This document discusses how low-cost deposit growth is valued by the market and acquirers. It notes that core deposits, not book value, drive a bank's franchise value. Demographic data on depositors is important to understand concentrations. The market will pay more for institutions with strong, low-cost deposit franchises as this stabilizes earnings. Acquirers seek to buy core deposits through acquisitions. Strategies for banks to offset net interest margin pressure include growing low-cost deposits or leveraging excess capital to add loans or securities.

1. MERCER CAPITAL
www.mercercapital.com
Jeff K. Davis, CFA
February 6, 2020
The Market Will Pay You For
Low-Cost Deposit Growth
Deposit Mastery Summit
jeffdavis@mercercapital.com
(615) 345-0350
1

2. Core deposits – not book value –
drive your institution’s franchise
value
2The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

3. Know Your Deposit Demographics
Demographics of depositors
Concentrations
Other product ties to the bank
What happens to large deposits when?
• The depositor passes?
• The business is sold?
3The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

4. Why Acquire?
Results of Acquire or be Acquired Conference 2019 and 2020 bank executive and director poll
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Core
Deposits
Market Culture Lending
Talent
Mng't
Talent
Loan
Growth
2019 AOBA Survey
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Scale Core
Deposits
Increase
Profits
Market Share
Gain
Growth
2020 AOBA Survey
4The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

5. Core Deposit Framework
What matters?
5
Rate paid
Alternative funding rate
Deposit retention rate
Fees generated
Cost to service
Gross
Deposit Account Type Balance Current + 0.25 bps - 0.25 bps
NIB Demand Deposits $27,225,059 2.39% 2.59% 2.05%
Interest-Bearing Demand 19,386,292 1.70% 1.87% 1.02%
Money Market Deposits 22,064,356 1.38% 1.63% 1.12%
Savings Deposits 10,292,343 3.60% 4.31% 2.90%
IRAs 5,273,589 2.96% 3.51% 2.41%
Time Deposits 44,433,685 1.23% 1.45% 1.01%
Subtotal $128,675,324 1.83% 2.10% 1.46%
Public Funds 10,313,707 0.00% 0.00% 0.00%
Internal Accounts 296,254 0.00% 0.00% 0.00%
Brokered CDs na 0.00% 0.00% 0.00%
QwickRate CDs na 0.00% 0.00% 0.00%
TOTAL $139,285,285 1.69% 1.94% 1.35%
Fair Value %of Total Balance
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

6. Valuation Framework
Core deposits drive earning power and impact P/E via risk and growth
6The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com
Loans Risk-Free Rate
Bonds Equity Premium
Core Deposits Beta
Non-Core Funding
Beta Adj Equity
Premium
Deposit-Related
Fees
Other Fee Income
Personnel Costs
Other Costs
ORE Expense
Loan Loss Prov
Tax Rate Taxes
Fee
Businesses
Earning Power x P/E Multiple
Growth
Risk
Profile
Organic vs
M&A
Bank Specific
(Size, Lending,
Funding Profile)
Credit
Costs
Core Deposit
vs Loan
NIM &
Spread
Revenue
Fee Income
Operating
Expenses

7. Why Risk and Growth Matter
+ Yield to Maturity on 10 Yr UST 2.00%
+ Equity Premium 5.50%
x Company Beta 1.10
=Beta Adj Equity Premium 6.05%
+ Small-Mid Cap Equity Premium 2.50%
+ Company Specific Risks 1.50%
= Discount Rate (Equity Cost of Capital) 12.05%
- Long-Term Growth Rate (G) -5.00%
= Capitalization Rate 7.05%
= Multiple (1 / Cap Rate) 14.2x
Ongoing Earning Power Estimate $100,000
x Price/Earnings Ratio 14.2x
= Capitalized Earnings Value $1,420,000
Multiples are negatively correlated
with risk …higher risk = P/E
Multiples are positively correlated with
growth …higher G = P/E
Point in the cycle matters re what
investors care about the most
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 7

8. P/E – Growth vs Risk
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 8

9. P/TBV as Rule of Thumb
Every industry has a valuation rule of thumb
Most only indirectly speak to economics
Business model entails leveraging capital ~10x
to produce an earnings stream
Earnings and P/E drive value
P/TBV is a byproduct (P/E x ROTE = P/TBV)
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 9

