R 170 G 123 B 85 December 11, 2015

Transcription

1 December 11, 2015

2 Presentation Overview Recent Developments Affecting Capital Planning Utilizing Debt as a Component of the Capital Mix Analyzing Equity Capital Opportunities Structuring Strategies for Capital Offerings + Revisions to Small Bank Holding Company Policy Statement + Enhanced Capital Requirements under Basel III + Revisions to Prompt Corrective Action + Using Leverage to Increase Returns + Debt Capital Alternatives + Tier 2 Capital Treatment of Subordinated Debt + Senior Debt vs. Subordinated Debt + Common vs. Preferred + Regulatory Capital Considerations + Public vs. Private + Private Offering Exemptions + Limited Public Offering Regulation A+ 2

3 1 Recent Developments Affecting Capital Planning 3

4 Recent Developments Affecting Capital Planning Regulatory Developments REVISIONS TO SMALL BANK HOLDING COMPANY POLICY STATEMENT December 2014 ENHANCED REGULATORY CAPITAL REQUIREMENTS UNDER BASEL III Effective January 2015 Debt Capital Drivers REPRICING OF SBLF SECURITIES IN 2016 REPRICING OF CPP/CDCI SECURITIES IN 2017, 2018 LOW INTEREST RATE ENVIRONMENT ENHANCED SHAREHOLDER RETURNS WITHOUT ADDITIONAL DILUTION 4

5 Recent Developments Affecting Capital Planning Regulatory Developments REVISIONS TO SMALL BANK HOLDING COMPANY POLICY STATEMENT December CFR Part 225, Appendix C ENHANCED REGULATORY CAPITAL REQUIREMENTS UNDER BASEL III Effective January CFR Parts 3 and CFR Parts 209, 217 and 225, Appendix A 12 CFR Parts 324 and 325 5

6 Regulatory Developments Revisions to Small Bank Holding Company Policy Statement Bank holding companies with assets < $1 billion are now small bank holding companies. SMALL BHCs ARE NOT SUBJECT TO CONSOLIDATED RISK BASED CAPITAL RULES. + Bank holdings companies designated as small bank holding companies are not subject to the FRB s riskbased capital and leverage rules + Required to report regulatory capital ratios only at the subsidiary bank level INCREASE IN ASSET THRESHOLD FOR SMALL BHCs. + From $500 million to $1 billion in December 2014 CHANGE PERMITS MORE BHCs TO USE DEBT FINANCING. + Small bank holding companies may use debt to finance up to 75% of the purchase price of an acquisition, allowing a bank holding company (in theory) to have a debt-to-equity ratio of up to 3:1 + Must retire parent company debt within 25 years + Must achieve debt-to-equity ratio of.30:1 or less within 12 years of incurrence of debt BHCs SHOULD MAINTAIN A DEBT-TO-EQUITY RATIO OF 1:1 OR LESS TO: + Avoid restrictions on dividends + Avoid restrictions on stock redemptions + Qualify for expedited processing of regulatory applications 6

7 Regulatory Development Enhanced Regulatory Capital 2.5% Requirements CAPITAL BUFFER Under Base III CAPITAL CHANGES: 2.5% CAPITAL BUFFER LIMITS DIVIDENDS, REPURCHASES, DISCRETIONARY EXECUTIVE BONUSES PHASE-IN ELIGIBLE RETAINED INCOME LAST 4 QUARTERS OF NET INCOME LESS ANY CAPITAL DISTRIBUTIONS AND CERTAIN DISCRETIONARY PAYMENTS Common Equity Tier 1 Capital Phased in Was Now CCB Effective (CETI)/RWA Majority 4.5% + 2.5% = 7% Tier 1 Capital/RWA 4 6% + 2.5% = 8.5% Total Capital/RWA 8 8% + 2.5% = 10.5% Tier 1 Leverage Ratio/AA 4 4% January 1,

8 Regulatory Developments Enhanced Regulatory Capital Requirements Under Basel III Regulatory Deductions and Adjustments to Capital DTA MSR INVESTMENT IN UNCONSOLIDATED FINANCIAL ENTITIES RISK WEIGHTING CHANGE HVCREs PAST DUES 8

9 Regulatory Developments Debt Capital Drivers REPRICING OF SBLF SECURITIES IN 2016 REPRICING OF CPP/CDCI SECURITIES IN 2017, 2018 LOW INTEREST RATE ENVIRONMENT ENHANCED SHAREHOLDER RETURNS WITHOUT ADDITIONAL DILUTION 9

