This white paper discusses trends in the U.S. banking M&A market in 2011 and provides an outlook for continued consolidation. Key points: - 159 bank M&A deals in 2011 with average premium of 69%, though volume declined from 2010. Deals continue to generate strong returns for buyers. - Conditions that drove the 1990s M&A boom, like depressed valuations and a challenging operating environment, remain in place and will likely lead to increased dealmaking in the coming years. - Impediments like high seller expectations and regulatory uncertainty have slowed the pace of deals but these challenges will eventually push more banks to sell as conditions become more difficult. - Fundamentally strong small banks

1. White Paper
Update
Long-term M&A Cycle
Creates Opportunity
in
Banking Industry
2011 in Review
February 9, 2012
www.fjcapital.com

2. Table of Contents
Executive Summary 3
Value Proposition Similar to Early 1990s 4
2011 Transactions in Review 5
Buyer Post-Transaction Price Performance 6
Bank & Thrift Deal Valuation Trends 7
Recent Transaction Highlights 8-10
Sector Performance Review 11
Industry Fundamentals 12
Review of Merger Trends: 1990 to 2011 and Beyond 13
Recent M&A Quotes from Industry Participants 14
Board Perspective and Consolidation Drivers 15
Why Banks Want/Need to Merger — 2011 in Review 15-16
Impediments to M&A 16-17
The Banking Landscape 18
Summary of Potential Market Opportunity 19
Update on FDIC-Assisted Acquisitions 20
About FJ Capital Management 21
www.fjcapital.com 2

3. Executive Summary
 In this second annual white paper on bank M&A, we update our thesis on the emerging
M&A boom in the U.S. small cap bank sector. We examine the current banking environment
and opine on pricing and other trends that should lead to an unprecedented level of bank
transactions during the next several years. In establishing this view, we examine the factors
that should create the need and opportunity as well as present the challenges that have slowed
substantial consolidation activity.
 Conditions highlighted in last year’s paper remain intact, with many recent acquisitions
driving very attractive shareholder returns. While U.S. banking fundamentals remain
challenged, albeit improving, and the coming M&A boom cannot be timed precisely, history
shows stock performance often front-runs such major trends as well as actual economic
recovery. Given the extremely compelling potential returns offered by heavily discounted
bank valuations, the time to invest is likely sooner rather than later.
 The 159 bank M&A transactions in 2011 had an average one-day premium of 69% over the
prior day closing price. While transaction volume moderated compared to 175 transactions
in 2010, outsized market premiums remain about the same. Still, beyond industry
publications and local media, small bank M&A continues to draw little attention.
 The U.S. economy continues to grow below trend following the great recession. Our thesis
takes into account a slow and uneven recovery, regulatory changes and a more realistic view
of long-term banking conditions. We believe that as these factors sink in, M&A will pick up
steam and produce a record number of transactions.
 Challenges to our thesis also remain in place. With overall equity prices of buyers still
relatively undervalued and sellers expectations still lofty, the clearing price for record M&A
has not presented itself. Furthermore, the government’s delay in writing the new regulations
has caused banks to retrench and wait for clarity on the rules of engagement in this changing
regulatory world. Finally, the accounting for transactions creates challenges for buyers and
sellers to get on the same page with respect to potential credit marks. These realities have
caused a more cautious stance and thus a slowdown in consolidation activity.
 The irony is that the same challenges recounted above, eventually will lead to a pick up in
M&A activity. Smart executives and boards of community banks that lack the scale to
handle these exogenous factors will grow more weary of the tough operating and regulatory
environment and depressed equity valuations.
 As managers execute their 2012 budgets, they see headwinds regarding both revenue and
expenses. Revenues are lower due to the interest rate environment (a result of Operation
Twist and lower asset yields) and weak loan demand (as the economy grows below trend).
Additionally, the prospects of new assaults from regulatory changes (Durbin and CFPB)
create pressure to grow the top line. On the expense side of the equation, companies will
incur significant costs in putting the necessary infrastructure in place to handle the roughly
400 regulations that have yet to be written.
www.fjcapital.com 3

4.  It is a buyers market, yet sellers benefit — we will look at how banks capitalize on this trend.
Banks that produced solid returns throughout the downturn, armed with strong balance sheets
bolstered by excess capital have opportunities to grow their franchises at historically low
multiples. Prudent managers and bank boards that choose to partner with stronger and larger
institutions are receiving currency that looks attractively valued and poised to recover as the
economy stabilizes.
Value Proposition Similar to Early 1990s
 If the past is prologue, prudently investing in the space before the M&A boom takes full force
and the credit cycle has fully normalized likely will lead to outsized returns. We refer to the
early 1990s when bank equity valuations recovered well before credit deterioration reached
its peak (see below chart). While banks surely have more losses to take, the worst appears to
be behind them; and investors must consider that these losses already may be baked into bank
equities, which are trading at historically depressed levels.
 A focus on healthy, smaller banks with strong balance sheets, marked by excess capital and
solid credit quality, can produce outsized, risk-adjusted investment returns over a multi-year
period. Current bank equity valuations aside, these institutions are NOT all equal. In fact,
the fundamentally strong banks view this environment as a generational opportunity to
strengthen their franchises by taking market share from weaker players.
Valuation (P/TBV) vs. Credit Quality (NPAs) Over Time
250% 3.50%
Similar to early 1990’s,
P/TBV is poised to rise as 3.00%
200% NPAs/Assets fall
2.50%
NPAs/Assets
150% 2.00%
P/TBV
100% 1.50%
1.00%
50%
0.50%
0% 0.00%
1990Y
1991Y
1992Y
1993Y
1994Y
1995Y
1996Y
1997Y
1998Y
1999Y
2000Y
2001Y
2002Y
2003Y
2004Y
2005Y
2006Y
2007Y
2008Y
2009Y
2010Y
2011Y
P/TBV NPAs/Assets
Sources: SNL Financial LC & FJ Capital Research
www.fjcapital.com 4

