Shareholder Value Drivers

Shareholder Value Drivers
Consumer Bankers Association Executive
Banking School
July 23, 2021
Jeff K. Davis, CFA
Managing Director
1.615.345.0350
jeffdavis@mercercapital.com

What’s the Bank Worth?
CBA Banking School – Shareholder Value Drivers // © 2021 Mercer Capital 2

CBA Outline
1. Hypothetical Stock Grant
2. Bond Market Speaks
3. Earnings – Various Perspectives
4. Earnings Issues Today
5. Valuation Framework
6. Reconciling P/TBV and P/E
7. How Institutional Investors View Value
8. Overview of the Market for Bank Stocks
9. JPM Stock Grant
10. Appendix – M&A Stats

Hypothetical Stock Grant
Section 1
CBA Banking School – Shareholder Value Drivers // © 2021 Mercer Capital

Lagniappe—Maybe
Good News!
The JPM Board of Directors at the
recommendation of Jamie Dimon
has approved a stock grant to all
employees equal to 1x base pay up
to $100,000 provided JPM’s share
price closes above $200 by year-
end 2022
JPM’s shares closed @ $155 per
share on July 15, 2021 – 22% below
the target
Source: S&P Global MI

Is $200 Doable
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
$220
$240
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
Jun-18
Aug-18
Oct-18
Dec-18
Feb-19
Apr-19
Jun-19
Aug-19
Oct-19
Dec-19
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
JPM Share Price 50-Day Average

A lot of moving parts impact share prices
Catalysts to Payday
Earnings
• JPM vs Street
Expectations
• Street Revisions
• Long-Term vs
Short-Term(ism)
• Return on Equity
vs Growth
• Revenue and
PPNR
• Credit
Cycle
• Economic
• Interest Rates
• Industry Profits
• Broader Market
(bull, bear or
sideways)
Valuation
• P/E vs P/TBV
• Absolute
• vs Peers
• vs History
• Dividend Yield?

Bond Market Speaks re the Cycle
Section 2

Risk-free rates (US sovereign) – most
important price in a capitalistic economy
Short-term policy rates set by the Fed
• Interest on reserves @ Fed
• Fed Funds rate
US Treasury Rates
• Rates from short-term bills to long-term
bonds reflect the “yield curve”
• Determined by market participants
though influenced by Fed policy
• Rates reflect inflation expectations, term
premium, money flows, Fed bond buying
• Shape of the yield curve speaks a lot
about investor economic views
Corporate bond market—credit risk
Also known as “spread” products
Market opines on credit risk
Measured as spread over the equivalent
maturity risk-free UST rate
• 30/90 Day LIBOR (vs 30/90 Day Bills)
• Investment grade corporate bonds
(AAA+ to BBB-) yields vs USTs
• High yield (or junk) bonds (BB+ to CCC)
yields vs 5-7 year USTs
• Market participants determine yields
(and spreads vs USTs)
Two Big Markets
“Rates” Market “Credit” Market

Market believes Fed will begin to raise
short-term policy rates by late 2022
based upon rising forward rates for 30-
day LIBOR – Positive for JPM’s and
industry’s NIM
Yield curve is moderately steep—
implying economy will remain in a growth
mode which should promote loan growth
Very narrow spread on high yield
corporate bonds over USTs implies
corporate credit quality outlook is
stable or even improving and
therefore JPM / industry loan losses
will remain low
Yield curve has narrowed since March
when the 10-year UST yielded 1.75% vs
1.30% today
Fed does not seem to be in a hurry to
taper bond buying much less raise short-
term rates
Loan demand is very sluggish
Implies revenue growth via loan growth
and NIM expansion may be much
further in the future than JPM and bank
investors generally assume
Bond Market re $200 JPM Price Target
Positive Negative

Earnings – Various Perspectives
Section 3

Three Earnings Perspectives
Source: Chatham Financial
Reported vs core earnings
• Objective is to eliminate non-recurring and unusual items
• Multiple earnings concepts—adjusted net income, debt-free net income, EBITDA
• Envelope pushed—especially tech and other sectors with negative reported
earnings—to focus on adjusted EBITDA
Use core earnings to develop “earning power”
Wall Street earnings analysis
• “Beat” vs “miss” quantitative and qualitative analysis of the quarter to discern
core from reported
• Quarter does not matter per se but revisions to current and especially the “out”
year consensus matters a lot
• Most analysts are not focused on earning power, but many investors are

