Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.

1. www.mercercapital.com
Second Quarter 2018
MAY 2019
Bank Watch
ARTICLE
Net Interest Margin Trends and Expectations
In This Issue
Net Interest Margin Trends and
Expectations 1
Public Market Indicators 5
MA Market Indicators 6
Regional Public
Bank Peer Reports 7
About Mercer Capital 8

2. © 2019 Mercer Capital // www.mercercapital.com 1
Mercer Capital’s Bank Watch May 2019
Net Interest Margin Trends and
Expectations
Since Bank Watch’s last review of net interest margin (“NIM”) trends in July
2016, the Federal Open Market Committee has raised the federal funds rate
eight times after what was then the first rate hike (December 2015) since mid-
2006. With the past two years of rate hikes and current pause in Fed actions,
it’s a good vantage point to look at the effect of interest rate movements on the
NIM of small and large community banks (defined as banks with $100 million to
$1 billion of assets and $1 billion to $10 billion of assets).
As shown in Figure 1, NIMs crashed in the immediate aftermath of the financial
crisis, primarily because asset yields fell much quicker than banks could reprice
term deposits. NIMs subsequently rebounded as the asset refinancing wave
subsided while banks were able to lower deposit rates. A several year period
then occurred in which asset yields grinded lower at a time when deposit rates
could not be reduced. This period was particularly tough for commercial banks
with a high level of non-interest bearing deposits.
Since rate hikes started, the NIM for both small and large community banks
have increased about 20bps through year-end 2018 before experiencing some
pressure in early 2019. The nine hikes by the Fed to a target funds rate of
2.25% to 2.50% amounts to a 225bps increase.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
3.00%
3.10%
3.20%
3.30%
3.40%
3.50%
3.60%
3.70%
3.80%
3.90%
4.00%
2008Q
1
2008Q
3
2009Q
1
2009Q
3
2010Q
1
2010Q
3
2011Q
1
2011Q
3
2012Q
1
2012Q
3
2013Q
1
2013Q
3
2014Q
1
2014Q
3
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
2018Q
1
2018Q
3
2019Q
1
10YRUST
NetInterestMargin
Avg 10 YR UST NIM Assets $1 B - $10 B NIM Assets $100 M - $1 B
Figure 1: Net Interest Margin Trend
Source: FDIC

3. © 2019 Mercer Capital // www.mercercapital.com 2
Mercer Capital’s Bank Watch May 2019
At first pass, the expansion in the NIMs is less than might be expected; however,
there are always a number of factors in bank balance sheets that will impact the
NIM, including:
»» Loan Floors. Many Libor- and prime-based commercial loans had floors that
required 100-150bps of hikes before the floors were “out-of-the-money.”
»» Competition. Intense competition for loans in an environment in which
bonds yielded very little resulted in pressure in the margin over a base
rate as bank and non-bank lenders accepted lower margins in order
to make loans.
»» Asset Mix. Community banks located in rural and semi-rural areas tend to
have low loan-to-deposit ratios and, therefore, have not benefited as much as
peers located in and around MSAs that are “loaned-up.” Nonetheless, net loans
as a percentage of assets among community banks increased by an average
of 15bps each quarter since year-end 2016 while bond portfolios declined.
What We’re Reading
Considering the current intensity of competition for deposits, Bank Director highlights opportunities for smaller banks to profitably grow deposits by investing in technology to
improve customer retention, better understand consumer behavior, and develop personalized offerings.
Barron’s reports that the federal funds futures markets and the Treasury market indicate increased expectations of a 25 basis point reduction in the federal funds target rate
within the year. Following lower-than-expected April retail sales, the yield on two-year Treasury notes reached its lowest level since February 2018. (subscription required)
Analysts inquire about CECL on community banks’ first quarter earnings calls as many are not yet providing estimates, SNL reports. (subscription required)
With low deal volume to this point in 2019, bankers anticipate a rebound in MA activity in the latter half of the year as sellers adapt expectations to current valuations and
become more comfortable with stock offers, SNL reports. (subscription required)
»» Loan Mix. Community banks tend to have somewhat more of their loan
portfolios allocated to residential mortgages and CRE than regional banks.
As a result, it will take much longer for these mostly fixed-rate assets to
reprice than Libor-based CI portfolios.
»» Deposit COF. In recent quarters the marginal cost of funds (“COF”) has
become expensive as depositors who came to accept being paid essentially
nothing for their money began to demand more competitive rates once the
Fed Funds rate approached 2%.
»» Deposit Mix. In addition to depositors demanding higher rates, a mix
shift from non-interest bearing and very low-yielding transaction accounts
into higher paying money markets and time deposits has pushed the COF
higher, too, in recent quarters.