5. Transactions in Review
In FJ Capital’s inaugural 2010 white paper, we highlighted our outlook for bank M&A. The
theme of the paper was that a boom in M&A would drive the community and regional bank
sector in the coming years. Our view was and continues to be that the next M&A cycle will
rival the last major U.S. bank consolidation wave in the mid 1990s. While the past 12 months
have seen a year-over-year decrease in the number of transactions, deal value increased during
this time. There were 159 transactions in 2011, with an aggregate deal value of $16.9 billion
vs. 175 transactions worth $12.2 billion in 2010. The long-term trend of industry consolidation
continues intact as the United States has 3% less banks today than it did in 2010. We expect
activity to increase modestly thorough 2012 and pick up steam in the 2013 to 2015 timeframe
as the conditions highlighted in this paper come to fruition.
Recent M&A Activity Summarized by Year
Period Number of Deals Aggregate Deal Value ($M) Avg. Deal Size ($M) Averag e P/TBV (%) Market Premium (%)
2011 159 16,941 182 108 68.5
2010 175 12,172 112 117 70.6
2009 119 1,328 20 114 64.9
2008 143 35,606 304 170 64.9
Sources: SNL Financial LC & FJ Capital Research Data as of December 31, 2011
One day market premiums (below) continue to support our thesis that the equity markets are not
accurately reflecting the franchise value of many community banks. In fact, the median
community bank with below $250 million in market cap currently trades at just 70% of tangible
book value. While sellers must adjust their valuation expectations, with peak pricing likely
behind us, we continue to see opportunities to earn 25%+ IRRs over the next 3-5 years by
investing in select companies.
Public Whole Banks & Thrifts M&A Transactions
Excludes FDIC-Assisted Transactions
1/1/2011 Through 12/31/2011
Deal Price/ 1 Day
Target Target Announcement
Rank Buyer Name/ Target Name Value Tangible Premium
S tate Ticker Date (m/d/yyyy)
($M) Book (%) (%)
AVERAGES 137.8 127.5 68.5
MEDIANS 37.6 125.0 51.1
1 Beneficial M utual Bancorp, Inc. (M HC)/ SE Financial Corp. PA SEFL 12/5/2011 32.2 110.5 249.4
2 S&T Bancorp, Inc./ M ainline Bancorp, Inc. PA M NPA 9/14/2011 21.4 125.9 191.4
3 SCBT Financial Corporation/ Peoples Bancorporation, Inc. SC PBCE 12/19/2011 41.4 61.4 164.4
4 Opus Bank/ RM G Capital Corporation CA RM GC 6/6/2011 49.2 130.6 147.1
5 F.N.B. Corporation/ Parkvale Financial Corporation PA PVSA 6/15/2011 130.7 197.6 106.7
6 ESSA Bancorp, Inc./ First Star Bancorp, Inc. PA FSSB 12/21/2011 24.7 49.3 90.2
7 Sandy Spring Bancorp, Inc./ CommerceFirst Bancorp, Inc. MD CM FB 12/20/2011 25.4 106.7 79.7
8 AltaPacific Bancorp/ Stellar Business Bank CA SLRB 9/14/2011 17.4 98.8 72.7
9 Grandpoint Capital, Inc./ Orange Community Bancorp CA OCBN 3/10/2011 32.1 134.6 67.1
10 NBT Bancorp Inc./ Hampshire First Bank NH HFBN 11/16/2011 45.2 144.0 65.9
11 Brookline Bancorp, Inc./ Bancorp Rhode Island, Inc. RI BARI 4/19/2011 233.7 193.3 57.1
12 First PacTrust Bancorp, Inc./ Beach Business Bank CA BBBC 8/30/2011 37.1 119.1 53.8
13 Embarcadero Bank/ Coronado First Bank CA CDFB 3/22/2011 9.3 99.7 48.4
14 Susquehanna Bancshares, Inc./ Tower Bancorp, Inc. PA TOBC 6/20/2011 342.1 149.3 40.6
15 Berkshire Hills Bancorp, Inc./ Connecticut Bank and Trust Compa CT CTBC 10/25/2011 30.0 143.2 33.0
16 People's United Financial, Inc./ Danvers Bancorp, Inc. MA DNBK 1/20/2011 488.9 184.1 32.9
17 Comerica Incorporated/ Sterling Bancshares, Inc. TX SBIB 1/16/2011 1028.9 229.7 29.8
18 Valley National Bancorp/ State Bancorp, Inc. NY STBC 4/28/2011 266.9 188.2 25.7
19 Home Bancorp, Inc./ GS Financial Corp. LA GSLA 3/30/2011 26.4 95.4 21.7
20 Park Sterling Corporation/ Community Capital Corporation SC CPBK 3/30/2011 32.3 69.7 21.2
21 Kentucky First Federal Bancorp (M HC)/ CKF Bancorp, Inc. KY CKFB 11/3/2011 10.5 80.8 16.4
22 California United Bank/ Premier Commercial Bancorp CA PCBP 12/8/2011 38.1 91.6 15.9
23 Susquehanna Bancshares, Inc./ Abington Bancorp, Inc. PA ABBC 1/26/2011 273.8 124.1 13.8
24 BankUnited, Inc./ Herald National Bank NY HNB 6/2/2011 70.0 132.0 0.1
Sources: SNL Financial LC & FJ Capital Research Data as of December 31, 2011
www.fjcapital.com 5

