Mergers & Acquisitions: A Look at New Jersey

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1 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey Summary Sometimes we ride on your horses, sometimes we walk alone. The Grateful Dead New Jersey appears primed for further bank consolidation. Industrywide challenges, which include net interest margin pressure, high regulatory burdens, heavy technology costs, and succession issues may be overcome through mergers. In addition, several fairly large and recently converted thrifts in the Garden State have the capacity to deploy excess capital through acquisitions. As we go to press, seven deals with New Jersey sellers were announced thus far in 2016 vs. six deals for all of Three of this year s deals involved sellers based in the southern part of the state, which is slower growing and less affluent than northern and central New Jersey. Based on anecdotal evidence and recent transactions, the primary goal of buyers appears to be finding an institution that expands the bank s geographic franchise, with cost savings and increasing scale as secondary considerations. We believe that aggressive competition for quality loans entices banks to seek new commercial and retail customers outside traditional markets. As long as pricing discipline is maintained, this strategy is sensible given that the flattening yield curve and spotty economic conditions continue to make it difficult to grow revenue and earnings. New Jersey bank deals have been strategic and much smaller following the completion of the M&T Bank Corporation (NYSE: MTB) and Hudson City Bancorp continued on page 2 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey 1

2 merger in November Announced in August 2012, this deal apparently gave regulators more issues than the Real Housewives of New Jersey gave its viewers over the same time period. That said, the recently completed mergers between North Carolina-based BB&T Corporation (NYSE: BBT) and Pennsylvaniabased Susquehanna Bancshares and National Penn Bancshares imply that larger bank mergers are achievable within acceptable time frames. Potential sellers, moreover, are aware that attractive market premiums are being paid as stronger currencies give buyers greater ability to pursue stock deals. Valuations appear deal-friendly: larger in-state companies generally enjoy higher stock trading multiples vs. smaller institutions. Deals, however, should be smaller in size since many banks have assets less than $2 billion and bigger in-state banks appear to be interested buyers rather than sellers. Highlights New Jersey has 75 regulated depository institutions, of which 44 are publicly traded banks and thrifts. Only 11 companies have assets more than $2 billion. The top 10 banking institutions in New Jersey combine for 72% of the state s deposit market share. (Only Investors Bancorp Inc. [NASDAQ: ISBC] and Valley National Bancorp [NYSE: VLY] are headquartered in New Jersey.) Bank of America Corporation (NYSE: BAC) leads with 16% of the total deposit market share. As we go to press, 156 bank and thrift deals were announced nationally (five involved New Jerseybased sellers) since January 1, There were 167 deals over the same period, last year. Several recently converted Jersey companies have much capital to deploy in order to boost returns on equity. Among these institutions, Investors Bancorp stands out due to its size and history as a successful acquirer. Other thrifts with tangible capital ratios over 14% include Clifton Bancorp, Inc. (NASDAQ: CSBK), Kearney Financial Corp. (NASDAQ: KRNY), Oritani Financial Corp. (NASDAQ: ORIT), and Northfield Bancorp Inc. (NASDAQ: NFBK). Among the larger out-of-state institutions, the more logical buyers of New Jersey s community banks appear to be BB&T, BankUnited (NYSE: BKU), Beneficial Bancorp (NASDAQ: BNCL), New York Community Bancorp (NYSE: NYCB), People s United Financial (NASDAQ: PBCT), Sterling Bancorp (NYSE: STL), and Webster Financial Corp. (NYSE: WBS). Fulton Financial (NASDAQ: FULT) appears to be sidelined due to regulatory issues. Institutions with significant commercial real estate loan concentrations face more regulatory scrutiny. It appears that this issue has factored into the strategic planning process of a number of institutions. Considerations for potential sellers include the flattening yield curve, ongoing technology and cybersecurity costs, regulatory demands, succession planning, edgy shareholder activists, and attractive deal premiums. Potential acquirers, on the other hand, should be motivated by an opportunity to gain more customers, strong currencies, solid credit quality, more fee income sources, and an opportunity to achieve economies of scale. Depending upon the deal price, acquiring core deposits may be preferable versus organic growth. Effective cybersecurity involves much more than a one-time technology upgrade. Management and staff must exercise proper corporate governance and prove to regulators that complex operational risk issues are under control. Banks of all sizes need to upgrade risk management systems, which will drag efficiency ratios and earnings in the short run. Companies that invest in technology and management systems should seek strategic partnerships to realize economies of scale. One of the bigger cost elements related to compliance is staffing, and smaller banks, in particular, are more apt to sell as they often lack the critical mass of interest-earning assets and/or other revenue drivers to offset fixed costs. continued on page 3 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey 2