Concept of Earning Power
Earning power reflects an estimate of ongoing earnings through a full
business/credit cycle
Earning power is derived from an analysis of historical core earnings combined
with an earnings forecast over the next 1-2 years
The most significant variables for a bank will be a) the expected range of credit
losses; b) NIM; and c) volume of loans and core deposits
The challenge of estimating a bank’s earning power is that credit losses tend to
be episodic (i.e., very low for years then very big) and the current rate
environment that devalues low cost deposits
Product of earning power and reasonable multiple assumption provide one
perspective on whether shares are “cheap” or “expensive”

Earning Power
Primary variables for a commercial bank: credit costs, NIM and loan growth
Implications of earning power 1 vs 3?
NIM < by NIM > by LL Prov = LL Prov = Earning Earning Earning
2020A 2021E 2022E 18-19E 19-20E -0.30% 0.10% 0.25% 0.75% Power - 1 Power - 2 Power - 3
Avg Earning Assets $4,000 $4,500 $4,700 13% 4% $4,700 $4,700 $4,700 $4,700 $4,700 $4,700 $4,700
NIM 3.80% 3.60% 3.50% (20 bp) (10 bp) 3.20% 3.60% 3.50% 3.50% 3.20% 3.50% 3.80%
Net Int Income $152.0 $162.0 $164.5 7% 2% $150.4 $169.2 $164.5 $164.5 $150.4 $164.5 $178.6
Fee Income 50.0 51.5 53.7 3% 4% 53.7 53.7 53.7 53.7 53.7 53.7 53.7
Revenues $202.0 $213.5 $218.2 6% 2% $204.1 $222.9 $218.2 $218.2 $204.1 $218.2 $232.3
Expenses 140.0 148.0 152.0 6% 3% 152.0 152.0 152.0 152.0 152.0 152.0 152.0
Efficiency Ratio 69% 69% 70% 74% 68% 70% 70% 74% 70% 65%
Op Income (PPOI) $62.0 $65.5 $66.2 6% 1% $52.1 $70.9 $66.2 $66.2 $52.1 $66.2 $80.3
ORE Expense 4.2 4.3 4.0 3% -8% 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Provision 6.0 7.5 10.0 25% 33% 10.0 10.0 8.0 23.9 23.8 10.0 8.0
Net Charge-Offs 4.5 6.0 8.5 33% 42% 9.0 9.0 7.2 21.5 21.4 9.0 7.2
Amortization Exp 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
Net Non-Recurring -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Pre-tax $50.2 $53.2 $51.8 6% -3% $37.7 $56.5 $53.8 $37.9 $23.9 $51.8 $67.9
Taxes 11.6 12.2 11.9 8.7 13.0 12.4 8.7 5.5 11.9 15.6
Effective Tax Rate 23% 23% 23% 0 bp 0 bp 23% 23% 23% 23% 23% 23% 23%
Net Inc-Common $38.7 $40.9 $39.9 6% -3% $29.0 $43.5 $41.5 $29.2 $18.4 $39.9 $52.3
Avg Shares O/S 16.6 16.6 16.6 0% 0% 16.6 16.6 16.6 16.6 16.6 16.6 16.6
EPS $2.33 $2.47 $2.41 6% -3% $1.75 $2.62 $2.50 $1.76 $1.11 $2.40 $3.15
P/E Multiple 10.1x 10.4x 14.3x 9.5x 10.0x 14.2x 22.6x 10.4x 7.9x
% Change
$25.00

Source of surprise matters vs expectations
Street Focus – Quarter vs Consensus

Direction matters, but why matters more depending upon where in the economic cycle
Direction of Consensus EPS
Per Share Level FQ1 2022 - Mar
2022
FQ2 2022 - Jun
2022
FQ3 2022 - Sep
2022
FQ4 2022 - Dec
2022
FY 2022 - Dec 2022
NYSE : JPM
EPS Normalized
Last Month
Number of Analysts 3 3 3 3 14
Number of Analysts still in Consensus 3 3 3 3 13
Upward 1 0 0 2 2
Downward 1 2 3 1 8
Last Two Months
Number of Analysts 2 2 2 2 13
Number of Analysts still in Consensus 2 2 2 2 12
Upward 1 0 0 1 1
Downward 0 1 2 1 8
18 Months ago 3.00 3.00 2.92 3.02 12.82
12 Months ago 2.82 2.74 2.70 2.70 10.33
9 Months ago 2.42 2.56 2.58 2.61 10.39
6 Months ago 2.93 2.84 2.74 2.87 11.04
3 Months ago 3.08 3.01 3.00 3.02 11.88
2 Months ago 3.01 3.07 3.11 3.12 12.05
1 Month ago 3.06 3.06 3.09 3.05 12.06
11.78
Current 3.00 3.00 2.92 3.02 11.78
NYSE:JPM ($)
EPS Normalized 3.00 3.00 2.92 3.02
FQ1 2022 - Mar 2022 FQ2 2022 - Jun 2022 FQ3 2022 - Sep 2022 FQ4 2022 - Dec 2022 FY 2022 - Dec 2022

