Mergers & Acquisitions: A Look at New Jersey Some Come To Make It One More Day

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1 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey Some Come To Make It One More Day If you align expectations with reality, you will never be disappointed. TERRELL OWENS Bank consolidation stalled in New Jersey until the end of the second quarter with the announced acquisition of Sun Bancorp, Inc. (NASDAQ: SNBC) by in-state rival OceanFirst Financial Corp. (NASDAQ: OCFC). Only two deals were previously announced to date in 2017 but there are reasons to expect the pace to accelerate. Rising concerns that the sour political climate may delay (or even prevent) many pro-growth/business policies from being enacted should convince some banks that selling out might be the better option. Our opinion that the Jersey deal flow will pick up is also supported by rising short-term interest rates and the flatter yield curve that will likely stall earnings growth for both buyers and sellers. Due to the bank stock rally following the November 2016 elections, potential buyers generally enjoy strong currencies, which can be used to justify higher deal premiums. That said, we think some potential sellers have forgone reasonably priced transactions in 2017 in the hopes of achieving a blockbuster price at a later opportunity, while some potential buyers have simply said no. At this stage of the M&A cycle, we believe the likely buyers of Jersey banks have generally maintained their pricing discipline, to the frustration of potential sellers and their shareholders. This disparity exists mainly because sellers focus on market premiums and buyers look at potential earnings, tangible book value dilution, and earn-back periods. Because banks are sold and not bought, we consider it more likely that committed sellers will lower their pricing expectations, which will drive more deals. Despite postelection hopes that a favorable banking environment (less regulation, lower taxes, higher interest rates, etc.) would ensue, banks continue to face industrywide earnings challenges. These include net interest margin pressure, high regulatory burdens, and heavy technology costs. Along with succession issues, all these issues may be overcome through mergers. Credit quality generally remains very good. 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 and customer base, with cost savings and increasing scale as secondary considerations. continued on page 2 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 1

2 Five and six deals with Garden State sellers were announced in 2016 and 2015, respectively. New Jersey bank deals have been strategic and much smaller following the M&T Bank Corporation (NYSE: MTB) and Hudson City Bancorp merger in November Many New Jersey banks have assets less than $2 billion, and bigger in-state banks appear to be interested buyers rather than sellers. That said, there have been some recent national deals with larger sellers, which suggests that bigger bank mergers are achievable within acceptable time frames. In addition, several fairly large and recently-converted thrifts in the Garden State have the capacity to deploy excess capital through acquisitions. Highlights New Jersey has 73 regulated depository institutions, of which 42 are publicly traded banks and thrifts. Only 11 companies have assets more than $2 billion. The top five banking institutions in New Jersey combine for nearly 55% of the state s deposit market share. (Of the top 10 banks with regard to deposit market share, only Investors Bancorp Inc. [NASDAQ: ISBC] and Valley National Bancorp [NYSE: VLY] are headquartered in state.) Bank of America Corporation (NYSE: BAC) leads with 16% of the total deposit market share. Merger activity has been reasonably steady, but it has fallen a bit short of investors eager expectations. As we go to press, 120 bank and thrift deals were announced nationally (three involved New Jerseybased sellers) since January 1, There were 124 deals over the same period last year, and 243 deals for all of fiscal According to S&P Global Market Intelligence, the aggregate deal value was $17.0 billion and the median price-to-tangible book value was 159.9% for announced deals in The same metrics were $14.4 billion and 128.0%, respectively, for the same period last year. Many New Jersey banks have assets less than $2 billion, and bigger in-state banks appear to be interested buyers rather than sellers. Thus far in 2017, the number of deals has varied dramatically by state and region. For example, deals with New Jersey and New York sellers totaled three each, vs. six announced deals with Pennsylvania-based sellers. Fifteen transactions in were announced the mid-atlantic region. Other states with an outsized number of sellers in 2017 (announced) are North Carolina (eight) and Pennsylvania, Florida, Illinois, Nebraska, and Texas (six). There probably isn t a single reason why mergers occur more frequently in certain states at any given time. We theorize that one deal can spark other deals as other in-market institutions become inspired to maximize shareholder value. We surmise that out-of-state banks are put-off by the perception that New Jersey is not businessfriendly due to high taxes, strong union presence, and overbearing regulations. For example, New Jersey is the only state where pumping your own gas is illegal. Several recently converted Jersey companies have much capital to deploy in order to boost returns on equity. Among these institutions, larger thrifts with tangible capital ratios over 13% include Clifton Bancorp, Inc. (NASDAQ: CSBK), Kearney Financial Corp. (NASDAQ: KRNY), Oritani Financial Corp. (NASDAQ: ORIT), and Northfield Bancorp Inc. (NASDAQ: NFBK). Investors Bancorp, which is another highly capitalized large thrift and an experienced acquirer, appears to be sidelined as a buyer due to regulatory issues. continued on page 3 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 2