6. Overall, buyer stock price performance has been positive following the announcement of a
transaction to purchase a target bank. This trend is illustrated in the below table.
Median Buyer Price Performance Post‐Transaction Announcement
Year 1 Month (%) 3 Months (%) 6 Months (%) 1 Year (%)
1990 0.0% 0.0% ‐0.5% ‐4.5%
1991 0.4% 8.5% 18.4% 30.3%
1992 2.7% 6.5% 5.3% 19.2%
1993 0.4% ‐0.3% ‐0.5% ‐1.2%
1994 0.0% 1.2% 1.8% 9.5%
1995 1.5% 6.5% 9.8% 20.9%
1996 1.4% 7.6% 15.6% 40.8%
1997 3.9% 9.5% 20.0% 25.2%
1998 0.2% 0.0% ‐4.0% ‐9.5%
1999 ‐2.0% ‐5.2% ‐12.2% ‐18.3%
2000 2.2% 4.9% 7.5% 19.4%
2001 2.8% 2.8% 12.9% 11.9%
2002 ‐1.0% 1.4% 0.0% 15.6%
2003 1.6% 5.2% 10.4% 17.5%
2004 1.3% 1.6% 0.3% 5.9%
2005 ‐0.3% 0.6% 2.9% 4.8%
2006 0.3% 0.7% 0.0% ‐4.0%
2007 ‐1.3% ‐5.5% ‐8.2% ‐21.7%
2008 0.0% ‐5.3% ‐16.7% ‐24.0%
2009 ‐1.1% ‐1.2% 0.9% 0.6%
2010 0.8% 3.4% 3.6% ‐1.8%
2011 ‐0.1% ‐5.3% ‐9.3% NA
Grand Medians 0.7% 1.7% 2.7% 6.0%
Sources: SNL Financial LC & FJ Capital Research Data as of January 5, 2012
While this table highlights post-transaction announcement performance for all acquisitive
banks, the stock performance of the successful acquirers is muted by the stock performance of
the less successful acquirers. The result of an industry with so many banks and so many deals
is that a certain number of acquisitive banks have actually become quite successful acquirers
and have turned it into a business in its own right. These institutions have seen much better
stock performance than what is shown above, and represent another way to invest in banking
consolidation.
www.fjcapital.com 6

7. The next chart highlights M&A pricing trends and offers some key takeaways.
 During recessionary periods, transaction pricing averaged 125% to 150% of tangible book
value.
 The peak level of 264% of tangible book value was reached in 1998 due to a debt-enhanced
economy that is unlikely to repeat in the foreseeable future.
 Contrary to expectations, transactions are getting done, albeit at lower pricing of 125% to
150% of adjusted tangible book. Since 2009, over 450 deals have been announced.
Bank & Thrift M&A & Deal Valuations (P/TBV)
600 300
Early 1990's Early Housing crash, credit
Banking Crisis 2000's crisis and recession
Recession (2007 to Present)
500 250
400 200
Transaction
P/TBV (%)
Count
300 150
200 100
100 50
‐ ‐
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Transactions 203 299 380 470 526 436 443 450 476 334 254 251 212 261 269 270 293 288 143 119 175 159
P/TBV (%) 145 139 151 172 172 178 186 223 264 229 202 187 188 216 224 229 244 230 170 114 117 108
Sources: SNL Financial LC & FJ Capital Research Data as of January 5, 2012
In 2010, failed bank or FDIC-assisted transactions created a slowdown in whole bank
acquisitions, a trend that began to reverse in 2011. The open-bank consolidation trend should
continue as banks better understand the value of their balance sheets.
We will later examine other factors that drive M&A and draw conclusions on the next great
consolidation boom. But first, let’s review some of the recent transactions that highlight the
compelling opportunity we foresee during the next several years.
www.fjcapital.com 7

8. Recent Transaction Highlights
Buyer: F.N.B. Corporation (FNB)
Seller: Parkvale Financial Corporation (PVSA)
Announcement: June 15, 2011
Deal Value: $130 million Valuation: 198% of TBV
1-Day Market Premium: NM 1-Month Market Premium: 120.8%
Seller ROA: 0.4% Seller ROE: 6.6%
Buyer Expectations:
TBV Accretion: Flattish without equity raise and 5.7% accretive with equity raise
Earnings Accretion: 6% in year 1
TBV Earn Back Period: N/A
Transaction Rationale:
In-market consolidation to strengthen FNB’s status in Pittsburgh, PA market, where
MSA market rank increases from #7 to #3. Parkvale had security issues that detracted
from a valuable Pittsburgh franchise. FNB capitialized on the opportunity to
significantly add to its density in the Pittsburgh MSA.
Buyer: Brookline Bancorp, Inc. (BRKL)
Seller: Bancorp Rhode Island, Inc. (BARI)
Announcement: April 19, 2011
Deal Value: $234 million Valuation: 193% of TBV
1-Day Market Premium: 57.1% 1-Month Market Premium: 58.5%
Seller ROA: 0.6% Seller ROE: 7.7%
Buyer Expectations:
TBV Dilution: 22% or $1.66 per share
Earnings Accretion: 25% accretive to EPS in 2012
TBV Earn Back Period: > 8 years
Transaction Rationale:
Out of market expansion to leverage excess capital via acquisition of a target in a less
competitive market. Focus on long run EPS growth versus TBV. BRKL paid a full
price to gain market share in Rhode Island. BRKL was searching for a catalyst to
drive EPS and leverage its excess capital.
www.fjcapital.com 8