10 2 Utilizing Debt as a Component of the Capital Mix 10

11 Revised Policy Provides Opportunity to Enhance Shareholder Value Bank Level No BHC Debt With BHC Debt Total Assets $1000 $1000 Common Stock $100 $100 ROAA 0.80% 0.80% Net Income $8.00 $8.00 BHC Level Subordinated Debt (6.99%) $0 $40 Common Stock $100 $60 Income from Bank $8.00 $8.00 Debt Expense $0.00 ($1.80) Net Income $8.00 $6.20 ROAE 8.00% 10.3% Except for ability to downstream additional capital to banking subsidiary as common equity, the revised policy provides for no material change at the bank level. Debt becomes a larger component of the holding company s capital structure. Despite lower net income due to debt service, earnings are spread over a significantly smaller equity base, thus increasing ROE. 11

12 Debt Capital Alternatives Capital Raised by U.S. Banks through Sept. 1, 2015 DEBT CAPITAL VERSUS EQUITY CAPITAL + Tax deduction on interest payments, which lowers effective interest rate + Non-dilutive to common shareholders + Enhanced returns to common shareholders SENIOR DEBT + Unsecured versus secured (i.e., bank stock loans), and typically amortizing + Proceeds contributed to the bank are Tier 1 common equity at the bank level + Attractive rates in current interest rate environment Common Equity Senior Debt Preferred Equity Sub Debt -- Source: SNL Financial SUBORDINATED DEBT + For institutions with $1 billion or more in total consolidated assets, can count as Tier 2 capital in the consolidated organization if properly structured + Multiple distribution opportunities, including retail offering, private placements to institutional investors and pooling structures similar to TruPS + Interest only, without the strings attached to senior debt 12

13 Tier 2 Capital Treatment of Subordinated Debt PRACTICAL OBSERVATION: Most subordinated debt issuances by institutions with less than $1 billion in total consolidated assets are structured consistent with Tier 2 capital treatment. LITTLE-KNOWN FACT: Basel III eliminated limitations on the amount of Tier 2 capital that can be recognized in total capital (due to the increased common equity and Tier 1 capital requirements), as well as the limitations on the amount of subordinated debt that can be included in Tier 2 capital. MATERIAL REQUIREMENTS INCLUDE: + Subordinate in right of payment to claims of senior debt holders and general creditors. + Minimum original maturity of 5 years. + Redeemable by the issuer no less than 5 years after issuance. + Unsecured. + No acceleration of principal prior to maturity except in the event of bankruptcy, appointment of a receiver or failure of subsidiary bank. + No credit sensitive features tied to financial condition of the issuer. + Tier 2 capital treatment is reduced by 20 percent of the original principal amount, net of any redemptions, during each of the last five years of the instrument. 13

14 Evaluating Senior Debt vs Subordinated Debt Interest Rate Amortization Covenants Typically lower for senior debt, although retail subordinated debt offerings are competitive. Rate is sensitive to size and public company-status of the issuer. Subordinated debt is interest-only, with principal due at maturity; senior debt can be interest only, but is generally amortizing. Increased amortization can result in higher dividend requirements, which reduces bank-level capital and, in turn, lending capacity. Typically, none for subordinated debt. Senior debt typically involves extensive covenants regarding regulatory capital, financial condition and no additional debt. Acceleration No acceleration of subordinated debt except bankruptcy. Senior debt can be accelerated for breach of covenants, failure to pay interest and deterioration in financial condition, among others. Redemption Subordinated debt cannot be redeemed within 5 years of issuance, except in certain limited circumstances. 14

15 3 Analyzing Equity Capital Opportunities 15

16 Capital Considerations Common BASEL III Capital Ratios New CET1 Ratio Leverage Tier 1 RBC Dilutive impact Merger consideration Preferred Can be structured to qualify as Tier 1 capital Non-dilutive, generally Not available for S corps Cost of capital, generally between common & debt Practical observation: Although the most common form of capital raised by community banks, common stock is usually the most expensive to the institution and existing shareholders. Practice tip: Except in limited cases, preferred stock is rarely used by community banks because coupon payments are non-deductible (compare to interest on debt).

17 4 Structuring Strategies for Capital Offerings 17

18 Offering Structure Public Cost/benefit analysis Expense/time Ongoing obligations Access to public markets Impact of JOBS Act Inability to qualify under exemptions or Reg A+ Private Most utilized structure for community banks Expense/time Limitation on nature/types of investors Regulation A+ 17 CFR to

19 Private Offering Exemptions Reg. D No General Solicitation + Accredited + up to 35 non-accredited + No advertising or general solicitation + Pre-existing relationship + Bad actor rules + 1 year holding period, generally + Disclosure requirements Reg. D General Solicitation + General solicitation permitted + Accredited only + Verification process + Bad actor rules + 1 year holding period, generally + Disclosure requirements Intrastate Offering Exemption 17 CFR to CFR Practice Note: Reg. D. preempts state blue sky laws + All subscribers must be residents of the same state as issuer + No transfer to nonresident for 9 months + General solicitation permitted + State exemption? 19

