Banking industry update Primatics Financial Risk and Finance Banking - - PowerPoint PPT Presentation

This document is confidential and is intended solely for the use and information

• f the SNL Financial and the individual, group,
• r corporation to whom it is addressed.

Banking industry update

Primatics Financial Risk and Finance Banking Industry Event, May 12, 2015 — Chicago, Ill.

Bank Performance Bank M&A Brief Regulatory Update Outlook

2

Agenda

Bank Performance

3

Fundamentals improving but remain challenged

Confidential – Not for Redistribution

4

• Credit quality has improved dramatically. Credit leverage waning
• Deposit growth has outpaced loan growth for years
• Loan growth has shown signs of rebounding, but weakened in the last two

quarters

• Banks have invested excess liquidity in their securities portfolios. Some

compelled to do so by regulations like the LCR

• The rate environment continues to weigh on NIMs
• Still hoping for rate increases. Fed rate hikes kicked further out in ‘15. Low

rates globally have pushed long-term rates lower

Credit leverage waning

Confidential – Not for Redistribution

5

Credit leverage waning

Confidential – Not for Redistribution

6

Deposit growth faster than loan growth

Confidential – Not for Redistribution

7

Loan growth faster at midsize banks since the crisis

8 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Banks over $250B Banks $50B-$250B Banks $10B-$50B Banks $1B-$10B Banks below $1B

Median loan growth by asset group (%)

Since '08

Excludes industrial banks, nondepository trusts, cooperative banks, thrift holding companies. Includes historical institutions that were still current at the end of a given year. Source: SNL Financial

Loan-to-deposit ratios have fallen

9

• Loan-to-

deposit ratios have declined across the industry

• Nation’s

largest banks have seen greatest decrease

Loans-to-deposits ratio for US bank and thrifts by asset size (%) Represents medians for asset buckets

Securities larger portion of bank balance sheets

10

• Slow loan

growth, excess liquidity, regulation has prompted banks to buy more securities

• Big banks have

been forced to buy securities due to LCR

• Securities have

grown to ~20%

• f assets

LCR driving security purchase activity

11

US government, state & municipal and residential mortgage backed securities at US banks & thrifts

Rates, LCR weighing on securities yields

12

Securities yields for US banks and thrifts by asset size (%)

Represents medians for asset buckets

Yields under pressure, no more funding relief

13

Yields and costs for US bank and thrifts (%)

NIM chart by asset size

14

• Banks’ NIMs fall

to 3.15% in ‘14

• NIMs remained

under pressure in Q1

• Low rates, slow

loan growth, competition for loans & excess cash balances have weighed on margins

• No one safe from

margin pressure

Net interest margin for US bank and thrifts by asset size (%)

Represents medians for asset buckets

Cost of low rates, regulation evident

Confidential – Not for Redistribution

15

Profitability at US banks and thrifts (2004- 2014) Represents medians for asset buckets ROAA (%) 2004Y 2014Y Change (bps) Industry aggregate 1.32 1.01

• 31

Above $250B 1.36 0.79

• 57

$50B-$250B 1.31 0.99

• 32

$10B-$50B 1.30 0.95

• 35

$1B-$10B 1.16 0.93

• 23

Below $1B 1.01 0.83

• 18

ROAE (%) Industry aggregate 13.67 8.96

• 471

Above $250B 15.50 9.11

• 639

$50B-$250B 15.15 8.14

• 701

$10B-$50B 15.65 8.33

• 732

$1B-$10B 12.84 8.57

• 427

Below $1B 9.90 7.65

• 225

Efficiency ratio (%) Industry aggregate 57.91 61.83 392 Above $250B 59.33 63.06 373 $50B-$250B 51.18 62.84 1166 $10B-$50B 56.33 60.93 460 $1B-$10B 57.61 65.92 831 Below $1B 65.10 70.83 573

Data compiled April 7, 2015. Analysis is based on commercial banks, savings banks and savings institutions regulatory filings. Net income used in the analysis was not adjusted for S-corps. ROAA = return on average assets; ROAE = return on average equity Efficiency ratio = total noninterest expense less amortization of intangible assets as a percent of noninterest income and net interest income on a fully taxable equivalent basis if available. Source: SNL Financial

Bank M&A Activity

16

Drivers of Bank M&A

• Challenging earnings environment due to slow loan growth, low

rates and heightened regulatory costs

• Need for scale
• Sellers seeing upside post deal in the right transactions. Investors

supporting many deals

• Board and management fatigue taking a toll
• More banks seem to be improving regulatory standing, allowing for

a few more buyers

• Mostly smaller deals

17

Bank M&A Activity Since 2013

18

• Slower start to ‘15

because of volatility

• But deal activity

higher, in part due to a handful of deals

• As growth

challenged and currencies stronger, many banks considering M&A

Banks M&A Activity last 10 years

Confidential – Not for Redistribution

19

Pace of bank M&A activity

Confidential – Not for Redistribution

20

Recent bank M&A pricing

21

• Bank M&A pricing is increasing
• A handful of big ticket transactions a year
• Banks beginning to pay up for strong deposit

franchises

Notable deals

Confidential – Not for Redistribution

22

• City National sold to Royal Bank of

Canada for $5.4B, or 2.6x TBV

• Surprising – no one considered them a

seller – great franchise that was asset

• sensitive. Why sell before rates go up?
• City National essentially brings forward