10. Market forecast is more NIM pressure to come
Market’s vs Fed’s Rate Forecast
0.80%
1.05%
1.30%
1.55%
1.80%
Market'sShort-TermRate Projections
30 Day LIBOR Forward Curve 90 Day LIBOR Forward Curve Current Fed Funds Target
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 10
Fed's Forecast of Future Fed Funds Rate
Rates 2019 2020 2021 2022 2023
Median 1.625% 1.625% 1.875% 2.125% 2.500%
1.625% 17 13 5 1
1.875% 4 4 5
2.000% 1
2.125% 5 3
2.250% 2
2.375% 3 4
2.500% 8
2.625% 2
2.750% 2
2.875% 2
3.000% 1
3.250% 1
Fed Dot Plot as of 12/11/19, Forward USD LIBOR curves as of
1/31/20
Source: Chatham Financial

11. Strategies to Offset NIM Pressure
Leverage excess capital with securities
Grow Loans
Reduce deposit rates
Grow non-interest bearing deposits (get deposits regardless of loan demand!)
11Evaluating the Buyer's Shares // © 2020 Mercer Capital // www.mercercapital.com

12. Capital and Cash Flow Considerations
$1.0 billion asset bank faces 10bps of NIM pressure in 2020 – what to do?
12The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com
Marginal Cost of New Core Deposits 0.50%
Retire Wholesale Funding 1.75%
Spread -1.25%
Spread Revenues at Risk $1,000
Wholesale Funding Replaced ($80,000)
Capital Allocation @ 9.0%
Capital Allocation @ 100% RWA
Market or Acquirer Pay for Core
Deposit Growth?
Absolutely
Grow NIB and Low-Cost Core Deposits
No
Incremental
Capital
Bonds 2.75%
Wholesale Funding 1.75%
Spread 1.00%
Spread Revenues at Risk $1,000
Bonds to be Added $100,000
Capital Allocation @ 9.0% $9,000
Capital Allocation if 20% RWA $1,800
Market or Acquirer Pay for
Leverage Earnings?
No
Leverage Excess Capital: Add Securities
Loans 5.00%
Wholesale Funding 1.75%
Spread 3.25%
Spread Revenues at Risk $1,000
Loans to be Added $30,769
Capital Allocation @ 9.0% $2,769
Capital Allocation @ 100% RWA $2,769
Market or Acquirer Pay for Loan
Growth?
Yes +/-
Leverage Excess Capital: Add Loans

13. Low Rate Environment Dangers
Inflated asset values (collateral, etc.)
Less spread between NIB and low cost deposits vs wholesale funding
Easy route to fund incremental assets with wholesale funding
But, core deposits (customer relationships) is where the real value resides
Public market investors generally assume strong deposit franchise banks have
less risk than banks that have a high amount of purchased funding
13The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

14. Low cost deposit growth a
significant variable in ROE
produced from capital
retention
Capital Allocation
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 14
Internally
Generated
Capital
M&A Dividends
Buybacks
Reinvest
(Retain)

15. Market Rewards Low Cost Core Deposit Franchises
15The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com
Assets Cost of Cost of Efficiency Loans/
($000) Deposits Funds NIM Ratio Deposits ROA ROE ROTCE P/E (20E) P/BV P/TBV
Top Quintile
Median 2,068,796 1.56 1.67 3.25 56.8 98.2 0.97 9.4 10.0 11.7 113 127
Average 3,184,688 1.60 1.72 3.23 58.2 100.5 1.12 10.2 11.1 13.6 120 131
2nd Quintile
Median 2,473,691 1.20 1.32 3.46 63.2 98.4 1.04 9.2 12.1 12.1 114 129
Average 3,904,177 1.20 1.33 3.41 62.8 99.2 1.00 9.0 11.2 14.3 119 138
3rd Quintile
Median 3,341,290 0.98 1.09 3.40 63.2 95.1 1.04 8.7 11.1 12.7 116 137
Average 3,923,393 0.96 1.08 3.42 63.3 92.1 1.04 9.0 11.3 13.7 121 146
4th Quintile
Median 3,019,919 0.73 0.81 3.61 60.8 89.7 1.18 10.1 12.2 12.2 121 144
Average 3,567,954 0.73 0.83 3.72 62.0 88.3 1.16 9.8 12.2 12.5 128 154
Bottom Quintile
Median 2,671,413 0.44 0.53 3.91 59.7 84.6 1.29 10.5 13.8 13.5 132 155
Average 3,639,683 0.45 0.52 3.91 60.5 84.0 1.30 10.7 13.3 13.8 142 171
Source: S&PGlobal Market Intelligence; pricing as of 1/31/20
Publicly Traded Banks with $1 Billion - $10 Billion of Assets