9. Recent Transaction Highlights (continued)
Buyer: Susquehanna Bancshares, Inc. (SUSQ)
Seller: Tower Bancorp, Inc. (TOBC)
Announcement: June 20, 2011
Deal Value: $342 million Valuation: 149.3% of TBV
1-Day Market Premium: 40.6% 1-Month Market Premium: 38.4%
Seller ROA: 0.1% Seller ROE: 0.5%
Buyer Expectations:
TBV Dilution: 8.5% (PF TBV from $7.16 to $6.55 with Abington and Tower)
Earnings Accretion: 10%
TBV Earn Back Period: ~5 years
Transaction Rationale:
In market transaction improves Pennsylvania deposit market share from #12 (PF with
Abington) to #5
Buyer: Berkshire Hills Bancorp, Inc. (BHLB)
Seller: Connecticut Bank and Trust Company (CTBC)
Announcement: October 25, 2011
Deal Value: 30 million Valuation: 143.2% of TBV
1-Day Market Premium: 33% 1-Month Market Premium: 29.4%
Seller ROA: 0.7% Seller ROE: 7.2%
Buyer Expectations:
TBV Dilution: 4% or $0.65 per share
Earnings Accretion: Core EPS accretion of $0.03 in 2012 before net deal costs
TBV Earn Back Period: >8 years, per Sandler O’Neill research
Transaction Rationale:
Future accretion to benefit from revenue synergies and regional expansion.
Demographically accretive, reflecting the comparatively high income and population
densities in the Hartford, CT market. CTBC’s TARP to be repaid at/near closing.
www.fjcapital.com 9

10. Recent Transaction Highlights (continued)
Buyer: People’s United Financial, Inc. (PBCT)
Seller: Danvers Bancorp, Inc. (DNBK)
Announcement: January 20, 2011
Deal Value: $489 million Valuation: 184.1% of TBV
1-Day Market Premium: 33% 1-Month Market Premium: 38%
Seller ROA: 0.7% Seller ROE: 6.1%
Buyer Expectations:
TBV Dilution: 6.7%
Earnings Accretion: 2012 operating EPS accretion of ~$0.08
TBV Earn Back Period: ~7 years
Transaction Rationale:
Leverages excess capital and accretive to EPS. Immediately adds scale to existing
Boston MSA presence. Pro forma PBCT improves to 7th largest bank in
Massachusetts (from #16) and Boston MSA (from #15) and 2nd largest bank in Essex
County, MA (from #9).
Buyer: Home Bancorp, Inc. (HBCP)
Seller: GS Financial Corp. (GSLA)
Announcement: March 30,2011
Deal Value: 26.4 million Valuation: 95.4% of TBV
1-Day Market Premium: 21.7% 1-Month Market Premium: 82.6%
Seller ROA: 0.2% Seller ROE: 1.4%
Buyer Expectations:
TBV Dilution: Minimal
Earnings Accretion: 10% accretive to EPS when cost savings fully phased in by 2012
TBV Earn Back Period: N/A. Continued positive TBV growth, even during quarter in
which transaction closed.
Transaction Rationale:
Expands Louisiana franchise via addition of GSLA’s presence into Orleans and
Jefferson Parishes and leverages excess capital with a transaction priced below TBV.
www.fjcapital.com 10

11. Sector Performance Review
The anemic U.S. economic recovery drove the smaller cap bank index down 4.04% in 2011,
while the NASDAQ Bank Index was down 12.4%. In 2010, the banking sector experienced a
rebound as the economic picture looked “less bad”. The higher returns were led by the larger
cap banks, which advanced 11.4%, while the smaller cap banks were up 5.2%.
The relentless negative headlines centered around mortgage abuses coupled with economic
headwinds and regulatory pressures caused a major break in large cap bank stocks in 2011.
Smaller community banks fared better as their equity prices have not materially advanced since
the start of the economic downturn in 2007. The volatility in the sector continued, as most of
the declines were registered in August and September of last year, with the NASDAQ Bank
index down 19% in the two-month span. Smaller cap bank stocks experienced less volatility
than their larger brethren in 2011, outperforming the bigger banks and money centers by more
than 20%. We believe this return disparity is justified due to the current steeply discounted
multiple of book value for small cap banks stocks and the resurgence of both actual M&A
activity as well as projected activity over the next few years. We would also add that the
economic conditions of the “survivors” of the past cycle are stronger now than in 2007, as
many of the non-performing loans continue to work through the resolution process. For sure,
many headwinds exist, including continued weak economic activity characterized by fits and
starts, margin pressure as a result of Fed intervention, and a lack of revenue resulting from the
below trend U.S. economic environment.
As shown in the following chart, since Nov. 30, 2006, the average market multiple has drifted
well below tangible book value, with the current median at only 70% of tangible book value.
The index that tracks 1,000 public banks and thrifts has traded off nearly 70% during this time.
Index SNL Bank & Thrift Index1 Index
Total Return (1,000 companies with < $250 million Market Cap) P/TBV
1000% 300%
241% 250%
800%
Down 3
69% 200%
600%
FJ Starts 150%
400% 2/1/2008
100%
200% Historically low
50%
valuation and
prices 2,
0% 0%
Dec-1994 Dec-1998 Dec-2002 Dec-2006 Dec-2010
Source: SNL Financial LC.
1
The historical chart-line reflects a market-weighted index.
2
The 12/31/2011 Micro-Cap (excluding MHCs) median valuation of 70% is based on an equal-weighted index.
3
Micro-cap banks fell 18% from the 3/23/07 peak through 2/1/2008, then fell 58% more through 11/25/2011 for
total fall of 70%.
www.fjcapital.com 11