3 Table 1: Recent New Jersey Bank Deals Buyer/Target Name Status Completion Date** Deal Value ($MM) Tangible Book LTM Earnings (X) Core Deposit Premium OceanFirst Financial Corp./ Sun Bancorp Pending 06/30/ BCB Bancorp/ IA Bancorp Pending 06/07/ NM 0.2 Sussex Bancorp/ Community Bank of Bergen County Pending 04/11/ Berkshire Hills Bancorp, Inc./ First Choice Bank* Completion 12/02/ Lakeland Bancorp, Inc./ Harmony Bank Completion 07/01/ Regal Bank/ Community First Bank Completion 04/01/ NM 1.4 Northfield Bancorp, Inc./ Hopewell Valley Community Bank Completion 01/08/ Lakeland Bancorp, Inc./ Pascack Bancorp, Inc. Completion 01/07/ NexBank Capital, Inc./ College Savings Bank Completion 12/01/15 NA NA NA NA OceanFirst Financial Corp./ Colonial American Bank Completion 07/31/ NM 2.6 Spencer Savings Bank/ Assets and Liab. of NJM Bank Completion 12/05/14 NA NA NA NA Center Bancorp, Inc./ ConnectOne Bancorp, Inc. Completion 07/01/ First Bank/ Heritage Community Bank Completion 03/07/ NM 4.8 1st Constitution Bancorp/ Rumson-Fair Haven Bank & Trust Completion 02/07/ Haven Bancorp, MHC/ Hilltop Community Bancorp, Inc. Completion 11/08/ NA Wilshire Bancorp, Inc./ BankAsiana Completion 10/01/ Lakeland Bancorp, Inc./ Somerset Hills Bancorp Completion 05/31/ BCB Bancorp, Inc./ Allegiance Community Bank Completion 10/14/ Investor group/ Northern State Bank Completion 12/14/10 NA NA NA NA Kearny Financial Corp. (MHC)/ Central Jersey Bancorp Completion 11/30/ NM 7.4 Investor group/ Sun Bancorp, Inc. Completion 09/22/10 NA NA NA NA Roma Financial Corporation (MHC)/ Sterling Banks, Inc. Completion 07/16/ NM 0.0 Highlands State Bank/ Noble Community Bank Completion 12/31/ NM NM NM Valley National Bancorp/ Greater Community Bancorp Completion 07/01/ *Ambassador provided fairness opinion **Announcement date is listed for pending deals Source: S&P Global Market Intelligence continued on page 4 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 3

4 Table 2: Recent New Jersey Thrift Deals Buyer/Target Name Status Completion Date** Deal Value ($MM) Tangible Book LTM Earnings (X) Core Deposit Premium OceanFirst Financial Corp./ Ocean Shore Holding Co. Completion 11/30/ OceanFirst Financial Corp./ Cape Bancorp, Inc. Completion 05/02/ M&T Bank Corporation/ Hudson City Bancorp, Inc. Completion 11/01/15 3, NM 3.6 Glen Rock Savings Bank/ Llewellyn-Edison Savings Bank Completion 10/02/15 NA NA NA NA Cape Bancorp, Inc./ Colonial Financial Services, Inc. Completion 04/01/ NM NA Investors Bancorp, Inc. (MHC)/ Gateway Community Financial Completion 01/10/14 NA NA NA NA Investors Bancorp, Inc. (MHC)/ Roma Financial Corp. (MHC) Completion 12/06/ NM NA TF Financial Corporation/ Roebling Financial Corp, Inc. Completion 07/02/ NM 2.0 Ocean Shore Holding Co./ CBHC Financialcorp, Inc. Completion 08/01/ Investor group/ Saddle River Valley Bancorp Completion 10/27/10 NA NA NA NA BCB Bancorp, Inc./ Pamrapo Bancorp, Inc. Completion 07/06/ Investors Bancorp, Inc. (MHC)/ American Bancorp of NJ Completion 05/31/ NA ** Announcement date is listed for pending deals Source: S&P Global Market Intelligence Among the potential larger out-of-state institutions, the more logical buyers of New Jersey s community banks appear to be BankUnited (NYSE: BKU), Beneficial Bancorp (NASDAQ: BNCL), Peoples United Financial (NASDAQ: PBCT), and Webster Financial Corp. (NYSE: WBS). We believe the aforementioned list of potential acquirers is limited at the present time. BB&T and Fulton Financial (NASDAQ: FULT) appear to be sidelined due to regulatory issues; Sterling Bancorp (NYSE: STL) is occupied with its pending acquisition of Astoria Financial Corporation (NYSE: AF); and New York Community Bancorp (NYSE: NYCB) is in a holding pattern following the termination of its deal with Astoria. 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. Because banks are sold and not bought, consolidation activity is largely determined by potential sellers willingness to accept acquisition prices relative to trading values. 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. Benchmark 10-year U.S. yields have declined from postelection highs. On June 2, yields fell as much as seven basis points to 2.14%, the lowest since November 10. 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 to organic growth. continued on page 5 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 4