the impact of higher rates, maintains its brand

• RBC pays up to diversify out of Canada

Notable deals

Confidential – Not for Redistribution

23

• Square 1 sold to PacWest for $849M, or

2.62x of TBV in early March

• Surprising – Another great performer sells
• Sold at a good multiple
• PE investors made close to 5x original

investment

• Square 1 and City National sale had some

speculating that sellers were worried about the future

• Perhaps just as concerned that rates

weren’t moving higher in near term

Notable deals

Confidential – Not for Redistribution

24

• Bridge Capital Holdings sold to Western Alliance for $425M, or 2.22x

tangible book value

• Another strong performer selling at a high price tag
• PE firms were sizable investors in Bridge Capital. PE firms made a large

return & deal came roughly 5 years after investment

Regulatory Update

25

General regulatory issues

26

• Heightened expectations
• Still lots of focus on compliance
• Interest rate risk
• CECL — looming around the

corner

• UDAAP & Fair lending
• BSA / AML
• Stress testing: Smaller banks

beginning the exercise much earlier – some voluntarily, some at the behest of regulators

• Banks increasingly say they need to be

$15B to $20B in assets to absorb the cost of moving above $10B in assets

Regulatory changes

Confidential – Not for Redistribution

27

• New treatment of brokered

deposits – any third party that facilitates a deposit classified as a deposit broker

• Many more deposits

classified as brokered

• Some companies saw big

bump

Regulatory changes

Confidential – Not for Redistribution

28

• Regulators finalized a rule allowing banks up to $1B in assets

to increase leverage at HoldCo

• Asset threshold previously $500M
• Believed that more banks could easily raise capital – issue

debt and downstream it to the bank sub

• More advisers encouraging banks to consider issuing sub debt
• Josh Siegel at StoneCastle is trying to create pooled sub debt
• fferings as a result – call it the new pooled TruPS

More capital available

Confidential – Not for Redistribution

29

• Even without

changes, smaller banks now have greater access to capital

• Smaller banks

can issue preferred equity, senior debt, sub debt

Common equity not the only game in town for community banks

Sub debt offerings since 2013 at public banks with assets less than $1B*

Company Offering type Gross amount

• ffered

($000) Offering completion date Total assets ($M) Tier 1 risk- based ratio (%) Return

• n

average assets (%) Net interest margin (%) Texas ratio (%) Avenue Financial Holdings, Inc. Subordinated Debt 20,000 12/29/2014 998.79 10.62 0.59 3.44 7.16 Blackhaw k Bancorp, Inc. Subordinated Debt 6,100 3/31/2013 581.473 9.46 0.38 3.73 41.87 California Republic Bancorp Subordinated Debt 25,000 11/14/2014 1121.131 18.13 1.32 4.80 0.35 Community Shores Bank Corporation Senior Debt 1,280 3/20/2013 184.677 NA NA NA NA Cornerstone Community Bancorp Subordinated Debt 5,000 3/2/2015 149.16 NA NA NA NA DNB Financial Corporation Subordinated Debt 9,750 3/5/2015 723.679 14.90 0.71 3.40 14.60 First Capital Bancorp, Inc. Subordinated Debt 6,500 1/10/2014 598.54 11.00 0.76 3.70 17.95 First Community Financial Partners, Inc. Subordinated Debt 9,800 10/31/2014 924.075 10.27 0.66 3.41 11.01 First Community Financial Partners, Inc. Subordinated Debt 5,500 9/30/2013 924.075 10.27 0.66 3.41 11.01 First Community Financial Partners, Inc. Subordinated Debt 10,000 3/12/2013 924.075 10.27 0.66 3.41 11.01 Greer Bancshares Incorporated Subordinated Debt 3,975 7/23/2014 354.195 NA NA NA NA Greer Bancshares Incorporated Subordinated Debt 1,980 6/11/2014 354.195 NA NA NA NA Highlands Bancorp, Inc. Subordinated Debt 5,000 5/19/2014 272.622 NA NA NA NA KS Bancorp, Inc. Subordinated Debt 2,000 12/19/2014 318.451 NA NA NA NA MVB Financial Corp. Subordinated Debt 29,400 6/30/2014 1110.678 12.03 0.19 3.06 20.09 Northw est Bancorporation, Inc. Subordinated Debt 6,000 12/11/2013 421.807 11.03 0.80 4.45 14.18 Plumas Bancorp Subordinated Debt 7,500 4/15/2013 538.862 11.38 0.89 4.10 29.19 Presidio Bank Subordinated Debt 10,000 10/22/2014 542.753 10.00 0.64 NA 2.51 Triumph Bancorp, Inc. Senior Debt 12,573 12/31/2013 1447.898 19.56 1.31 6.76 11.78 Valley Financial Corporation Subordinated Debt 11,000 10/15/2013 901.399 11.96 0.77 3.52 30.95 York Traditions Bank Subordinated Debt 5,000 3/27/2015 300.231 13.11 0.66 NA 8.67 Data compiled April 23, 2015. * Analysis limited to public banks w ith assets less than $1B as of Dec. 31, 2014, w hich issued either senior or subordinate debt offerings since 2013. Net interest margin is on a fully taxable-equivalent basis. Financial data is based on regulatory filings. NA = not available Source: SNL Financial 2014Y

Outlook

30

31

Nathan Stovall Senior Editor and New York Bureau Chief SNL Financial 212.341.7304 nstovall@snl.com

Contact

Primatics Financial Risk and Finance Banking Industry Event, May 12, Chicago, Ill.