Earnings – Investor Issues Today
Section 4

Investor Questions for JPMs and Banks
2020 a surprise!
Deep, short recession necessitated 1H20
provision expense to build loss reserves
Bank earnings boosted in 4Q20 and 1H20
with reserve releases when sizable losses
did not materialize
Focus is now shifting to revenues
• No loan growth, strong deposit growth
• Lack of yield = NIM pressure
• Mortgage banking boom fading
• Trading revenues trending lower
Best allocation of excess capital
2018 1Q21
# of Institutions 128 145
Pre-Tax ROA 1.85% 2.07%
Pre-Tax, Pre-Prov / Assets 1.46% 1.58%
ROA 1.46% 1.60%
ROE 12.0% 15.0%
Leverage Ratio 10.4% 9.6%
Total Risk-Based Capital 14.6% 15.7%
Net Interest Margin 3.87% 3.12%
NIM less Net Charge-Offs 3.17% 2.71%
Fee Income / Assets 1.50% 1.29%
Efficiency Ratio 53.1% 55.9%
Loans / Assets 61.2% 58.2%
NPAs / Assets 0.62% 0.79%
Net Charge-Offs / Avg Loans 0.70% 0.41%
Loan Loss Reserve / Loans 1.34% 2.12%
Assets $10B - $250B
Source: FDIC Quarterly Banking Review

Returns on investments (including M&A) should exceed the bank’s cost of capital
Capital Allocation
Internally
Generated
Capital
M&A Dividends
Buybacks
Reinvest
(Retain)

Investors are focused on tough revenue environment & catalysts to change
JPM 2Q21 Summary

Valuation Framework
Section 5

Value = PV of Future Cash Flows
CF1 CF2 CF3 CF4
= Rn + Rn + Rn + Rn + …
CF = Cash Flow (year 1) ….
R = Equity Discount Rate
n = Number of years cash flows are discounted to the present value
=
G = Growth rate of cash flows
R - G = Capitalization Rate
1 / Cap Rate = Capitalization Factor (Earnings or CF Multiple)
=
Value = PV of Sum
of Cash Flows
Shortcut to PV (if
growth is constant)
Cash Flow (next year)
R - G
Same Concept as
Valuing CRE
Net Operating Income
Cap Rate

Wall Street ….
Growth!
Accelerating Growth!!

Measuring Risk
There is no return without risk
Risk is harder to measure than historical or even prospective growth
There are many permutations that investors will consider to calibrate a
reasonable valuation (or range)
• Amount of capital and capital structure
• Type of credits
• Hold positions
• Liquidity / source of funding
• M&A execution
• Key man/woman dependency
• Data integrity
• Customer concentration (not typical for banks)

Why Risk and Growth Matter
Multiples are negatively
correlated with risk …
higher risk = P/E
Multiples are positively
correlated with growth …
higher G = P/E
Growth matters a lot to
value, but so does risk
+ Yield to Maturity on 10 Yr UST 1.30%
+ Equity Premium 5.50%
x Company Beta 1.20
=Beta Adj Equity Premium 6.60%
+ Small-Mid Cap Equity Premium 2.50%
+ Company Specific Risks 2.00%
= Discount Rate (Equity Cost of Capital) 12.40%
- Long-Term Growth Rate (G) -5.00%
= Capitalization Rate 7.40%
= Multiple (1 / Cap Rate) 13.5x
Ongoing Earning Power Estimate $100,000
x Price/Earnings Ratio 13.5x
= Capitalized Earnings Value $1,350,000

P/E Increases with Growth
0x
5x
10x
15x
20x
25x
30x
35x
40x
45x
50x
-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
P/E (12% Cost of Capital vs Long-Term Growth Rate)

Valuation Methods
Value as an independent company
• Discounted Cash Flow (DCF) of projected future cash flow and terminal value
discounted at a risk appropriate rate (12-15%)
• Public market comps
• Transactions in the subject’s stock and (sometimes) net asset value
Acquisition value
• DCF with expense savings (and deal costs)
• M&A comp transactions
• Contribution analysis
Buyer dynamics
• Internal rate of return projected vs. hurdle rate
• EPS accretion vs. TBVPS dilution and earn-back period
• Strength of the buyer’s currency (how richly valued?)
• Excess capital and/or access to the capital markets to fund cash portion