4. © 2019 Mercer Capital // www.mercercapital.com 3
Mercer Capital’s Bank Watch May 2019
Fed to Cut Rates?
Recent incremental pressure on NIMs notwithstanding, community banks’ balance
sheets were poised to take advantage of rising rates the past several years.
The outperformance of bank stocks beginning in November 2016 reflected several
factors, including an economic and regulatory backdrop that would allow the Fed to
raise rates further and faster, and thereby support NIM expansion.
The underperformance of bank stocks since last fall reflects investor concern that
this tailwind is ending in addition to more general concerns about what a possible
economic slowdown implies for credit costs. Telltale signs include the inversion
of the Treasury yield curve and yields on the two-year and five-year Treasuries
that, as of the date of the drafting of this article, are below the low-end of the
Fed Funds target range.
Also, the spot and forward curves for 30-day Libor imply the Fed will cut the
Funds target rate and other short-term policy rates one or two times by early 2020
(or stated differently, the December rate hike was a mistake).
The Federal Funds rate, the predominant influence on short-term interest
rates, has remained unchanged since year-end 2018 at a target range of
2.25%–2.50% due to concerns about lower inflation figures and what they may
forewarn about future economic growth as reflected in falling U.S. Treasury yields.
The FOMC reiterated its wait-and-see approach on May 1. However, the sand
appears to be shifting beneath the Fed’s feet.
The Wall Street Journal’s most recent Economic Forecasting Survey revealed an
increasing belief that the Fed’s next move will be to cut rates. 51% of respondents
said that a rate cut would be the next move, up from 44% in April. 25.5% replied
that the next rate raise would occur in 2020 or later. Fed officials have maintained
their stance that a rate move in either direction will not occur soon.
1.5
1.7
1.9
2.1
2.3
2.5
2.7
Jun-19
D
ec-19
Jun-20
D
ec-20
Jun-21
D
ec-21
Jun-22
D
ec-22
Jun-23
D
ec-23
Jun-24
Percent
1 Mo. Spot Curve 1 Mo. Forward Curve
Figure 3: 1 Month Libor Projected Spot and Forward Curve
Source: Bloomberg
-0.50
0.00
0.50
1.00
1.50
2.00
D
ec-16
Feb-17
Apr-17
Jun-17Aug-17
O
ct-17D
ec-17
Feb-18
Apr-18
Jun-18Aug-18
O
ct-18D
ec-18
Feb-19
Apr-19
Percent
UST 10/2 Spread UST 5/3 Mo T-Bill Spread
Figure 2:Treasury Spreads
Source: Federal Reserve Bank of St. Louis