20 Regulation A+: Limited public offering 17 CFR to Issuers Securities Privately-held issuers based in U.S. or Canada No SEC-reporting companies, investment companies, etc. Bad actor disqualification Equity and debt securities (including warrants) Original issue vs. exchange Tier 1 Limitations Tier 2 Limitations Ongoing Reporting No more than $20MM in 12 month period No investor limitations No more than $50MM in 12 month period Non-accredited investors limited to <10% of greater of net income/net worth Tier 1 None Tier 2 SEC-lite disclosure Blue Sky Tier 1 Coordinated review process Tier 2 Exemption for offerings to qualified purchasers 20

21 Private Offering Exemptions Rule 147 Proposed Changes Organized in state + 80% of consolidated gross revenues + 80% of consolidated assets + 80% of net proceeds used and + principal place of office is within such state vs Principal place of business + 80% of consolidated gross revenues + 80% of consolidated assets + 80% of net proceeds used or + majority of employees 21

22 December 11, 2015

23 Capital Markets Trends for Community Banks Bank stock prices continue to preform reasonably well despite overall market volatility and challenging industry fundamentals Small banks have generally fared better than large banks recently as investors focus on growth opportunities and M&A opportunities Investors remain interested in the banking sector Banks with a combination of attractive markets, solid financial performance, growth prospects and reputable management can issue stock at premium valuations Investors are willing to consider investing in banks < $500 million The sub debt market is very active for community banks The market is also open to preferred stock in some cases

24 Bank Index Performance Since January 1, % 10% 5% 0% -5% -10% -15% Jan-15 Apr-15 Jul-15 Oct-15 SNL Bank S&P 500 NASDAQ NYSE DJIA

25 Bank Index Performance Since January 1, % 20% 15% 10% 5% 0% -5% -10% -15% Jan-15 Apr-15 Jul-15 Oct-15 SNL Bank < $500M SNL Bank $500M-$1B SNL Bank $1B-$5B SNL Bank $5B-$10B SNL Bank > $10B

26 Median Price / Tangible Book Value 75% 73% 87% 82% 84% 103% 104% 111% 124% 137% 133% 144% 176% 186% 177% 171% Median Price / LTM Core EPS 250% Historical Pricing Metrics of U.S. Publicly Traded Community Banks¹ 18.6x 17.8x 20.0x 16.4x 16.7x 15.1x 200% 150% 11.5x 13.9x 13.0x 14.4x 14.6x 14.0x 12.2x 12.0x 13.3x 13.5x 13.6x 16.0x 12.0x 100% 8.0x 50% 4.0x 0% 0.0x Price/ Tang. Book Price/ LTM Core EPS

27 Where are Bank Stocks Trading Today? By Broad Market Price to Return Tg. Bk EPS 30 Days 90 Days LTM S&P % (2.1%) 0.7% DJIA % (0.2%) (0.9%) NASDAQ % (1.5%) 6.3% Russell % (2.9%) 0.3% NASDAQ Bank % 2.0% 11.2% SNL U.S. Bank % (3.0%) 4.9% By Asset Size Assets > $10B % (3.7%) 4.0% Assets $5B-$10B % 6.7% 18.5% Assets $1B-$5B % 5.8% 13.1% Assets $500M-$1B % 4.2% 10.4% Assets < $500M (2.0%) 3.8% 15.0% By Market Cap Micro Cap % 2.9% 8.4% Small Cap % 5.6% 12.5% Mid Cap % 3.1% 12.4% Large Cap % (4.1%) 3.6% By Geography Mid-Atlantic % (3.5%) 6.7% Midwest % (4.0%) 3.1% New England % (5.8%) 0.3% Southeast % (1.3%) 3.8% Southwest % (0.1%) (3.3%) Western % (3.1%) 5.7% By Stock Exchange NYSE % (3.8%) 3.8% NYSE MKT % 8.5% 12.4% NASDAQ % 1.5% 10.6% Bank Pink % 2.4% 7.7% OTC > $500M % 2.2% 8.8% OTC $100M-$500M % 2.9% 6.6% 250% 200% 150% 100% 50% 0% 250% 200% 150% 100% 50% 0% Median - Price/Tangible Book NYSE & NASDAQ OTC MKTs 199% 165% 144% 102% 119% 108% 109% 91% 102% 0% <$500M $500M-$1B $1B-$5B $5B-$10B $10+B By Asset Size Median - Price/Tangible Book NYSE & NASDAQ OTC MKTs 175% 192% 144% 106% 124% 88% 90% 103% 108% 100% 0.25%-0.50% 0.50%-0.75% 0.75%-1.00% 1.00%-1.25% >1.25% By ROA

