price/
Tang Book
(%)
Price/
LTM Earn
(x)
Core Deposit
Premium
(%)
5,400
849
474
1,830
272
280
178
219
22.9
23.3
22.7
17.7
12.3
19.8
9.4
15.4
800
456
2,000
4,100
199
197
146
169
47.4
22.6
23.0
19.3
18.3
13.1
NA
6.7
Source: SNL Financial, Inc.
Community banks that approach assets of $10 billion appear more likely to engage in merger and
acquisitions - either as a buyer or seller. More draconian regulatory rules kick in when institutions reach
this asset level which include, but are not limited to: mandatory stress testing, direct regulation by the
Consumer Finance Protection Board (CFPB), and caps on interchange fees pursuant to the Durbin
Amendment. Based on anecdotal evidence, banks prefer to hurdle over the $10 billion asset level via a
larger deal, rather than crawl over via organic growth or a smaller acquisition. The announced sale by
National Penn Bancorp (NASDAQ: NPBC) to BB&T Corp. (NYSE: BBT) is an example of a bank ($9.6
billion in assets) unwilling to cope with the cost and hassle of exceeding $10 billion. On the other hand, The
Bank of the Ozarks, Inc. (NASDAQ: OZRK) announced the purchase of Community & Southern Holdings,
Inc. ($4.0 billion), which represents an example of a bank going over the threshold in a meaningful manner.
The challenge will be for those banks to find a willing seller among banks with assets between $3 and
$6 billion. Mergers-of-equals (MOEs) among banks with assets between $5 and $10 billion often make
sense in theory, but rarely occur due to social considerations.
7|Page
Figure 7 - Banks Approaching $10 billion in Assets
Tang Equity/
Assets
(%)
ROAA
(%)
9,935,046
9,844,161
9,798,654
9,587,459
9,413,996
9,329,216
9,264,554
8,934,908
8,858,588
8,764,299
8.5
14.4
8.3
9.1
9.4
12.7
7.6
10.3
NA
10.8
0.80
0.70
1.12
1.13
0.91
2.01
0.96
0.79
0.92
1.42
6.6
5.3
7.5
8.9
9.4
15.0
8.2
5.7
6.7
11.1
17.1
22.4
14.9
16.1
17.7
25.9
15.6
20.1
15.2
18.0
170
126
209
199
167
381
189
153
180
221
WA
MT
TN
AR
SC
WV
NY
NY
MS
OH
8,755,984
8,604,530
8,544,799
8,515,553
8,499,876
8,452,430
8,161,562
7,997,166
7,918,732
7,880,533
10.1
8.6
8.7
9.2
8.1
7.8
7.6
8.7
7.4
7.9
1.09
1.06
1.24
1.63
0.95
1.12
0.97
1.23
1.02
0.96
7.4
9.9
9.2
12.3
7.8
9.0
8.8
9.7
8.6
8.9
21.0
15.1
21.8
22.4
19.7
15.5
16.4
17.9
18.7
16.1
228
178
304
389
284
202
204
253
253
198
BHLB
CVBF
CUBI
UBSH
BBCN
SFNC
PRK
CBF
BANC
MA
CA
PA
VA
CA
AR
OH
FL
CA
7,804,488
7,626,462
7,599,471
7,594,313
7,583,002
7,559,694
7,300,340
7,261,196
7,256,810
7.3
11.2
7.0
9.3
11.0
NA
8.9
NA
8.1
0.55
1.45
0.78
0.72
1.30
0.80
1.22
0.77
0.69
4.9
12.5
10.4
5.3
10.4
8.1
12.3
4.7
7.3
17.3
19.4
14.9
17.6
14.4
20.6
16.6
28.3
11.3
162
220
159
167
163
243
216
165
125
OFG Bancorp
OFG
Boston Private Financial Holdings, Inc.BPFH
Independent Bank Corp.
INDB
FCB Financial Holdings, Inc.
FCB
LegacyTexas Financial Group, Inc. LTXB
Heartland Financial USA, Inc.
HTLF
Talmer Bancorp, Inc.
TLMR
First Financial Bankshares, Inc.
FFIN
BancFirst Corporation
BANF
First Commonwealth Financial Corporation
FCF
PR
MA
MA
FL
TX
IA
MI
TX
OK
PA
7,203,822
7,180,528
7,135,489
6,888,689
6,878,843
6,805,884
6,504,035
6,467,645
6,406,096
6,384,749
11.4
NA
7.9
11.3
9.1
NA
10.8
10.3
9.3
9.0
1.10
1.11
0.95
0.41
0.85
0.72
1.61
1.65
1.00
0.71
9.3
11.0
9.7
2.9
5.6
8.9
12.5
14.0
10.9
6.2
NM
16.4
19.3
42.8
21.9
13.1
21.6
22.0
14.8
17.3
63
196
225
190
224
177
159
337
162
146
BofI Holding, Inc.
BOFI
S&T Bancorp, Inc.
STBA
First Merchants Corporation
FRME
Opus Bank
OPB
TowneBank
TOWN
Farmers & Merchants Bank of Long FMBL
Beach
Eagle Bancorp, Inc.
EGBN
United Financial Bancorp, Inc.
