North Carolina Community Banking Forum 2014 Thursday, November 20, 2014 Grandover Resort - One Thousand Club Road, Greensboro, NC
8:30 am - 9:00 am Registration & Continental Breakfast
9:00 am - 9:05 am Welcome Jason Caskey, Financial Services Practice Leader, Elliott Davis
9:05 am - 10:00 am Investment Banking Update Bill Sammon, Managing Director, Raymond James & Associates
Bill Wagner, Managing Director, Raymond James & Associates
10:00 am - 10:50 am Issues Facing Community Bank CFOs Jason Caskey—Moderator
Terry Early, Chief Financial Officer, Yadkin Bank Tony VunCannon, Chief Financial Officer, HomeTrust Bank Kirk Whorf, Chief Financial Officer, North State Bank
10:50 am - 11:00 am Break
11:00 am - 12:05 pm Economic Update John Silvia, Chief Economist, Wells Fargo Securities, LLC
12:05 pm - 1:00 pm Lunch - Grandville A&B
1:00 pm - 1:50 pm A&A Update Garry Rank, Shareholder, Elliott Davis
1:50 pm - 2:50 pm Attorney Panel Discussion Jason Caskey—Moderator Tony Gaeta, Attorney, Wyrick Robbins Yates & Ponton, LLP Bill Lathan, Partner, Ward & Smith, PA Bob Singer, Partner, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP
2:50 pm - 3:00 pm Break
3:00 pm - 4:00 pm Empowering Your ALCO with the Tools & Critical Information for Successful Strategy Development Mark Haberland, Managing Director, Darling Consulting Group
4:00 pm - 5:00 pm Regulatory Panel Discussion Jason Caskey—Moderator
Jeff Burgess, Territory Supervisor, Federal Deposit Insurance Corporation Jim Euge, National Bank Examiner, Office of the Comptroller of the Currency Paul Frey, Supervisory Examiner, Federal Reserve Bank of Richmond Ray Grace, State of NC Commissioners of Banks
5:00 pm Adjourn Meeting
FINANCIAL SERVICES
Financial Services - 360° Industry Perspective
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elliottdavis.com © Elliott Davis LLC © Elliott Davis PLLC TM ValuCast Acquired Loan Valuation Solution Recent industry convergence in the banking industry is unprecedented, creating opportunities for banks to acquire new customers, new talent and diversify asset portfolios. When it comes to the acquired loan portfolios, evaluating fair market value as well as accounting and reporting on those assets in the new economy is essential. Effective decision-making requires swift analysis and assimilation of vast amounts of data which can be a major challenge. Elliott Davis’ Financial Services consultants help banks address and automate this process by providing a tested, transparent, efficient solution.
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Assist management in establishing general ledger accounts Help with setting up accounts required for Day 1 and ongoing Day 2 and Day 1 entries accounting POST-ACQUISITION DAY 2 ACCOUNTING Bank acquisitions involve highly complex financial and tax reporting, making Day 2 accounting critical to long-term success. Our professionals serve more than 100 banks in the Southeast and have developed a proprietary solution, ValuCastTM, to account for loans and related indemnification asset (if applicable) acquired in an acquisition.