5 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 risks 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 because they often lack the critical mass of interest-earning assets and/or other revenue drivers to offset fixed costs. 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, as sellers have one less career path option. On June 30, 2017, Toms River-based OceanFirst Financial Corp. (NASDAQ: OCFC) agreed to acquire Sun Bancorp Inc. (NASDAQ: SNBC). The stock and cash deal was valued at $487 million, or 169% of tangible book value, 7.8x trailing 12-month earnings and 14.5x estimated 2018 earnings. The core deposit ratio was 12.7%. OceanFirst will strengthen its position as the largest bank headquartered in central and southern New Jersey and gain greater access and proximity to more robust markets within the New York and Philadelphia metro areas. On April 11, 2017, Rockaway-based Sussex Bancorp (NASDAQ: SBBX) agreed to acquire Community Bank of Bergen County (OTC Pink: CMTM). The all-stock deal was valued at $45.4 million, or 162.5% of book and tangible book value and 27.9x trailing 12-month earnings. The core deposit ratio was 6.8%. Sussex will expand into Bergen County by three branches and will rank 23rd with a 0.67% deposit market share. Companies that invest in technology and management systems should seek strategic partnerships to realize economies of scale. On January 24, 2017, Investors, which is based in Short Hills, and the Bank of Princeton (OTC Pink: BPRN) terminated their acquisition agreement. The transaction, which was valued at $155 million, would have increased Investors presence in the Philadelphia market. The Bank of Princeton has total assets of approximately $1.0 billion. On November 30, 2016, OceanFirst Financial Corp. (NASDAQ: OCFC), which is headquartered in Toms River, completed its acquisition of Ocean Shore Holding Co. The bolt-on transaction was valued at approximately $148 million and followed closely OceanFirst s acquisition of Cape Bancorp, Inc. The deal lifted OceanFirst s presence in Atlantic County with a 19.5% deposit market share. The transaction was valued at approximately 132% of tangible book value and 20x trailing 12-month earnings and the core deposit premium was 5.2%. OceanFirst Financial completed its acquisition of Cape May County-based Cape Bancorp on May 2, Shortly before agreeing to merge with OceanFirst, Cape acquired Vineland-based Colonial Financial Services, Inc., on April 1, The merger between OceanFirst and Cape was valued at approximately $205 million and significantly expanded OceanFirst s presence in southern New Jersey and several suburban Philadelphia markets. At completion, the transaction was valued at approximately 136% of tangible book value and 15x trailing 12-month earnings. The core deposit premium was 5.3% at the time of announcement. continued on page 6 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 5

6 Lakeland Bancorp (NASDAQ: LBAI) acquired Harmony Bank on July 1, 2016 and Pascack Bancorp on January 7, Based in Jackson, Harmony Bank had total assets of approximately $295 million. The transaction had an aggregate deal value of approximately $32 million and was valued at 139% of tangible book value, 21.2x trailing 12-month earnings and carried a 4.9% core deposit premium at completion. Pascack Bancorp is based in Waldwick and had total assets of $354 million. At completion, the deal was valued at 129% of tangible book value, 20.3x trailing 12-month earnings. The core deposit premium was 4.0% and the aggregate deal value was $43.8 million. On November 1, 2015, M&T Bank Corporation (NYSE: MTB) completed its acquisition of Hudson City Bancorp. The aggregate deal value was $3.8 billion and was valued at 101% of tangible book value. Ryan Walker Associate Strategic Analyst Rick Weiss Chief Bank Strategist 3rd Quarter 2017 Mergers & Acquisitions: A Look at New Jersey 6

7 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 Executive Vice President Chief Compliance Officer Arnold G. Danielson Chairman Emeritus Danielson David G. Danielson Executive Director Senior Strategic Advisor Ryan G. Epler Fixed Income Trading Heidi Frey Officer Trade Settlement & Administration Charles Gorman Associate Strategic Analyst Mike Harrison Director Strategic Advisor Karl J. Ostby Managing Director Strategic Advisor Robert J. Pachence, Jr. Co-Founder & Managing Principal Jack E. Payne, CFA, CFP Finance & Operations John Putman Director of Analytics Michael Rasmussen Managing Director Senior Strategic Advisor Matthew T. Resch, CFA Co-Founder & Managing Principal Jay Shah, CFA Vice President Strategic Analyst Eric Tesche Executive Director Senior Strategic Advisor Mark B. Trinkle Fixed Income Trading John S. Walker, Ph.D., CFA Chief Economist Ryan Walker Associate Strategic Analyst Rick Weiss Chief 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.