16. Acquirers are Buying Core Deposits
(Earnings) & Markets
General trend to higher multiples for lower COF though data more nuanced vs public markets
16The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com
0
50
100
150
200
250
300
0.00 0.50 1.00 1.50 2.00
PricetoTangibleBookValue
Cost of Funds (%) @ Announcement
Stock & Mixed Deals
0
50
100
150
200
250
300
0.00 0.50 1.00 1.50 2.00
PricetoTangibleBookValue
Cost of Funds (%) @ Announcement
Cash Deals
Data based upon M&A transactions announced since Jan 2018 with disclosed pricing
Source: S&P Global Market Intelligence

17. US Bank M&A Market
Valuation multiples vary through time, activity not so much
17The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com
263%
115%
157%
16.8x
0%
40%
80%
120%
160%
200%
240%
280%
320%
0x
4x
8x
12x
16x
20x
24x
28x
32x
1990Y
1991Y
1992Y
1993Y
1994Y
1995Y
1996Y
1997Y
1998Y
1999Y
2000Y
2001Y
2002Y
2003Y
2004Y
2005Y
2006Y
2007Y
2008Y
2009Y
2010Y
2011Y
2012Y
2013Y
2014Y
2015Y
2016Y
2017Y
2018Y
2019Y
Price/TangibleBookValue
Price/Earnings(ReportedLTM)
U.S. Bank Price / Earnings U.S. Bank Price / Tangible Book Ratio
NM P/E
YTD 12/31/19
217
305
399
481
566
463 458
466
504
358
280
263
230
273
282 277
313 320
179
166
232
185
248 250
307
293
251
267 266 269
0%
1%
2%
3%
4%
5%
6%
0
100
200
300
400
500
600
1990Y
1991Y
1992Y
1993Y
1994Y
1995Y
1996Y
1997Y
1998Y
1999Y
2000Y
2001Y
2002Y
2003Y
2004Y
2005Y
2006Y
2007Y
2008Y
2009Y
2010Y
2011Y
2012Y
2013Y
2014Y
2015Y
2016Y
2017Y
2018Y
2019Y
%ofBanksasofJanuary1AcquiredEachYear
NumberofAnnouncedTransactions
Number of Bank Transactions % of Industry Acquired YTD 12/31/19
Source: S&P Global Market Intelligence

18. Key Takeaways
Core deposits are the primary driver of franchise value
Non-interest bearing (and near NIB) deposits matter a lot when rates fall, too
Reducing COF vs adding assets to offset NIM pressure is value accretive
Growing core deposits should improve both earning power and the P/E
Price / TBV multiple is a data point
18The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

19. 19
Questions?
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

20. About the Presenter
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com 20
Jeff K. Davis, CFA
Mercer Capital
Managing Director
jeffdavis@mercercapital.com
615.345.0350
Jeff Davis is Managing Director of Mercer Capital’s Financial Institutions
Group (FIG). Jeff primarily works with financial institutions in merger and
acquisition advisory engagements. He assists buyers in evaluating the
attractiveness of acquisition candidates, determining a price for the target
institution, structuring the transaction, and evaluating different forms of
financing. For sell-side clients, Jeff analyzes the potential value that the
institution may receive upon a sale, assists in locating potential buyers, and
negotiating a final transaction price and merger agreement.
Jeff also spent over a decade as a sell-side analyst covering small-, mid- and
large-cap banks and specialty finance companies. He has been an editorial
contributor to S&P Global Market Intelligence (SNL Financial) since 2012 and
holds the Series 7, 63 and 79 securities licenses.
Jeff is a graduate of Rhodes College (BA) and Vanderbilt University (MBA).
The Market Will Pay You For Low-Cost Deposit Growth // © 2020 Mercer Capital // www.mercercapital.com

21. Mercer Capital
1.800.769.0967
www.mercercapital.com