SERVICE PROVIDED CLIENT BENEFIT Assist with accounting policies and procedures A partnership to help in some of the most complex and technical documentation, playbooks, and other documentation in accounting decisions the company will face establishing an effective control environment
Transparent and flexible model to perform ongoing Allows management to clearly identify changes in expected cash processing and recasting for future expected cash flows flows; in addition, allows management to more effectively manage significant model assumptions
Advice to management based on developing trends and Establishes information source for management related to an best practices evolving accounting methodology that is not similar to traditional banking
ValuCastTM has the following capabilities relating to ASC 310-30 Accounting: • Project future cash flows on both loan and indemnification asset • Assess loan level carrying values and accretion • Perform recast analyses • Deliver accounting packages for monthly closings • Perform sensitivity and stress testing with real time insights into cash flow projections • Provide static carrying value and accretable yield percentage projections • Customize cash flow modeling, output exhibits, and input methodology with no writing of code
WHAT WE DELIVER TO YOU Unlike other solutions, our team has developed tools that provide you with – ✔ Transparency of formulas and test models ✔ Flexibility to customize analyses ✔ Timeliness of results ✔ Stress and Sensitivity Testing to see impact of assumptions and related impacts ✔ Improved Decision-Making through accurate budgeting, planning and projections ✔ Resource Utilization due to speed and ease of analysis ✔ Ongoing Advisory on best practices, policies and procedures moving forward
Financial Services Shareholder Contact Information
Bob Beckwith, CPA Bill Bossong, CPA, CBA Jason Caskey, CPA Shareholder Shareholder Financial Services Practice Leader Direct: 864.552.4763 Direct: 803.255.1497 Direct: 803.255.1203 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Lee Haynes, CPA Andy Mitchell, CPA George Noonan, CPA Shareholder Shareholder Shareholder Direct: 704.808.5208 Direct: 864.242.2691 Direct: 704.808.5293 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Paul Pickett, CPA Christopher Purvis, CPA Garry A. Rank, CPA Shareholder Shareholder Shareholder Direct: 804.887.2256 Direct: 704-808-5216 Direct: 864.242.2638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]
Barbara Rushing, CPA Beverly A. Seier, CPA, CPCU Stacy Stokes, CPA Shareholder Shareholder Shareholder Direct: 864.242.2625 Direct: 803.255.1214 Direct: 803.255.1472 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] 2014 Community Banking Forum
Thursday November 20, 2014
© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC
Is this the new normal? A capital markets perspective
Discussion Materials | November 2014
RAYMOND JAMES FINANICAL SERVICES INVESTMENT BANKING AND FINANCIAL INSTITUTIONS SALES & TRADING Discussion Materials | November 2014 THE FUNDAMENTALS OF COMMUNITY BANKING HAVE CHANGED…
Median 2006 2014 Metrics Southeast U.S. Southeast U.S.
Assets ($000s) 133,698 104,602 201,361 166,697
ROAA (%) 1.05 1.00 0.73 0.81
ROATCE (%) 10.9 10.1 7.1 8.0
TCE / TA (%) 7.7 7.9 9.4 9.5
NPAs / Assets (%) 0.29 0.26 1.94 1.10
Efficiency Ratio (%) 64 66 74 71
NIM (%) 4.34 4.14 3.85 3.72
Loan Growth (%) 8.8 7.1 3.9 5.5
Loans / Deposits (%) 82 81 76 76
Pre-Tax Pre-LLP ROAA (%) 1.61 1.44 1.02 1.07
Note: Banks with assets under $10 billion Source: SNL Financial LC; LTM data as of December 31, 2006 and September 30, 2014 2 Discussion Materials | November 2014 ...MEDIAN RESULTS NO LONGER COMMAND A PREMIUM TO TBV
Historical Median Price to Tangible Book Value 250% 234% Interquartile Range 232% 229% Floor and ceiling of middle 50% with median indicated
200%
179% 168% 171% 173% 150% 137% 145% 135% 140% 129% 135% 133% 107% 107% 106% 100% 104% 95% 100% 95% 88%
73% 70% 74% 66% 68% 65% 50% 62% 47% 45% 44% 39%
0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 11/10/14
Note: Banks with assets under $10 billion, excludes MHCs Source: SNL Financial LC; data as of November 11, 2014 3 Discussion Materials | November 2014 WHAT WILL IT TAKE TO COMMAND A PREMIUM TO BOOK VALUE?