5. © 2019 Mercer Capital // www.mercercapital.com 4
Mercer Capital’s Bank Watch May 2019
The Importance of Deposits and Next Steps
As deposit costs initially lagged, but more recently moved with short-term
interest rate hikes, the composition of a bank’s deposit base and funding
structure has become increasingly important. As shown in Figure 4, the
percentage of banks experiencing a rising cost of interest bearing deposits has
steadily increased. Total funding costs have nearly doubled since year-end
2016 as depositors have reoriented funds toward accounts offering higher rates.
Banks searching for funding either must engage in intense deposit competition or
tap into higher-cost sources such as wholesale funding.
Going forward community banks may face a modest reduction in NIMs
because the yield curve is flat and the cost of incremental funding is expensive.
Some community banks will choose to slow loan growth in order to protect margins;
others will accept a lower margin. The predicament demonstrates yet again why
deposit franchises are a key consideration for acquirers as banks with low cost
deposit franchises and excess liquidity are particularly attractive in the current
market.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2008Q
12008Q
32009Q
12009Q
32010Q
12010Q
32011Q
12011Q
32012Q
12012Q
32013Q
12013Q
32014Q
12014Q
32015Q
12015Q
32016Q
12016Q
32017Q
12017Q
32018Q
12018Q
32019Q
1
% Rate Sen sitive Assets % Rate Sen sitive Liabilities
* % of assets (liabilties) expected to mature or reprice within 1 year
Figure 5: Interest Rate Sensitivity
Source: SP Global Market Intelligence
0.00%
0.30%
0.60%
0.90%
1.20%
1.50%
1.80%
2.10%
2.40%
2.70%
3.00%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2008Q
2
2008Q
4
2009Q
2
2009Q
4
2010Q
2
2010Q
4
2011Q
2
2011Q
4
2012Q
2
2012Q
4
2013Q
2
2013Q
4
2014Q
2
2014Q
4
2015Q
2
2015Q
4
2016Q
2
2016Q
4
2017Q
2
2017Q
4
2018Q
2
2018Q
4
CostofFunds
%ofBanks
% of Banks with Declining Costs of IB Deposits % of Banks with Increasing Cost of IB Deposits
COF Assets $1 B - $10 B COF Assets $100 M - $1 B
Figure 4: Cost of Funds Trend
Source: FDIC, SP Global Market Intelligence
Brian F. Adams
901.322.9706 | adamsb@mercercapital.com

6. © 2019 Mercer Capital // Data provided by SP Global Market Intelligence 5
Mercer Capital’s Bank Group Index Overview Return Stratification of U.S. Banks
by Asset Size
Median Valuation Multiples
MedianTotal Return as of April 30, 2019 Median Valuation Multiples as of April 30, 2019
Indices
Month-to-
Date
Year-to-
Date
Last 12
Months
Price/
LTM EPS
Price /
2019 (E) EPS
Price /
2020 (E) EPS
Price /
Book Value
Price /
Tangible Book
Value
Dividend
Yield
Atlantic Coast Index 4.2% 8.5% -6.4% 13.5x 12.9x 11.8x 116% 132% 2.3%
Midwest Index 2.5% 8.9% -7.5% 12.7x 11.7x 10.5x 125% 142% 2.5%
Northeast Index 5.4% 14.3% 11.0% 13.4x 12.1x 11.1x 124% 138% 2.6%
Southeast Index 3.3% 6.4% -5.8% 14.1x 12.3x 11.8x 122% 136% 1.6%
West Index 4.2% 2.7% -9.6% 13.1x 12.5x 11.9x 122% 136% 2.1%
Community Bank Index 3.7% 9.4% -1.2% 13.1x 12.0x 11.2x 122% 137% 2.2%
SNL Bank Index 9.5% 18.9% -0.2%
Mercer Capital’s Public Market Indicators May 2019
Assets
$250 -
$500M
Assets
$500M -
$1B
Assets $1 -
$5B
Assets $5 -
$10B
Assets
$10B
Month-to-Date 3.96% 0.88% 4.49% 6.57% 9.77%
Year-to-Date 10.80% 8.22% 9.85% 13.84% 19.41%
Last 12 Months -3.60% -0.30% -6.66% -0.17% -0.05%
-10%
0%
10%
20%
30%
AsofApril30,2019
70
75
80
85
90
95
100
105
110
115
120
4/30/20185/31/20186/30/20187/31/20188/31/20189/30/201810/31/201811/30/201812/31/20181/31/20192/28/20193/31/20194/30/2019
April30,2018=100
MCM Index - Community Banks SNL Bank SP 500