Reconciling P/TBV and P/E
Section 6

High Level Math
P/TBV = ROE (ROTE) x P/E
ROE = ROA x Leverage … or
ROE = (Income / Assets) x (Assets / Equity)
P/E = Risk Profile and Growth Expectations
Bank investors toggle between what is top of mind depending in
part where we are in the economic/credit cycle

Institutional Investors View
Section 7

Or “fundamental” value
Net asset value (asset holding co)
Earning power and multiple
Cash (on cash) yield
Viewed in context of ROE
(profitability vs leverage) and
growth (organic vs acquisition)
Management (vision & execution)
Business units market share
Customer relationships
Core deposits
LT superior loss history (yield less
net charge-offs)
Market(s)
Intrinsic vs Franchise Value
Intrinsic Franchise

Investor view of a typical bank that is not acquired
Life Cycle Matters
-5%
0%
5%
10%
15%
20%
25%
0 2 4 6 8 10 12 14 16 18 20 22 24
Growth ROE
Time -->
Organic
Organic /
M&A
Efficiency /
ROE Focus
M&A

Migration from small cap growth to large cap value over time
Wall Street View
Value
Stocks
Growth
Stocks
Small Cap Stocks Large Cap Stocks
High
P/E
Modest
P/E
Organic
M&A
Organic /
M&A
Unicorn
Banks?

The Ideal Investment
Valuation
Absolute
History
Peer
ROA
NIM
Efficiency
Fees
Asset quality
Growth
Organic
M&A
vs Peer
Potential
Consensus
EPS Trend
ROE
Leverage
Bank capital
Parent leverage
Valuation
Profitability
Growth
(business
momentum)

Equity Markets and Bank Stocks
Section 8

Vaccine presents further waves
Strong economic growth continues
but inflation fades (transitory)
Loan growth resumes late 2021
Fed raises short-term policy rates in
2022, lifting NIMs with growing loans
CRE does not prove problematic
beyond the CMBS market
Significant capital returns
M&A momentum increases
Sugar high from government stimulus
fades, economy “meh”
Rates remain microscopic
Competitive pressures force loan
yields lower even as banks take more
risk to book earning assets
Fintech and challenger banks
CRE eventually proves problematic
Valuations do not offer much “margin
of safety” as was the case in 2H20
Investor 2H21-2022 Themes
Bull Case Bear Case
36

Total Return (price + dividends)
Banks underperformed in CY2019 as yield curve flattened then inverted reflected
classic investor concern about potentially late cycle peak earnings
Underperformance of banks during 2Q20 and 3Q20 reflected a) unknown credit losses
to come; b) reduced NIMs until further notice; c) potential dividend cuts
Outperformance since Fall 2021 reflects “relation” trade ... economic rebound, etc.
Index 7/15/21 1 Year 3 Year 5 Year 10 Year 15 Year 20 Year
JPM $155.46 60.3% 17.0% 22.7% 17.8% 12.1% 9.9%
Mid Cap Bank 437 65.8% 1.7% 8.5% 10.0% 0.7% 2.9%
Large Cap Bank 452 65.5% 9.3% 15.8% 13.4% 4.0% 4.7%
S&P 500 4360 37.2% 18.1% 17.3% 15.0% 11.0% 8.7%
Russell 2000 2190 49.7% 10.5% 14.2% 11.7% 9.6% 9.0%
NASDAQ 14069 33.4% 21.6% 22.8% 17.6% 13.7% 10.0%
CAGR Total Return (Price Change + Reinvested Dividends)

A Great 12-Month Run
51.9
58.5
30.0
73.9
52.2
46.1
74.7
33.5
90.0
52.7
61.5
69.0
81.3
148.6
76.0
67.3
0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0
JPM-US
BAC-US
C-US
WFC-US
USB-US
TFC-US
PNC-US
MTB-US
FITB-US
HBAN-US
KEY-US
CFG-US
CMA-US
COF-US
RF-US
FHN-US
1 - Year Change (%)

Bad Month or Investor Reassessment?
-2.8
-8.9
-6.4
-2.8
-2.2
-5.9
-3.5
-12.1
-10.2
-3.6
-11.5
-10.2
-10.6
-2.9
-11.2
-14.6
-16.0 -14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0
JPM-US
BAC-US
C-US
WFC-US
USB-US
TFC-US
PNC-US
MTB-US
FITB-US
HBAN-US
KEY-US
CFG-US
CMA-US
COF-US
RF-US
FHN-US
1 - Month Change (%)