Commentary ROAA Required to Trade at Book Value Assuming 9% Tang Common Equity / Tang Assets • For many banks, 250%2.52.5 improvement in asset quality hasn’t led to a 15x trading price above 200%22 book value
• From an investor’s 150%1.51.5 11x perspective, earnings are ultimately why bank stocks trade 100%11 above book value (or below book value)
50%0.50.5 Price Price Tang / Book Value
• Based on a range of Price Tang / Book Value Price/ TangBook Value P/E multiples of 11x – 15x, a bank with 9.0% 0%00 TCE / TA must earn 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% between 0.60% and 0.82% ROAA in order to trade at book value ROAAROAA • However, to trade at a Historic Current healthy premium to Median P / E P / E book value (150%), a Current & Historical SNL U.S. Bank < $500M 15.2x 14.7x bank must earn Bank Stock Index SNL U.S. Bank $500M-$1B 15.1x 15.2x between 0.90% and P/E Multiples SNL U.S. Bank $1B-$5B 15.7x 18.1x 1.23% ROAA SNL U.S. Bank $5B-$10B 16.1x 17.3x SNL U.S. Bank > $10B 14.0x 13.5x
Source: SNL Financial LC; index data since January 1993; trading data as of November 13, 2014 4 Discussion Materials | November 2014 WHY SHOULD A BANK STOCK TRADE AT A PREMIUM TO TBV?
• What makes $1 of tangible book value (TBV) in a bank superior to $1 under the mattress?
• In theory, the $1 of TBV should deliver returns that the $1 under the mattress cannot
• One way investors determine how much to pay for a bank stock relative to its TBV is by comparing Price / TBV and ROATCE (or Return on Average Tangible Common Equity)
• A general rule is that every 6.5% to 7.0% of ROATCE is worth approximately 1.0x TBV (1)
• With this mind, it is logical to see that the change in industry fundamentals (lower net income and higher TCE levels) has led to lower valuation multiples for community banks
• Absent an M&A takeout premium, its difficult for investors to envision underperforming community banks generating the level of standalone profitability required to provide them with an adequate internal rate of return
• In the following examples, we use a simplified 7.0% ROATCE = 1.0x TBV approach to evaluate how much investors can pay for a bank assuming the investors seek a 15% IRR over three years
(1) Correlation supported by historical data based on Raymond James Research analysis Source: SNL Financial LC; data as of November 11, 2014 5 Discussion Materials | November 2014 INVESTORS STRUGGLE TO PAY TBV PREMIUM AND MEET IRR...
Projected Stock Price of Example Bank Corp. (0.73% ROAA) Based on 7.0% ROE = 1.0x TBV
Projected Stock Price of Example Bank Corp. It is difficult for investors to meet $23.46 $24.00 Based on 7% ROE = 1.0x TBV their desired return hurdles and pay a premium to tangible book 15.0% Growth $22.00 10.0% Growth value for today’s median bank $20.36 3.9% Growth
without strong growth. $20.00 Projected TBV - 3.9% Growth $18.63 $17.67 Example Bank Corp. $18.00 $16.93 Actual Southeast LTM Medians $15.33 $16.00 Total Assets $ 201,361 $15.39 $14.36 TCE / TA 9.4% $13.98 $14.00 $13.30 $13.42 ROAA 0.73% $12.89 Efficiency Ratio 74% $12.70 $12.42 $13.89 $13.38 LTM Loan Growth 3.9% $12.00 $12.52 $11.97 $11.65 Implied Earnings and Book Value $10.00 $10.81 Implied Tangible Common Equity $ 18,928 $10.00 Implied Net Income 1,470 $8.00 Today Year 1 Year 2 Year 3 Year 4 Year 5 Share and Per Share Values Shares Outstanding 1,892,800 ROE Year 1 Year 2 Year 3 Year 4 Year 5 Earnings Per Share $0.78 3.9% Growth 7.8% 7.5% 7.2% 7.0% 6.8% Tangible Book Value Per Share $10.00 10.0% Growth 8.2% 8.3% 8.4% 8.5% 8.6% 15.0% Growth 8.5% 9.0% 9.4% 9.9% 10.2% Based on the Projected TBV Today Year 1 Year 2 Year 3 Year 4 Year 5 projected growth above, what is the 3.9% Growth $10.00 $10.81 $11.65 $12.52 $13.42 $14.36 resulting change in 10.0% Growth $10.00 $10.85 $11.79 $12.83 $13.96 $15.22 tangible book value? 15.0% Growth $10.00 $10.89 $11.92 $13.10 $14.46 $16.02