12. Industry Fundamentals
The banking industry’s fundamentals have generally improved year-over-year (Y/Y). FDIC
data shows that, despite 3.3% Y/Y industry asset growth, loans fell by 0.7%, a testament to an
important challenge many banks face in growing earnings. In contrast, deposit growth has been
very robust, up 9.9% Y/Y. Given the lack of lending opportunities, more deposits have been
invested in securities, typically at lower yields than loans. The confluence of these trends can
be seen in declining net interest margins (NIMs) in many recent earnings reports, although the
below table, based on data from SNL Financial LC, shows marginal year-over-year
improvement at the end of the recent September quarter.
A significant aspect of the banking industry is a major bifurcation in the financial condition and
performance of banks. In short, not all banks are equal, with many banks performing well or
well-enough, and many other banks facing almost insurmountable challenges to manage
problem loans, rising expenses and major growth headwinds.
Select Banking Industry Metrics
9/30/2010 9/30/2011 9/30/2010 9/30/2011 9/30/2010 9/30/2011
Median Median Percentile: > 50 Percentile: > 50 Percentile: < 50 Percentile: < 50
ROAA (%)
0.48
0.61
0.95
1.03
(0.81)
(0.37)
ROAE (%)
4.75
5.69
9.61
10.12
(12.28)
(6.93)
Net Interest Margin (%)
3.71
3.75
4.25
4.30
3.19
3.26
TCE/TA (%)
8.57
8.84
11.83
12.06
6.26
6.33
Reserves/ Gross Loans (%)
1.71
1.80
2.72
2.78
1.22
1.28
NPAs/ Assets (%)
2.63
2.79
1.25
1.35
6.06
6.49
NCOs/ Avg Loans (%)
0.54
0.44
0.15
0.11
2.32
1.80
Sources: SNL Financial LC & FJ Capital Research
The first two data columns of the above table highlight Y/Y comparisons of industry medians
for select metrics. The third and fourth data columns highlight the Y/Y comparisons of the
metric averages for the top half (50th to 100th percentile) of the metrics reported by all public
banks (i.e., higher performers). The fifth and sixth data columns highlight the Y/Y comparisons
of the metric averages for the bottom half (below 50th percentile) of the metrics reported by all
public banks (i.e., lower performers). For instance, the top half of the banking industry is much
more profitable than the bottom half, as the third quarter 2011 ROAA of the former is 1.03%
and the ROAA of the latter is (0.37%). Comparisons made between the two sub-groups’ credit
metrics and capital levels also demonstrate significant financial differences.
Clearly, many banks are facing industry challenges much more successfully than others. On
this front, size matters, and a rule of thumb used by many industry experts is that most banks
eventually will need to be $1 billion in assets or greater in order to achieve the scale necessary
to operate as an independent entity. Notably, non-interest income growth is currently anemic
due in no small part to regulatory pressures against bank fees (i.e., Durban Amendment of Dodd
Frank). Meanwhile, non-interest expense cuts can be achieved given the slower growth and
improving credit trends, but this is tough for smaller banks that lack the asset base over which
to spread rising regulatory costs. Cost cuts are more likely to come via M&A synergies.
Looking forward, many banks will have too high a hurdle to clear in finding levers to pull that
will achieve acceptable returns. This will drive a good number of these banks to the M&A alter.
www.fjcapital.com 12

13. Review of Merger Trends: 1990 to 2011 and Beyond
As demonstrated below, consolidation is clearly the dominant trend in the bank sector, with the
number of banks and thrifts dropping by about half, from almost 16,000 in 1989 to well below
8,000 today. Furthermore, based on the “new normal” operating environment, there could be a
similar decline during the next five years. In short, we believe conditions exist for a substantial
rebound in M&A that could equal or exceed 1994 peak levels.
Number of U.S. Banks & Thrifts
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
6/30/1…
1990A
1991A
1992A
1993A
1994A
1995A
1996A
1997A
1998A
1999A
2000A
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 6/30/201
0 1
1 58 1
5,1 4,482 13,853 13,221 12,604 1 ,971 1 ,454 1
1 1 0,923 10,464 10,222 9,904 9,61 9,354 9,1 8,976 8,833 8,680 8,534 8,305 8,01 7,657
4 81 2 7,418
2012 2013 2014 2015 2016 201 201
7 8 2019 2020 Sources: FDIC & FJ Capital Research
7,281 6,917 6,571 6,243 6,056 5,874 5,698 5,527 5,361 Data as of June 30, 2011
The above chart highlights the trends in bank transactions during the last 20 years, and our
estimate of what they likely will look like going forward. The last major boom in M&A was
the period from 1991 to 1998. After the 1990 to 1991 recession, which was particularly
harmful to real estate lenders, there was a spike in consolidation activity as the economy began
to show signs of improvement. Moreover, deals exploded to a peak of 526 transactions in 1994.
Steady consolidation activity slowed considerably in 2000, however, as bank stock valuations
took a back seat to the dot-com bubble and the resulting 2001 to 2003 recession. Thereafter,
bank deals began to pick up until the recent financial crisis of 2007, the effects of which
continue to plague bank balance sheets even today. The current recession is again centered on
real estate and has crippled many companies in the sector.
www.fjcapital.com 13