3 New Jersey Bank Deals Since 2008 Buyer/Target Name Berkshire Hills Bancorp, Inc./ First Choice Bank** Investors Bancorp, Inc./ Bank of Princeton Lakeland Bancorp, Inc./ Harmony Bank NexBank Capital, Inc./ College Savings Bank Regal Bank/ Community First Bank Northfield Bancorp, Inc./ Hopewell Valley Community Bank Lakeland Bancorp, Inc./ Pascack Bancorp, Inc. OceanFirst Financial Corp./ Colonial American Bank Spencer Savings Bank/ Assets and Liab. of NJM Bank Center Bancorp, Inc./ ConnectOne Bancorp, Inc. First Bank/ Heritage Community Bank 1st Constitution Bancorp/ Rumson-Fair Haven Bank & Trust Haven Bancorp, MHC***/ Hilltop Community Bancorp, Inc. Wilshire Bancorp, Inc./ BankAsiana Lakeland Bancorp, Inc./ Somerset Hills Bancorp BCB Bancorp, Inc./ Allegiance Community Bank Investor group/ Northern State Bank Kearny Financial Corp. (MHC)/ Central Jersey Bancorp Investor group/ Sun Bancorp, Inc. Roma Financial Corporation (MHC)/ Sterling Banks, Inc. Highlands State Bank/ Noble Community Bank Valley National Bancorp/ Greater Community Bancorp Status Completion Date* Deal Value Tangible Book LTM Earnings (X) Core Deposit Premium (%) Pending 06/27/ Pending 05/03/ Completion 07/01/ Completion 12/01/15 NA NA NA NA Completion 04/01/ NM 1.4 Completion 01/08/ Completion 01/07/ Completion 07/31/ NM 2.6 Completion 12/05/14 NA NA NA NA Completion 07/01/ Completion 03/07/ NM 4.8 Completion 02/07/ Completion 11/08/ NA Completion 10/01/ Completion 05/31/ Completion 10/14/ Completion 12/14/10 NA NA NA NA Completion 11/30/ NM 7.4 Completion 09/22/10 NA NA NA NA Completion 07/16/ NM 0.0 Completion 12/31/ NM NM NM Completion 07/01/ * Announcement date is listed for pending deals ** Ambassador provided fairness opinion. *** Ambassador acted as financial advisor and provided fairness opinion. Deals announced through September 30, 2016 Source: SNL Financial continued on page 4 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey 3

4 New Jersey Thrift Deals Since 2008 Buyer/Target Name United Roosevelt (MHC)/ Wawel Bank (MHC) United Roosevelt (MHC)/ Wawel Financial Services (MHC) OceanFirst Financial Corp./ Ocean Shore Holding Co. OceanFirst Financial Corp./ Cape Bancorp, Inc. M&T Bank Corporation/ Hudson City Bancorp, Inc. Glen Rock Savings Bank/ Llewellyn-Edison Savings Bank Cape Bancorp, Inc./ Colonial Financial Services, Inc. Investors Bancorp, Inc. (MHC)/ Gateway Community Financial Investors Bancorp, Inc. (MHC)/ Roma Financial Corp. (MHC) TF Financial Corporation/ Roebling Financial Corp, Inc. Ocean Shore Holding Co./ CBHC Financialcorp, Inc. Investor group/ Saddle River Valley Bancorp BCB Bancorp, Inc./ Pamrapo Bancorp, Inc. Investors Bancorp, Inc. (MHC)/ American Bancorp of NJ Status Completion Date* Deal Value Tangible Book LTM Earnings (X) Core Deposit Premium (%) Pending 08/29/ NM 6.6 Pending 08/29/16 NA NA NA NA Pending 07/13/ Completion 05/02/ Completion 11/01/15 3, NM 3.6 Completion 10/02/15 NA NA NA NA Completion 04/01/ NM NA Completion 01/10/14 NA NA NA NA Completion 12/06/ NM NA Completion 07/02/ NM 2.0 Completion 08/01/ Completion 10/27/10 NA NA NA NA Completion 07/06/ Completion 05/31/ NA Companies that invest in technology and management systems should seek strategic partnerships to realize economies of scale. * Announcement date is listed for pending deals Deals announced through September 30, 2016 Source: SNL Financial continued on page 5 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey 4