6 Discussion Materials | November 2014 TYPES OF CAPITAL / FINANCING: COST VERSUS TREATMENT
~ 15.0%
Common Equity
Conv. Preferred Equity Non-Cum. Preferred Equity
Conv. Cost of Financing of Cost Debt
~ 5.0% Sub Debt
Senior Debt
Low / None Equity Treatment by Rating / Bank Regulatory Agencies High Discussion Materials | November 2014 CAPITAL MARKETS ALTERNATIVES – IPOS
Commentary Bank IPO Activity (1) • The capital markets 4 Number of IPOs $1,000 are supportive of Total Amount Raised ($MM) growth-oriented $800 healthy community and 3 regional banks $600 • The bank IPO market 2 continues to gain $400 strength 1 $200 • The IPO market is 1 1 0 0 0 1 1 2 0 1 3 0 0 2 3 3 3 available to smaller and less profitable 0 $0 companies than before 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 - However, valuation is impacted by size '10 2011 - Q 2012 - Q 2013 - Q 2014 - Q and profitability Bank IPOs since January 1, 2014 Company City, State Total Assets ($000s) Completion Date Amount Offered ($000s) Triumph Bancorp, Inc. Dallas, TX 1,407,072 11/6/2014 80,400 • The smaller the bank, Great Western Bancorp, Inc. Sioux Falls, SD 9,292,283 10/14/2014 331,200 Veritex Holdings, Inc. Dallas, TX 710,382 10/8/2014 40,365 the more important its C1 Financial, Inc. Saint Petersburg, FL 1,449,214 8/13/2014 46,943 Green Bancorp, Inc. Houston, TX 1,751,563 8/7/2014 80,860 growth story FCB Financial Holdings, Inc. Weston, FL 5,167,500 7/31/2014 181,280 Investar Holding Corporation Baton Rouge, LA 673,964 6/30/2014 45,994 ServisFirst Bancshares, Inc. Birmingham, AL 3,572,914 5/13/2014 56,875 • Investors’ faith in the Opus Bank Irvine, CA 3,738,887 4/15/2014 163,328 Square 1 Financial, Inc. Durham, NC 2,326,427 3/26/2014 119,670 management team can Talmer Bancorp, Inc. Troy, MI 4,741,945 2/11/2014 232,555 open and shut the door for institutions on the $500MM $2B to < $500MM > $5B size “bubble” to $2B ? $5B
(1) Bank IPOs completed since September 30, 2010 with at least $10mm raised, excludes mutual-to-stock conversions Source: SNL Financial LC 8 Discussion Materials | November 2014 CAPITAL MARKETS ALTERNATIVES – FOLLOW-ONS
Commentary Bank Follow-On Activity (1) • Capital markets have 10 Number of Underwritten Follow-Ons $800 improved significantly Total Amount Raised over the last four years 8 $600 • At the early part of the recovery, the ability to 6 issue common equity $400 was only an option for 4 larger banks $200 • As the economy has 2 improved investors 8 9 5 1 4 4 2 2 6 1 4 4 6 2 7 0 2 have become more 0 $0 willing to provide 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 common equity to community banks '10 2011 - Q 2012 - Q 2013 - Q 2014 - Q Bank Follow-Ons since January 1, 2014 • The second quarter of Company City, State Total Assets ($000s) Completion Date Amount Offered ($000s) 2014 was the most Southern First Bancshares, Inc. Greenville, SC 1,007,553 11/5/2014 17,280 Anchor BanCorp Wisconsin Inc. Madison, WI 2,121,249 10/21/2014 11,122 active quarter in the River Valley Bancorp Madison, IN 483,943 6/30/2014 19,401 Chemical Financial Corporation Midland, MI 6,338,328 6/19/2014 80,500 last few years and Signature Bank New York, NY 23,104,422 6/10/2014 297,649 Shore Bancshares, Inc. Easton, MD 1,049,514 5/20/2014 34,155 indicates there is a Banc of California, Inc. Irvine, CA 4,030,634 5/15/2014 112,288 Bankwell Financial Group, Inc. New Canaan, CT 812,055 5/15/2014 48,649 healthy market for Old Second Bancorp, Inc. Aurora, IL 2,004,034 4/3/2014 68,310 bank equities Guaranty Federal Bancshares, Inc. Springfield, MO 619,888 3/4/2014 17,250 Texas Capital Bancshares, Inc. Dallas, TX 11,714,691 1/23/2014 112,969