14. Recent M&A Quotes from Industry Participants
A December 2011 article in SNL Financial highlighted the inevitability of bank M&A. “Declines in
lending and spreads, coupled with higher capital requirements, will over the next three to four years
leave some 3,000 banks — the vast majority of them community banks — unable to generate a sig-
nificant return on capital,” said Kamal Mustafa, Chairman of Invictus Consulting Group and a former
Citigroup Inc. banker in charge of M&A. Moreover, a “massive wave of consolidation” is inevitable
as small community banks pair up or sell to larger players in order to gain the size needed to compete
with the big banks and, equally important, to “eliminate destructive competition” among smaller
banks, Mustafa said. He added, “It has to happen. There’s been a paradigm shift across the board,
and there’s no other way to make it. There are 7,500-plus banks now. In five years, 5,000 would be
too many.”
“It’s about scale. It’s about size. It’s about the ability to absorb the increase in operating costs in an
environment that is difficult to grow your earnings,” “Revenue growth was becoming a challenge. As
we forecast it out over the next couple of years, we feel that it is going to continue to be a challenge
while costs are going to continue to increase,” said John Keach Jr., CEO of Indiana Community Ban-
corp, which announced its sale to Old National Bancorp on Jan. 24, 2012.
“There’s been a lot more engagement recently from banks, people really starting now to explore their
options, starting to have serious discussions” about possible sales, said John Boulware, Managing
Director at Community Capital Advisors. “And at some point, things will begin to snowball — M&A
activity will beget more M&A activity.”
"There's definitely something in the water," said Lee Bradley, Senior Managing Director at Commu-
nity Capital Advisors. "There are more people looking to sell, and more buyers at least showing some
interest." In an October SNL Financial article, Bradley said smaller banks — those with roughly
$250 million in assets or less — are likely to account for the largest share of sellers, as such compa-
nies with smaller bases over which to spread new expenses struggle the most to absorb rising compli-
ance costs linked to the Dodd-Frank legislation.
“The ability to reduce costs through consolidation is one of the few tools that bankers have to improve
operating results, as the fundamental business drivers will likely stay soft and banks face heightened
regulatory compliance costs,” said Tom Tullidge Jr., a Managing Director at Cary Street Partners
LCC.
“I know for a fact that a lot of thrifts are thinking hard about changing their charters to become a com-
mercial bank…thrifts by regulation had to have 65% of their balance sheet in housing and housing-
related assets. If we've learned any lesson it's that those levels of concentration don't make any sense
and that the real future of community banking is in diversification. I do think it's on the mind of a lot
of thrift executives and a lot of thrift boards — how do they find the right partner and what is the
process they need to achieve a more diversified balance sheet.”
— C.K. Lee, investment banker and former regulator
“We think [banking consolidation] will occur in the next 24 to 30 months as a result of earnings pres-
sure and the Fed’s flattening of the yield curve...”
— Berry, CEO & President, Equity Development
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15. Board Perspective and Consolidation Drivers
The big question on the minds of bank management and directors is when is the right time to
consider consolidation. Some sellers are pining and holding out for the peak pricing of
previous cycles, while others recognize the challenges of the current environment and have
decided to look for a partner. We believe peak pricing levels may be behind us as the economy
has structural issues that will take an extended period to adjust. First, peak pricing was a result
of a “hyper” economy driven by extreme levels of debt and irrational real estate gains. The
hangover will last for some time and will be characterized by slower growth and higher-than-
desired unemployment.
Bear in mind that many banks have just been through one of the toughest recessions in memory
and are dealing with the after effects, namely an extended low-rate environment that is
pressuring revenue. Additionally, the pendulum of regulatory involvement has swung to the
extreme with the final regulatory orders yet to be determined. So in addition to the past five
years of economic weakness and financial meltdowns, they are faced with another three to five
years of tepid growth, unnatural intervention by the Fed and a fight for well priced and solid
credits to add to the loan portfolio.
Why Banks Want/Need to Merge — 2011 Review
Generally speaking, the same drivers that existed in the early 1990s exist today. However,
there are new important drivers not present in 1994. For starters, there continue to be too many
banks competing for the same marginal deposit and loan. Major consolidation factors include:
 Cost Savings – The typical merger can save 20% to 40% in operating costs, thereby
creating significant earnings accretion for the combined entity.
 Lack of Loan Growth – Due to banking competition and the over saturation of banks, loan
growth could be muted in even the best of times. This is especially true in the current economic
environment, with large businesses hoarding record levels of cash and small businesses not
seeing the end demand needed to make capital investment. In addition, many individuals and
households are working to repair damaged balance sheets and de-lever.
 Lack of Access to Capital Markets – Most small cap firms have limited access to the capital
markets. Even if they have access, the punitive pricing commonplace in today’s market means
this route may not be an economically viable capital raising option for many smaller banking
institutions. Therefore, capital restraints will force banks to partner up.
 Fairly Illiquid Trading – Most smaller cap banks tend to have fairly illiquid shares. The
boards of such institutions will consider this as they deliberate on ways to increase shareholder
value. Most institutional investors will not invest in companies they deem illiquid, tending to
shy away from market caps under $500 million. This excludes most of the public banks and
thrifts from receiving direct investments by institutional investors.
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16.  Management/Board Fatigue – Sophisticated management and boards understand that a
bank must have a valid business plan in place, one that includes either organic growth or growth
via acquisition. We suspect many leaders find it difficult to execute their original business
plans in the current economic environment. This recession has been particularly tough on
banks focused on real estate lending. Therefore, we believe many banking leaders currently are
weighing their M&A options.
 Regulatory Reform – One recent factor is the Dodd-Frank legislation. The potential for
change is yet to be fully processed by management teams and boards. It is clear the regulation
will greatly increase operating costs and will reduce shareholder returns. In fact, new capital
standards alone will make it much harder for companies to earn an acceptable return on equity
to justify independence. Additionally, uncertainty surrounds the implementation of the new
reform and the potential impact on generating acceptable returns.
Impediments to M&A
 Evolving Accounting Standards – The accounting for bank M&A has evolved from the
favorable pooling of interest method (prior to 2001) to purchase accounting with new
pronouncements, such as SFAS 141R, and other bulletins along the way. Pooling was
favorable as it allowed the combination of assets and liabilities and did not create material
goodwill. Under the current scheme, all transactions are now completed under purchase
accounting. To complicate matters (or increase transparency, depending on your view) FASB
introduced SFAS 141R along with several bulletins that, among other things, restrict
transferring reserves over to the acquirer. These accounting rules, coupled with the credit
marks assumed by the buyers, create issues for both buyers and sellers. The higher the credit
mark (more conservative) the greater the goodwill, thus reducing the potential price a buyer
can/will pay. We suspect the accounting treatment and the credit marks have had the effect of
slowing consolidation. As the economy improves and loan books are more easily valued, the
credit marks should moderate, paving the way for lower goodwill charges and higher multiples.
 Regulatory and Legal Uncertainty - The process of approving transactions has appeared to
slow somewhat as the agencies consolidate their base and turn their attention to writing new
rules mandated by Dodd-Frank legislation. For companies with thin capital bases or credit
quality issues, winning the approval of regulators will be more challenging than in the past. It
is not to say that regulators have failed to look at these variables in the past, but rather more
attention is given today as capital rules are yet to be written. On the legal front, it seems every
transaction has some type of legal/investigation attached to it. While most of these suits are not
grounded in strong logic, nonetheless it is one more consideration to pulling the trigger on an
M&A transaction.
 Bank Stock Valuations – Arguably one of the most important factors in bank M&A is
pricing. One of the factors that limit the potential valuation a buyer can pay is its own currency.
Bank stocks have been under considerable pressure over the last several years, reacting both to
the financial crisis and the ensuing great recession, events that historically have been especially
hard on bank stock valuations. For the most part, valuations have not recovered – since the start
www.fjcapital.com 16