UBNK
Brookline Bancorp, Inc.
BRKL
Tompkins Financial Corporation
TMP
CA
PA
IN
CA
VA
CA
MD
CT
MA
NY
6,259,648
6,215,338
6,189,797
6,183,155
6,173,891
5,978,890
5,888,958
5,843,022
5,839,529
5,594,718
9.2
NA
9.2
9.8
10.7
14.2
NA
8.7
9.1
7.5
1.61
1.22
1.08
1.00
0.92
1.14
1.31
0.16
0.82
1.03
18.2
9.7
8.9
5.8
7.4
7.9
11.9
1.3
7.1
10.8
13.9
16.3
14.9
22.2
18.2
12.1
20.3
15.6
16.7
14.3
219
235
181
210
175
93
272
132
156
196
FFIC
NY
BANR WA
ABCB GA
BNCN NC
SRCE
IN
WTBFB WA
WSFS DE
CPF
HI
WABC CA
5,502,075
5,312,310
5,216,300
5,201,118
5,105,584
5,069,283
5,067,942
5,021,833
5,001,395
8.3
12.2
7.8
7.4
11.0
8.9
NA
9.9
8.2
0.91
1.17
1.04
0.83
1.21
0.92
1.17
0.85
1.22
9.8
9.6
12.2
9.1
9.6
9.2
12.2
6.8
11.6
13.4
19.9
25.6
18.7
14.5
11.3
17.4
15.6
19.1
133
160
256
228
149
107
200
141
282
9.1
1.01
9.0
17.3
193
Name
Ticker State
First Midwest Bancorp, Inc.
Capitol Federal Financial, Inc.
Great Western Bancorp, Inc.
National Penn Bancshares, Inc.
United Community Banks, Inc.
Bank of the Ozarks, Inc.
Chemical Financial Corporation
Northwest Bancshares, Inc.
Provident Financial Services, Inc.
Glacier Bancorp, Inc.
FMBI
CFFN
GWB
NPBC
UCBI
OZRK
CHFC
NWBI
PFS
GBCI
IL
KS
SD
PA
GA
AR
MI
PA
NJ
MT
Columbia Banking System, Inc.
First Interstate BancSystem, Inc.
Pinnacle Financial Partners, Inc.
Home BancShares, Inc.
South State Corporation
WesBanco, Inc.
NBT Bancorp Inc.
Community Bank System, Inc.
Renasant Corporation
First Financial Bancorp.
COLB
FIBK
PNFP
HOMB
SSB
WSBC
NBTB
CBU
RNST
FFBC
Berkshire Hills Bancorp, Inc.
CVB Financial Corp.
Customers Bancorp, Inc.
Union Bankshares Corporation
BBCN Bancorp, Inc.
Simmons First National Corporation
Park National Corporation
Capital Bank Financial Corp.
Banc of California, Inc.
Flushing Financial Corporation
Banner Corporation
Ameris Bancorp
BNC Bancorp
1st Source Corporation
W.T.B. Financial Corporation
WSFS Financial Corporation
Central Pacific Financial Corp.
Westamerica Bancorporation
Median
Total
Assets
($000s)
Price/
ROAE LTM EPS
(%)
(x)
Price/
Tang Book
(%)
* Return on average assets (ROAA) and return on average equity based on last 12 months reported earnings.
Source: SNL Financial, Inc.
8|Page
Earnings challenges are likely to continue for most financial institutions. Net interest margins remain
under pressure as newly-originated loans generally have yields lower than those of legacy loans and
funding costs cannot be significantly reduced at this point. We also opine that well-run banks are fairly
efficient and will be unable to increase profits substantially through cost-cutting measures. Interest rate
risk, rather than asset quality concerns, continues to be the primary concern among banking
regulators.
As shown in Figure 8 below, the slope of today’s yield curve resembles that from 2004, even though absolute
levels of interest rates are much lower. Banks will face the same problems as in the previous decade if shortterm rates rise quicker than longer-term rates. When the curve flattened in 2005 and then inverted by mid2006, net interest margins compressed and eventually credit soured from pristine levels as banks tried to
boost earnings through higher-yielding, but dicey loans and investment securities. History may not repeat
itself but merger and acquisition activity picked up considerably when the yield curve inverted in
2005-2006 (Figure 3).
Figure 8
Historical Treasury Yield Curve
6.0
5.0
Yield (%)
4.0
3.0
2.0
1.0
0.0
1 Mo
3Mo
10/29/2004
6 Mo
1 Yr
2 Yr
10/31/2005
3 Yr
5 Yr
10/31/2006
7 Yr
10 Yr
10/31/2007
20 Yr
30 Yr
10/30/2015
Source: SNL Financial
We should see more Board and shareholder activist pressure on management of banks and thrifts to
capitulate, given the difficulty of rationalized independence if the franchise has shown mediocre
performance. That said, we anticipate hostile deals will remain rare given the historically low rate of
success due to regulation and industry customs. Dissident shareholders typically pressure management
through proxy contests.
Important Disclosure: Ambassador Financial Group does and seeks to do business with companies included
in this report. As a result, readers should be aware that the firm may have a conflict of interest that could
affect the objectivity of the report.
9|Page