Valuations are mixed vs history
Bank Index Valuation
Index 7/15/21 3/24/20 3/9/09 3 Yr 5 Yr 10 Yr 20 Yr
JPM 10.4x 8.2x 11.6x 12.9x 13.0x 12.0x 16.1x
Mid Cap Bank 15.3x 8.3x 9.3x 14.5x 16.7x 16.7x 16.6x
Large Cap Bank 12.5x 7.6x 10.9x 13.1x 13.7x 13.7x 14.8x
Index 7/15/21 3/24/20 3/9/09 3 Yr 5 Yr 10 Yr 20 Yr
JPM 228% 147% 72% 196% 180% 159% 178%
Mid Cap Bank 178% 117% 96% 176% 194% 189% 224%
Large Cap Bank 195% 116% 161% 168% 170% 163% 229%
Index 7/15/21 3/24/20 3/9/09 3 Yr 5 Yr 10 Yr 20 Yr
JPM 2.3% 4.1% 1.3% 3.0% 2.7% 2.9% 3.0%
Mid Cap Bank 2.5% 4.7% 5.3% 2.8% 2.4% 2.3% 2.4%
Large Cap Bank 2.2% 4.6% 2.3% 3.0% 2.5% 2.3% 2.6%
Average Price / Earnings (Trailing 4 Quarters)
Average Price / Tangible Book Value
Median Dividend Yield

Public Market P/TBV (16-21)
0
50
100
150
200
250
300
Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
SNL Small Cap Bank Index P/TBV SNL Midcap Bank Index P/TBV SNL Large Cap Bank Index P/TBV
Data as of 7/15/21
UST rates begin
to fall (front
runs Fed
Nov 16 election &
expected policy
change for banks
Bottom of March
2020 Panic

Investor Focus on 22E EPS (not 21E)
12.9x
12.4x
8.4x
12.3x
12.8x
11.1x
12.9x
10.8x
11.2x
9.9x
9.8x
9.7x
12.4x
9.8x
9.4x
9.6x
0x 2x 4x 6x 8x 10x 12x 14x
JPM-US
BAC-US
C-US
WFC-US
USB-US
TFC-US
PNC-US
MTB-US
FITB-US
HBAN-US
KEY-US
CFG-US
CMA-US
COF-US
RF-US
FHN-US
2022 Price/ EPS Est.

JPM @ $200?
Section 9

JPM Consensus
Street expects lower EPS in 2022
due to loan loss provision expense
of $4.8B vs $4.7B release in 2021
Earnings (capital generation) used
to boost dividend and repurchase
shares in all three years
Consensus reflects (presumably)
rising short-rates in late 2022 and
into 2023 given NIM increase
Loans rising moderately by YE23
Asset quality improving via easing
NPA ratio though charge-offs up
Lower trading and mortgage
banking revenue in 2022 vs 2021,
rebound in 2023
2021Y 2022Y 2023Y
Primary Metrics ($)
EPS Mean $13.91 $11.78 $12.89
High 14.55 12.70 13.70
Low 13.30 9.66 10.08
# of Estimates 11 16 7
Current P/Es @ Price of $151.91 10.9x 12.9x 11.8x
Income Statement ($000)
Net Interest Income Mean 52,426,429 55,217,571 58,375,500
Loan Loss Provision Mean -4,739,000 4,801,733 6,153,429
Non-Interest/Fee Income Mean 69,744,500 67,160,750 71,968,750
Revenue Mean 121,907,987 121,243,137 126,057,231
Non-Interest Expense Mean 71,208,000 70,947,933 73,413,571
Pre-Tax Income Mean 55,182,547 45,189,493 47,478,401
Tax Rate (%) Mean 21.33 21.89 22.07
Net Income Mean 42,248,044 34,474,127 36,594,673
Dividends per Share ($) Mean 3.80 4.09 4.33
Dil. Shares Outstanding (x) Mean 3,026,292,308 2,904,153,846 2,832,600,000
Balance Sheet ($000)
Loans Mean 1,052,546,333 1,067,392,500 1,106,866,000
Average Deposits Mean 2,300,752,000 2,252,495,333 NA
Book Value per Share ($) Mean 85.40 89.82 96.04
Tangible BV per Share ($) Mean 69.44 72.98 77.63
Current P/TBVs @ Price of $151.91 2.19x 2.08x 1.96x
Ratios (%)
Net Interest Margin Mean 1.64 1.69 1.76
Efficiency Ratio Mean 57.78 58.05 57.06
NPAs/Assets Mean 1.16 1.12 1.03
NCOs/Avg. Loans Mean 0.38 0.54 0.59
ROA Mean 1.19 0.95 0.95
ROE Mean 16.36 13.47 13.90