5 Despite more widespread shareholder activism, consolidation activity could be restrained by managements desire to remain independent for social and other reasons, rather than strictly adhering to the discipline of maximizing shareholder value. Mergers of equals often make sense financially but rarely occur due to social factors. The difficulty of forming a de novo bank probably restricts deal activity, because sellers have one less career path option. Institutions with outsized CRE loan portfolios may expect regulators to require more detailed plans to identify, measure, and monitor CRE concentrations; raise underwriting standards; slow growth; and/or to raise capital. Increased commercial real estate (CRE) loan concentration has attracted more regulatory scrutiny. Increased commercial real estate (CRE) loan concentration has attracted more regulatory scrutiny. Bank regulators, including The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the Fed), and the Federal Deposit Insurance Corporation (FDIC) have greater concerns regarding low capitalization rates and fast-appreciating property values. These agencies also noted that CRE loan underwriting standards have eased and certain risk management practices at some institutions that cause concern include a greater number of underwriting policy exceptions and insufficient monitoring of market conditions. The agencies specified supervisory criteria that they intend to focus on to reduce portfolio risk: (1) total construction, land development and other land loans representing 100% or more of total risk-based capital; (2) total CRE loans representing 300% or more of total risk-based capital; and (3) if the outstanding balance of the institution s CRE and/or construction loan portfolio increased 50% or more during the prior 36 months. Institutions with outsized CRE loan portfolios may expect regulators to require more detailed plans to identify, measure, and monitor CRE concentrations; raise underwriting standards; slow growth; and/or to raise capital. We believe that some management teams will prefer to sell the institution instead. Anecdotal evidence suggests some New Jersey institutions are slowing growth and/or tightening underwriting standards as a result. Recent sellers that considered potential loan concentration issues include Long Island-based Suffolk Bancorp (NYSE: SCNB) and First Capital Bancorp of Virginia. Rick Weiss Managing Director, Senior Bank Strategist 4th Quarter 2016 Mergers & Acquisitions: A Look at New Jersey 5

6 THE AMBASSADOR TEAM: 1605 North Cedar Crest Blvd. Suite 508 Allentown, PA (toll-free) Executive Blvd. Suite 503 Rockville, MD (toll-free) Chicago Mercantile Exchange 30 South Wacker Drive 22nd Floor Chicago, IL (toll-free) Joshua A. Albright, CFA Fixed Income Trading Allen R. Collins Managing Director, Chief Compliance Officer Arnold G. Danielson Chairman Emeritus, Danielson David G. Danielson Managing Director, Head of Investment Banking Ryan G. Epler Fixed Income Trading Heidi Frey Administrative and Trade Settlement Coordinator Charles Gorman Associate Strategic Analyst Mike Harrison Vice President Karl J. Ostby Managing Director, Investment Banking Robert J. Pachence, Jr. Co-Founder & Managing Principal Jack E. Payne, CFA, CFP Finance & Operations John D. Putman Senior Vice President Michael Rasmussen Managing Director, Investment Banking Matthew T. Resch, CFA Co-Founder & Managing Principal Jay Shah, CFA Vice President, Capital Markets Eric R. Tesche Managing Director Mark B. Trinkle Fixed Income Trading John S. Walker, Ph.D., CFA Chief Economist Ryan Walker Associate Strategic Analyst Rick Weiss Managing Director, Senior Bank Strategist The information presented is for informational purposes only. This is not an offer or solicitation to purchase or sell any security through Ambassador Financial Group, Inc., a current member of FINRA/SIPC. For more information contact us at Ambassador Financial Group, Inc. Important Disclosure: Ambassador Financial Group does and seeks to do business with companies included in this report. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of the report.