7. © 2019 Mercer Capital // Data provided by SP Global Market Intelligence 6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 20.0% 18.4% 12.0% 6.9% 6.3% 5.4% 4.3% 5.5% 7.5% 7.5% 6.1% 10.0% 9.6% 8.9%
0%
5%
10%
15%
20%
25%
CoreDepositPremiums
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 243% 228% 196% 145% 141% 132% 130% 134% 155% 148% 143% 170% 178% 178%
0%
50%
100%
150%
200%
250%
300%
350%
Price/TangibleBookValue
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 22.0 22.1 19.9 19.3 21.7 21.9 17.0 16.5 17.5 18.8 18.1 19.5 22.4 20.1
0
5
10
15
20
25
30
Price/Last12Months
Earnings
Regions
Price /
LTM
Earnings
Price/
Tang.
BV
Price /
Core Dep
Premium
No.
of
Deals
Median
Deal
Value
($M)
Target’s
Median
Assets
($000)
Target’s
Median
LTM
ROAE
Atlantic Coast 21.3x 178% 11.2% 14 109.9 476,158 9.6%
Midwest 16.6x 163% 7.6% 77 41.7 172,520 10.4%
Northeast 23.9x 191% 10.9% 11 62.0 487,870 7.2%
Southeast 20.1x 178% 8.8% 29 37.5 221,519 9.2%
West 23.8x 208% 10.9% 18 76.0 259,228 8.9%
National Community
Banks
20.1x 178% 8.9% 149 54.3 213,017 9.6%
Median Valuation Multiples for MA Deals
Target Banks’ Assets $5B and LTM ROE 5%, 12 months ended April 2019
Median Core Deposit Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Tangible Book Value Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Earnings Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Mercer Capital’s MA Market Indicators May 2019
Source: SP Global Market Intelligence

8. Updated weekly, Mercer Capital’s Regional Public Bank Peer Reports offer a
closer look at the market pricing and performance of publicly traded banks
in the states of five U.S. regions. Click on the map to view the reports from
the representative region.
© 2019 Mercer Capital // Data provided by SP Global Market Intelligence 7
Atlantic Coast Midwest Northeast
Southeast West
Mercer Capital’s
Regional Public
Bank Peer Reports
Mercer Capital’s Bank Watch May 2019

9. Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements,
transaction advisory services, and other strategic decisions.
Mercer Capital pairs analytical rigor with industry knowledge to deliver unique insight into issues facing banks. These insights underpin the valuation analyses that are at the
heart of Mercer Capital’s services to depository institutions.
»» Bank valuation
»» Financial reporting for banks
»» Goodwill impairment
»» Litigation support
»» Stress Testing
»» Loan portfolio valuation
»» Tax compliance
»» Transaction advisory
»» Strategic planning
Depository Institutions Team
MERCER CAPITAL
Depository Institutions Services
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES
Jeff K. Davis, CFA
615.345.0350
jeffdavis@mercercapital.com
Andrew K. Gibbs, CFA, CPA/ABV
901.322.9726
gibbsa@mercercapital.com
Jay D. Wilson, Jr., CFA, ASA, CBA
469.778.5860
wilsonj@mercercapital.com
Eden G. Stanton, CFA
901.270.7250
stantone@mercercapital.com
Mary Grace Arehart
901.322.9720
arehartm@mercercapital.com
Madeleine G. Davis
901.322.9715
davism@mercercapital.com
Brian F. Adams
901.322.9706
adamsb@mercercapital.com
William C.Tobermann
901.322.9707
tobermannw@mercercapital.com
Copyright © 2019 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged.
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Bank Watch is published monthly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
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