JPM to Hit $200 by YE22?
JPM beta = 0.88 (vs S&P 500)
Broad market has to do well (or well
enough) and/or banks have to
outperform the market to hit $200 given
22% appreciation required to hit the
vesting threshold
One can weight various outcomes but a
simplistic analysis is to apply JPM’s 10-
year median trailing 12-month P/E and
one-year forward P/E to the 2022 and
2023 estimates to derive a price range
as of year-end 2022
The same analysis can be applied to
the low and high estimates, etc.
Shares do not have to trade at median
multiples but the analysis implies
shares are rich like most stocks in most
industries
But—banks trade ~12x next 12 month
earnings vs 23x for S&P 500 vs long-
term average of 75-80% (though 2H21
EPS reflects some reserve release)
YE22E TBV 22E EPS 23E EPS
High TBVPS and EPS Estimates $76.71 $12.70 $13.70
Mean Consensus TBVPS and EPS $72.98 $11.78 $12.89
Low TBVPS and EPS Estimates $69.54 $9.66 $10.08
JPM's 10 Year Median Multiple 1.48x 11.9x 10.8x
High Indicated Price @ YE22 $113.53 $151.13 $147.96
Medan Indicated Price @ YE22 $108.01 $140.17 $139.24
Low Indicated Price @ YE22 $102.92 $114.95 $108.86

Final Thoughts
Market is focused on growth and 22/23 EPS vs “margin of safety” in 20
Capital creates a margin of safety, but capital is not free
The level of earnings before credit costs is a margin of safety element
ROE before EPS growth
Loan and deposit growth are counter-cyclical
Very low rates = low NIMs and significant pressure to reduce costs
Over the long-run above avg ROE and outperforming in downturns produces
big shareholder returns

Appendix
Section 10

M&A Themes
Pricing driven by seller earnings and expense savings (but value quoted as a
multiple of tangible book value!)
Expense savings always a key in the analysis but who gets credit?
Most acquisitions tied to customer (core deposit) additions
Large banks (but not the largest) re-engaging in bank M&A (e.g. PNC)
Emergence of more super community banks and small regional banks with
publicly-traded stock to acquire
Intense NIM/revenue pressure implies M&A an ongoing theme
Street prefers premium acquisitions to MOEs (though BBT-STI well received as
a moderate risk transaction and help from slightly better pre-announce
valuation multiples for BBT vs STI)

Typical Pricing Parameters
Maxim: Value is quoted as a multiple of tangible book value, but value is a function of ongoing core
earnings and an appropriate P/E multiple which is then overlaid with other governors such as accretion
targets and pro forma capital.
Pricing: 8-12x pro forma earnings with 100% after-tax expense saves
Expense Saves: 15-30% for out-of-market deals, 30-45% in-market
Revenue Synergies: Good luck!
Acceptable TBVPS Dilution: Earn-back within 2-3 years via the “cross-over” method
EPS Accretion: Threshold varies, but 4-5% usually the minimum accretion
Internal Rate of Return: Comfortably above the buyer’s cost of capital
Bank Capital: Varies but day one leverage ratio 9-10% (note- investors in public acquirers are
focused on consolidated capital, not bank-level)
Parent Capital Structure: Significant flexibility for small BHCs (though most boards probably not
comfortable with Fed allowed max)
M&A Post COVID-19: Picking-up as expected in 2021 though drop in bank stocks would be
problematic because buyers will not offer more shares (though maybe a bit more cash)

Consolidation and Industry Earnings
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
12,000
13,500
15,000
16,500
18,000
19,500
21,000
($20)
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
$220
$240
$260
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
1Q21
Industry Net Income ($B) # of FDIC Institutions
Source: FDIC, 1Q21

3-4% of banks acquired annually
US Bank M&A Activity
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
267 266 272
117
95
0%
1%
2%
3%
4%
5%
6%
0
100
200
300
400
500
600
1990
Y
1991
Y
1992
Y
1993
Y
1994
Y
1995
Y
1996
Y
1997
Y
1998
Y
1999
Y
2000
Y
2001
Y
2002
Y
2003
Y
2004
Y
2005
Y
2006
Y
2007
Y
2008
Y
2009
Y
2010
Y
2011
Y
2012
Y
2013
Y
2014
Y
2015
Y
2016
Y
2017
Y
2018
Y
2019
Y
2020
Y
21YTD
%
of
Banks
as
of
January
1
Acquired
Each
Year
Number
of
Announced
Transactions
Number of Bank Transactions % of Industry Acquired YTD 7/2/21