17. of the economic downturn, the SNL Bank and Thrift index is down 62.3%, while the smaller
banks are down 60%. The largest banks in the country, with market caps greater than $10
billion, are down 81% from their peak. In addition, the industry median price-to-book value
has declined from approximately 174% at the end of 2006 to 75% at present. Conversely,
sellers may be holding out for better times when they could fetch 2.5 to 3 times book value.
You can see with the value destruction caused in the market that seller expectations are too
high. The bid/ask spread needs to adjust as equities have adjusted over the last several years.
 Establishing the Right Credit Mark – The wide bid/ask spread between buyers and sellers
is in part driven by what the credit mark should be. While sellers have put aside reserves
(which now cannot be transferred under FASB 141r), buyers take a fresh look and re-mark the
portfolio based on their own set of assumptions. Buyers will take a conservative approach to
make sure they identified all the impairments and mark them accordingly. Sellers either believe
their marks are appropriate for the risk or they are in denial about the real mark to mark value of
their loan books. We believe the answer falls somewhere in the middle. Nonetheless, this is a
major impediment when delivering a price that the seller can accept.
 Social Issues – The social issues are an important consideration when discussing potential
mergers and acquisitions. The phrase most often used in this sector is “banks are sold not
bought,” which refers to the fact that boards and managements make the decision to sell rather
than reacting to either a hostile situation or overtures from other banks. That is not to say that
good bank managers are not talking all the time to potential sellers, rather that the ultimate
decision to pull the trigger resides with the board and/or management. It is difficult to handicap
this, as many management teams are entrenched and happy to have a job even as their
institutions are producing an insufficient ROE for shareholders. In fact, there are many
undercapitalized and underperforming banks that clearly are not acting in the best interests of
their shareholders. Most bank board members are successful business people in their own
rights, yet are often guided by managers that are not always aligned with shareholders. We
strongly suspect that as more bank boards realize that the industry will not move back to peak
profitability or peak pricing, more will decide to find a partner.
www.fjcapital.com 17

18. The Banking Landscape
# of Institutions Assets ($ Billions)
Total Industry Banks & Thrifts 7,040 100% 18,460 100%
Private 5,799 82% 2,512 14%
Public 1,241 18% 15,948 86%
# of Institutions Assets ($ Billions)
Public Banks & Thrifts 1,241 100% 15,948 100%
Public Banks 992 80% 15,317 96%
Public Thrifts 249 20% 632 4%
# of Institutions Assets ($ Billions)
Public Thrifts 249 100% 632 100%
Fully Public 196 79% 593 94%
MHCs 53 21% 39 6%
Sources: SNL Financial LC & FJ Capital Research Data as of January 2, 2012
The above chart illustrates the landscape of private and public U.S. banking institutions. A
review of the opportunity set shows that the majority of banks are small community banks with
assets of less than $500 million. Of that, roughly 1,100 are publicly traded companies with
market caps below $250 million, and a combined $85 billion capitalization (table on p. 19).
U.S. Banking System Composition
Number of Banks by Asset Size
6,000 5,714
4,000
2,000
646
400
76 154
0
$0 to $500 Mil $500 Mil to $1 Bil $1 Bil to $3 Bil $3 Bil to 5 Bil $5+ Bil
Sources: SNL Financial LC & FJ Capital Research Data as of January 2, 2012
www.fjcapital.com 18

