Second Quarter 2015: Community Banking Trends

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1 Second Quarter 2015: Community Banking Trends

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3 The Analysis This analysis is presented to highlight the trends in community banking compared to the entire banking industry. Analysis Covers Three Bank Cohorts: Total Industry (Blue) Community Banks Banks Under $25B in assets (Green) Community Banks below $1B in total assets (Gold) Past five quarters are presented. All rate changes are quarter over quarter. Source: FDIC Call Report Data as of August 6, 2015.

4 General Trends Summary Driven by national banks, the industry improved its return performance with an increase in return on equity from 8.91% to 9.21%. Return on Assets moved about 1% for the industry, getting back to 4Q 2013 post recession peak. Most community bank categories did equally as well except those under $1B in total asset size lagged. After a brief pause last quarter, net interest margin for community banks continue to fall as loan pricing was reduced. Cost of funds remained largely unchanged from 1Q and expenses were down slightly. Credit quality continued to improve across the board as all categories of delinquencies kept their march downward going. This caused a reduction of loan and lease loss allowance from 1.47% to 1.39% in 2Q. With lower loan pricing, net interest income fells slightly, while non interest income improved due to more fees from cash management and consumer lending.

5 General Trends Here are some other community bank trends of note: Assets growth slowed and came in at 0.25% for the industry qtr overqtr for a 2.5% YTD annual growth rate. Community banks did better at 2.8% and 4.1%, respectively. Cost of funds decreased slightly and core deposits were stable Wholesale funding increased for community banks, but decreased for the industry. Whole sale funds make up 12.5% of total deposits. C&I, construction and consumer loans as a percent of total loan mix increased. Asset duration increased (also more floors), while deposit duration remained unchanged Balances per branch increased slightly due to fewer branches

6 General Trends Service charges on interest bearing deposits increased Fees from insurance fell as a percent of total non interest income. Advertising and marketing expenses increased slightly Legal fees increased slightly Accounting fees were unchanged Deposits per branch increased due to branch reduction Bank staff numbers and compensation increased slightly Premise cost was stable, but telecom costs increased.

7 General Trends Number of Banks: 6,348 (Down 1.04%) Bank Failures: 1 (vs. 4 for 1Q) New Bank Charters: 0 Mergers And Acquisitions: 74 (Up 9%) Avg. Price Per Book: 1.31x (vs. 1.38x for 1Q) Price To Earnings: 27.3x (vs. 23.5x for 1Q) Branches Sold: 318 (compared to 339) Median Premium To Core: 4.9% (compared to 6.2%)

8 General Trends Balance Sheet Growth: Driven by loan growth, the average community bank grew at a 1% rate for an annualized 6.5% growth rate. Investment holdings to earning assets dropped to 18.5% from 20.2% Deposits dropped for the industry, largely due to larger banks moving money off balance sheet. For community banks, deposits increased 0.25% for the quarter for a 3.6% YTD annualized rate. Loans to deposits increased from 68.7% to 69.8% for the industry and 80.1% to 81.9% for community banks. This increased in leverage helped offset decreasing margins.

9 General Trends Funding: Cost of funds fell 1bp for both the industry and community banks. Community banks had a cost of funds of 40bp compared to 31bp for the industry. Interest bearing deposits to total deposits decreased slightly for the industry to 73.3%and 78.0% for the industry and community banks, respectively. FHLB Advance usage increased to 3.75% for the industry, but spiked to 5.7% for community banks (from 4.9%).

10 General Trends Credit Quality: Loan loss reserves as a percent of loans continued to drop and now average 1.39% of total loans for the industry and 1.32% at community banks (down from 1.36%) Non current loans decreased as a percent of total loans from 1.80% to 1.64% for the industry and from 1.26% to 1.18% for community banks. The Texas Ratio dropped from 14.7% to 13.7% for the industry and 14.4% to 12.9% for community banks.

11 General Trends Lending: Despite an improvement in credit quality, new loan origination increased due to less demand for larger sized, riskier loans. Demand for CRE construction lending increased driving pricing. Competition for loan renewals increased and pricing decreased. The Mid west was the most competitive on credit spreads, while the Northeast was the least. For C&I, finance companies and manufacturing continue to be active and tighten in spreads while commodity based firms and retail stores increased in spreads.

12 Loan Class Performance: Loan delinquencies by sector and pricing. Commentary After a slow down in credit quality improvement last quarter 2Q was an improvement. Every major bank lending category improved. While CRE put in the best performance, the consumer remained strong. While C&I is in record territory, now CRE is as well. Despite credit improvement, pricing increased. Average Upfront Fees: Last Qtr. This Qtr. New Loans 40bp 42bp Renewed 17bp 18bp

13 Loan Pricing: Here, we tracked some 580 loans from a variety of community banks over the course of 2013 and now into 2015 in order to look at spreads to Libor on new and renewed loans that are between $1mm and $5mm with maturities between five and ten years. We looked at closed new loans and compared them to similar credit loan renewals. All the loans were either on commercial real estate or to commercial borrowers. Debt service coverage was above 1.30 times in every case making these high quality borrowers with probabilities of default all less than 60bp.

14 Heat Map - ROE:

15 Avg. ROE Ranked By State:

16 Heat Map Yield on Earning Assets:

17 Heat Map Cost of Funds:

18 Heat Map Loans To Deposits:

19 Heat Map Credit Quality:

20 Heat Map Credit Quality: Wyoming, Idaho, Kansas, and Missouri have improved.

21 Selected States Credit Quality:

22 Selected States Credit Quality:

23 Selected States Credit Quality:

24 Heat Map Capital:

25 Metrics Of Other Selected States: What to see other states or metrics? Let a CenterState representative know or contact cnichols@centerstatebank.com

26 Return on Equity:

27 Return on Assets:

28 Net Interest Margin:

29 Yield On Earnings Assets:

30 Cost of Funds:

31 Loans To Deposits:

32 Dividends To Net Income:

33 Fee Income:

34 Fee Income:

35 Efficiency:

36 Deposits Per Branch:

37 Capital:

38 Capital:

39 Credit Quality ALLL To Loans:

40 Credit Quality:

41 Credit Quality:

42 Credit Quality:

43 Total Asset Growth:

44 Loan Growth:

45 Deposit Growth:

46 Investment Portfolios:

47 Graphics provided by: trends.com Didn t see a metric that you want to track? Let us know and we can see if we can add it.

48 Disclaimer: This presentation is for general strategic information only and should not be relied upon as a substitute for independent research before making a material management decision. This presentation does not take into account any particular bank s performance objectives, financial situation or needs. All banks should obtain advice based on their unique situation before making any decision based upon this presentation or any information contained within. In addition, any implied projections or views of the bank market provided by the authors may not prove to be accurate. While all the information contained herein is believed to be accurate as of the date of source or publication, the information is subject to change and constant revision.