P/TBV multiples are tied to the earnings cycle and public market valuations
US Bank M&A Median Multiples
263%
115%
157%
17x
0%
40%
80%
120%
160%
200%
240%
280%
320%
0x
4x
8x
12x
16x
20x
24x
28x
32x
1990
Y
1991
Y
1992
Y
1993
Y
1994
Y
1995
Y
1996
Y
1997
Y
1998
Y
1999
Y
2000
Y
2001
Y
2002
Y
2003
Y
2004
Y
2005
Y
2006
Y
2007
Y
2008
Y
2009
Y
2010
Y
2011
Y
2012
Y
2013
Y
2014
Y
2015
Y
2016
Y
2017
Y
2018
Y
2019
Y
2020
Y
21YTD
Price
/
Tangible
Book
Value
Price
/
Earnings
(Reported
LTM)
Median M&A Bank P/E Median M&A Bank P/TBV
NM P/E
YTD 7/2/21

Market Message re Future Fed Policy
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
30 Day LIBOR Forward Curve 7/15/20 vs 7/15/21
30 Day LIBOR Forward Curve July 2020 30 Day LIBOR Forward Curve July 2021 Current Fed Funds Target

Shape of the UST Yield Curve
Shape refers to the spread between short-term rates (bills) that are tethered to
Fed short-term policy rates and market determined long-term matters
Steep yield curve implies over next 6-12 months
• Economy relatively strong and inflation stable or rising
• Fed may need to raise short-term rates
• Bank credit losses likely stable and NIMs wide(ish)
Flat or (worse) inverted yield curve implies
• Economy will weaken and inflation will fall
• Fed should cut short-term policy rates (if not at 0)
• Bank credit losses likely will rise and NIMs will contract

UST Yield Curve
Source: US Dept of Treasury
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr
Jul-15 Jul-18 Jul-19 Jul-20 Jul-21
2015 - Fed at zero but market expects increases
2018 - Fed hiked 7 times by July and would hike 2
more times by year-end 2018
2019 - inverted curve signalled Fed over-tightened
and should cut short rates which occurred in 3Q19
2020/2021 - Fed back at zero, steeper curve in 2021
vs 2020 reflects better economy, closer to Fed hikes

Corporate Spreads (over USTs)
High yield spreads contain more information about the economy and potential
future credit losses than investment grade corporate bonds
Spreads are tightest when economy is performing well, widen in anticipation of
a slowdown and peak during recessions
Prior to 2009, it typically took several years after a recession to return to an
average spread level
In both 2009 and 2H20 spreads rapidly normalized (tightened) as investors
willingly assumed more risk to obtain higher yields when short-term policy rates
are near zero