19. Summary of Potential Market Opportunity
SNL Micro-Cap Bank & Thrift Index
993 Companies with:
--A Median Market Cap of $ 20.6 Million
--An Average Market Cap of $ 39.3 Million
--For a Total Index Market Cap of $ 39.0 Billion
SNL Small-Cap Bank & Thrift Index
98 Companies with:
--A Median Market Cap of $ 426.2 Million
--An Average Market Cap of $ 474.0 Million
--For a Total Index Market Cap of $ 46.5 Billion
SNL Micro-Cap and Small Cap Bank & Thrift Indices
1,091 Companies with:
--A Median Market Cap of $ 25.0 Million
--An Average Market Cap of $ 78.3 Million
--For a Total Index Market Cap of $ 85.5 Billion
Sources: SNL Financial LC & FJ Capital Research Data as of February 3, 2012
As noted below, nearly 764 companies are trading at less than book value, reflecting investor
appetite for liquidity coupled with the current economic environment and company-specific
issues. As previously stated, new capital requirements and banks’ lack of access to the public
markets, will contribute significantly to the increase in consolidation. As the below chart
shows, 413 companies or 54% of the public banks trading below tangible book value, are
experiencing substandard capital levels and/or elevated asset quality issues.
Public Banks: Current Valuation and Credit Summary
Public Banks 1,180 100.0%
P/TBV >= 100% as of close on 2/3/2012 352 29.8%
P/TBV < 100% as of close on 2/3/2012 764 64.7%
P/TBV is not available or not meaningful 64 5.4%
P/TBV < 100% 764 100.0%
TCE > 6% AND NPAs/Assets < or = 4% 472 61.8%
TCE > 6% 990 129.6%
NPAs <= 4% 747 97.8%
TCE < 6% AND NPAs/Assets > or = 4% 122 16.0%
TCE < 6% 179 23.4%
NPAs >= 4% 413 54.1%
No TCE data available 11 1.4%
No NPA data available 20 2.6%
Sources: SNL Financial LC & FJ Capital Research Data as of February 3, 2012
www.fjcapital.com 19

20. Update on FDIC-Assisted Transactions
The financial crisis of late 2007 sparked a resurgence in bank failures. As shown below, the
real estate bust led to an unprecedented number of failures in the early 1990s. The trough phase
of the most recent cycle has seen some very large institutions fail, yet the absolute number of
failures remains well below the peak created in the prior real estate crash.
Companies with strong balance sheets have taken advantage of this cycle to prudently grow
their franchises. Often, multiple bidders try to grow their franchises with the help of
government stop-loss guarantees. The below chart shows that while the U.S. economic
recovery still has a long way to go, the pace of FDIC-assisted transactions has slowed, coupled
with much more competitive pricing.
Number of FDIC Assisted Deals (1990-2011)
555
485
279
194
147
118 115
90
22 25
9 2 3 8 8 5 7 3 3 3
0 0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: SNL Financial LC & FJ Capital Research Data as of January 13, 2012
In the second half of 2010, Sheila Bair, former head of the FDIC, highlighted that there were
829 banks on the FDIC’s “Problem List” at June 30, 2010. She also declared the market near a
peak in failures and said that this cycle will produce far less bank failures than the mid 1990s
cycle. At September 30, 2011, the number of problem banks was 844, down 5% from the
recent high of 888 banks at March 31, 2011.
Based on FJ Capital’s research and SNL Financial LC data, we count 415 banks with Texas
ratios [nonperforming assets/(tangible common equity + loan loss reserves)] greater than 100
percent, a typical sign of potential failure. The five states with the highest numbers of banks
with Texas ratios above 100% are: Georgia (63 banks), Florida (43 banks), Illinois (42 banks),
Minnesota (29 banks) and Missouri (23 banks).
www.fjcapital.com 20

21. About FJ Capital Management, LLC
This paper was written by FJ Capital Management Co-Founder, Managing Member and CIO,
Martin Friedman, and FJ Capital Management Managing Director, Scott Cottrell, who have a
combined 35-plus years of capital markets experience, much of this time spent following and
analyzing small- and mid- capitalization financial institutions. A special thanks goes out to
Mutian Yang, who helped significantly in data collection and presentation.
Prior to founding FJ Capital in 2007, Mr. Friedman served nine years as director of research at
Friedman, Billings, Ramsey Group, a major financial services firm publicly traded on the New
York Stock Exchange, where he built the 13th largest U.S. sell side research organization, with
140 professionals encompassing eight industry sectors. Previously, Mr. Friedman was a senior
research analyst focused on the financial services industry covering small- and mid- cap banks
and thrifts. Mr. Friedman has been analyzing and investing in this sector for over 20 years. Mr.
Friedman currently serves on the board of Access National Bank (ANCX), an $800 million asset
community bank headquartered in Reston, VA.
Prior to joining FJ Capital, Mr. Cottrell served as a research analyst at FBR covering small-
and mid- cap banks and thrifts. Mr. Cottrell has approximately 15 years of banking industry
experience for firms that include Wells Fargo, National City Bank and Servus Financial Corp.
He is a CPA and earned his MBA from Georgetown University.
FJ Capital Management is a fundamentally driven investment management firm founded in
2007 that analyzes and invests in publicly traded U.S. community and regional banks through
alternative strategies. The firm utilizes proprietary fundamental research to uncover value
disparities in the small- and mid-cap bank sector and seeks to take advantage of these disparities
by building core positions with longer term holding periods. The firm also seeks to generate
attractive, risk-adjusted investment returns by uncovering opportunities with identifiable, near-
term catalysts. For more on FJ Capital or to further explore opportunities in the bank sector,
please visit www.fjcapital.com or contact:
Andrew Jose FJ Capital Management
O: 703.875.8378 1313 Dolley Madison Blvd.,
M: 703.408.0394 Suite 306
ajose@fjcapital.com McLean, VA 22101
www.fjcapital.com
Important Disclosures:
This White Paper is provided for informational purposes only, does not constitute investment
advice and should not be relied upon as such. It is neither an advertisement for investment
advisory services nor an offer to sell or solicitation of an offer to buy securities.
The information presented in this White Paper has been developed internally and/or obtained
from resources believed to be reliable; however, FJ Capital Management does not guarantee the
accuracy, adequacy or completeness of such information. References to securities or asset classes
do not constitute recommendations to purchase or sell any specific securities or asset classes.
www.fjcapital.com 21