28 Noteable Leverage Measures Risk-Based Measures Basel III Now Effective Basel III - New Capital Requirements Minimum Common Equity Tier-1 ("CET1") 4.50% 4.50% 4.50% 4.50% 4.50% Capital Conservation Buffer ("CCB") % 1.25% 1.88% 2.50% Minimum Common Equity Plus CCB 4.50% 5.13% 5.75% 6.38% 7.00% Minimum Tier 1 Risk-Based Capital 6.00% 6.00% 6.00% 6.00% 6.00% Capital Conservation Buffer ("CCB") % 1.25% 1.88% 2.50% Minimum Tier 1 Risk-Based Plus CCB 6.00% 6.63% 7.25% 7.88% 8.50% Minimum Total Risk-Based Capital 8.00% 8.00% 8.00% 8.00% 8.00% Capital Conservation Buffer ("CCB") % 1.25% 1.88% 2.50% Minimum Total Capital Plus CCB 8.00% 8.63% 9.25% 9.88% 10.50% Leverage Ratio- New Tier 1 Capital/Average Assets 5.00% 5.00% 5.00% 5.00% 5.00% Capital Conservation Buffer ("CCB") Minimum Leverage Ratio 5.00% 5.00% 5.00% 5.00% 5.00% Phase-in Of Deductions & Adjustments From CET1 (including amounts exceeding the limt for DTAs, MSRs, and financials) Capital Instruments That No Longer Qualify as Non-Core Tier 1 or Tier 2 Capital 40% 60% 80% 100% 100% Grandfathered for Banks <$15B in Assets ; Phased out by 1/1/16 for Banks >$15B in Assets New Risk-Weighted Asset Calculations - Standardized Approach Effective January 1, 2015 AOCI Opt-Out Determination (upon first regulatory filing) March 31, 2015

29 Flexibility Cost $ Summary: Types of Capital Pros Cons Common Stock Permanent capital Strongest form of capital Dilutive to ownership Most expensive form of capital Time to raise Preferred Stock Tier 1 capital at holding company Flexible structures Non-dilutive to common ownership Cost Dividends are after-tax Sub Debt Senior Debt Non dilutive to ownership Down-streamed to bank as tier 1 capital; tier 2 at holding company Interest payments are tax deductible Non dilutive to ownership Down-streamed to bank as tier 1 capital Interest payments are tax deductible Not permanent capital Phase-out of capital treatment as maturity approaches Not permanent capital Not treated as capital at the holding company

30 Offering Amount (in thousands) Capital Offering Trends The most obvious trend over the last 5 years is the increasing significance of subordinated debt due to the prolonged low rate environment Preferred equity has become less prevalent at this stage of the current cycle 2015 Offering Type Breakdown Subordinated Debt 27% The amount of common equity raised has been relatively stable and continues to be the preferred capital raising vehicle Senior debt has remained relatively consistent, although senior debt is less common in community banks versus regional peers Senior Debt 11% Preferred Equity 8% Common Equity 54% $8,000 $7,000 Capital Offerings By Community 1 Banks $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ YTD Common Equity Preferred Equity Senior Debt Subordinated Debt

31 Offering Comparison Private Placement Benefits Ability to execute in expeditious manner Attractive option when capital market conditions are difficult for traditional public equity raises Greater pricing flexibility Ability to disclose greater financial detail and speak directly with selected potential investors A strong leading institutional investor likely to provide seal of approval to other potential investors In the event of termination, no public disclosure Considerations Limited pool of retail investors can be contacted May seek Board positions Public Offering Benefits Greater reach of potential investors Not forced to open up the hood for additional information disclosures Improvement in liquidity for current shareholders and increase in market capitalization Considerations Limited release of data may not be enough for institutional investors Limited pricing flexibility Valuation In the event of termination, public perception will be negatively affected Regulatory approval and due diligence costs

32 Registered vs. Unregistered Offering Pros Cons Registered Offering Pricing Broader distribution Greater liquidity More reporting More expensive More time Unregistered Offering Less reporting Less expensive Flexibility/faster execution Lack of liquidity Limited distribution

33 Liquidity Concerns The Importance of Investor Base Investor Base: Institutional Retail Pros Financial sponsorship Enhanced liquidity Strategic partners Price drivers Active investors Diversified shareholder base Lack of scrutiny Silent partners Community-based Cons Increased accountability More transparency Reduced control Lack of investors Unlikely to move stock Passive investors

34 Investor Expectations Institutional investors typically look for the following in an offering: Attractive entry valuation 15%+ internal rate of return Liquidity even in 3 to 7 years IPO, refinancing, future sale Traits investors look for: Markets Proven management teams Financial performance Strong asset quality or ability to manage asset quality issues Proven ability to grow organically Demonstrated ability to execute M&A transactions and pricing discipline Prudent capital allocation High insider ownership Post-offering expectations Successful execution of articulated strategy Open dialogue with bank management Serve as a sounding board for all transformational ideas Aggressive deployment of excess capital