Record Low HY Bond Yields and Spreads
Source: St. Louis FRB’s FRED

Credit Spreads Predict Credit Losses
Source: St. Louis FRB’s FRED

Core Earnings Analysis
Fiscal Years Ended December 31
Adjusted Income Statement 2016 2017 2018 2019 2020 2021E 2022E 2023E
Average Assets $2,694,168 $2,241,515 $2,027,543 $1,931,352 $2,077,206 $2,181,066 $2,290,120 $2,404,626
Average Equity 378,184 289,242 252,526 269,048 277,598 292,928 302,850 312,003
Average Loans 2,201,622 1,559,443 1,310,252 1,333,309 1,518,964 1,594,912 1,674,658 1,758,391
Net Interest Margin 3.40% 3.45% 3.35% 3.45% 3.58% 3.45% 3.40% 3.40%
Efficiency Ratio 67.0% 69.5% 68.7% 68.6% 67.2% 68.0% 67.7% 66.9%
Loan Loss Prov & ORE Exp / Avg Loans 7.14% 0.18% -0.85% -0.51% -0.24% 0.34% 0.24% 0.24%
Pre-Tax, Pre-Provision & ORE Op Income $32,153 $26,320 $23,550 $23,750 $26,875 $30,100 $32,750 $36,500
Reported Net Income to Common ($71,818) $17,750 $15,225 $17,695 $20,137 $21,900 $25,500 $27,250
Adjustments:
(1) (Gains) / Losses on Sale of Securities 0 (837) 0 (1,884) (162) 0 0 0
(2) Add Loan Loss Provision 115,000 3,107 7,209 6,624 3,566 5,385 4,000 4,240
Less: Normalized Provision 0.33% (7,265) (5,146) (4,324) (4,400) (5,013) (5,263) (5,529) (5,785)
(3) (Gain) / Loss on ORE Sales 25,083 (271) (3,897) (200) (123) 0 0 0
(4) (Gain) on Sale of Branches 0 0 0 (4,378) 0 0 0 0
(5) Restructuring & Transaction Costs 0 0 0 0 1,538 339 0 0
(6) Tax Adjustment to 1-5 @ (46,486) 1,102 354 1,483 41 (97) 321 324
ADJUSTED NET INCOME $14,513 $15,704 $14,567 $14,940 $19,984 $22,264 $24,292 $26,030
Analysis of Adjusted Returns
Pre-Tax, Pre-Prov Op Inc / Avg Assets 1.19% 1.17% 1.16% 1.23% 1.29% 1.38% 1.43% 1.52%
Peer Group PPOI / Avg Assets 1.36% 1.39% 1.36% 1.44% 1.52%
Adjusted Return on Average Assets 0.54% 0.70% 0.72% 0.77% 0.96% 1.02% 1.06% 1.08%
Peer Group ROA 0.77% 0.83% 0.64% 0.80% 1.04%
Adjusted Return on Average Equity 3.8% 5.4% 5.8% 5.6% 7.2% 7.6% 8.0% 8.3%
Peer Group ROE 6.3% 6.7% 7.7% 8.5% 9.9%
Cowboy Forecast

The trend is your friend – if it is real
Core Earnings Analysis
0.00%
0.15%
0.30%
0.45%
0.60%
0.75%
0.90%
1.05%
1.20%
$0
$4,000
$8,000
$12,000
$16,000
$20,000
$24,000
$28,000
$32,000
2017 2018 2019 2020 2021E 2022E 2023E
Return
on
Average
Assets
Income
($000s)
Reported Net Income Adjusted Net Income Adjusted ROA

Banks have limited loan growth, deposit inflows to no/low yielding cash & securities
JPM 2Q21 Summary

Consumer & Community Banking
JPM 2Q21 Summary

Rule of Thumb
Every industry has a rule-of-thumb for valuation and a preferred valuation
metric; most only indirectly speak to economics
Banking’s metric is tangible (common) equity and the most widely quoted
metric is price/tangible book value (P/TBV)
Business model entails leveraging capital 9-10x with deposits and other
borrowings to fund loans, the bond portfolio, etc. to produce an earnings stream
(ROE)
But, equity per se is not the point; it is the base of the business model – what
matters is the a) earnings stream; b) the risk profile of the business to produce
the earnings; and c) expected growth over time
Management should focus on ROE before EPS growth

Consider P/E both in relation to
current earnings and earning power
P/Es vary within the industry
Low P/Es reflect riskier biz models,
limited growth or lower quality
earnings
Above average P/E usually reflects
better than average growth
Investors especially value three
things: EPS growth, accelerating
growth and organic revenue growth
when assigning a P/E
Persistently “low” P/TBV multiples
usually signal depressed profitability
with limited prospect for improvement
or credit issues
P/TBV is a secondary proxy for
earning power
• ROA / TCE % = ROTCE
• P/E x ROTCE = P/TBV
High ROTCE yields high P/TBV
High P/E and ROTCE = very high
P/TBV
P/E and P/TBV Perspective
P/E P/TBV

Jeff K. Davis, CFA
Managing Director – Financial Institutions Group (FIG) @
Mercer Capital
Provides financial advisory services primarily related to
M&A and capital structures and the valuation of privately-
held equity and debt issued by financial services
companies
Clients include public and private financial institutions;
private equity and private credit funds
S&P Global Market Intelligence contributor “Nashville
Notes”
Previously a sell-side analyst covering commercial banks
and specialty finance companies for Guggenheim
Partners, FTN Financial and J.C. Bradford & Co.
Securities Licenses 7, 63, 79 (CRD #4007205; StillPoint
Capital, LLC)
Rhodes College (BA); Vanderbilt University (MBA)
Jeffdavis@mercercapital.com
jeffkdavis@comcast.net
Twitter@JeffKDavis1
615-345-0350 (O)
615-767-9490 (M)

Mercer Capital
Memphis | Dallas | Nashville | Houston
1.800.769.0967
www.mercercapital.com
Jeff K. Davis, CFA
Managing Director
1.615.345.0350
jeffdavis@mercercapital.com

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