$500MM $2B to < $500MM > $5B to $2B $5B
(1) Bank underwritten follow-on offerings completed since September 30, 2010 with at least $10mm raised; excludes “secondary only” offerings Source: SNL Financial LC 9 Discussion Materials | November 2014 CAPITAL MARKETS ALTERNATIVES – PREFERRED
Commentary Bank Preferred Stock Offering Activity (1) • Historically, preferred Number of Preferred Offerings stock was issued mostly 12 $1,000 by larger banks and Total Amount Raised ($MM) only to a limited extent 10 $800 by community banks 8 • Without TruPS as an $600 option for Tier 1 capital, 6 preferred stock has $400 become more popular 4 as the only alternative to common equity for 2 $200 Tier 1 capital 0 4 3 3 1 2 1 2 10 7 3 1 6 1 7 1 0 • As the economy has 0 $0 improved, bank-focused 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 and other investors have created a market '10 2011 - Q 2012 - Q 2013 - Q 2014 - Q for community bank Bank Preferred Stock Offerings since January 1, 2014 preferred equity Company City, State Total Assets ($000s) Completion Date Amount Offered ($000s) Central Federal Corporation Worthington, OH 258,989 7/15/2014 12,000 MVB Financial Corp. Fairmont, WV 997,425 6/30/2014 7,834 Katahdin Bankshares Corporation Patten, ME 639,618 6/27/2014 10,000 Commerce Bancshares, Inc. Kansas City, MO 22,837,120 6/12/2014 150,000 Merchants Bancorp Gresham, OR 173,083 5/24/2014 2,200 Kinderhook Bank Corporation Kinderhook, NY 354,019 5/5/2014 7,400 Highlands Bankshares, Inc. Abingdon, VA 598,312 4/16/2014 7,169 Cordia Bancorp Inc. Midlothian, VA 235,148 4/10/2014 15,428 Golden State Bank Upland, CA 77,584 3/3/2014 10,300
$500MM $2B to < $500MM > $5B to $2B ? $5B
(1) Bank preferred offerings completed since September 30, 2010 with at least $5mm raised; excludes mandatorily convertible issuances and offerings issued under SBLF and TARP 10 Source: SNL Financial LC Discussion Materials | November 2014 CAPITAL MARKETS ALTERNATIVES – PRIVATE PLACEMENTS
Commentary Private Placements (1) • Early on, most of the 30 Number of Private Placements $1,600 capital being raised Total Amount Raised ($MM) was through private $1,400 placements and was $1,200 related to the 20 recapitalization of $1,000 distressed banks $800 • The Southeast saw a 10 $600 large number of private $400 placements given this $200 region saw a 25 23 18 12 13 8 10 16 21 7 11 15 21 11 18 12 9 significant number of 0 $0 troubled banks directly 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 related to the decline in real state activity and values '10 2011 - Q 2012 - Q 2013 - Q 2014 - Q
Private Placements since September 30, 2014 • The recapitalization Company City, State Total Assets ($000s) Completion Date Amount Offered ($000s) Umpqua Holdings Corporation Portland, OR 22,488,059 7/15/2014 763,885 phase is over, so Texas Capital Bancshares, Inc. Dallas, TX 14,266,502 6/30/2014 252,425 Banc of California, Inc. Irvine, CA 4,537,996 6/27/2014 149,848 private placements are Southern First Bancshares, Inc. Greenville, SC 1,007,553 6/12/2014 23,455 Boston Private Financial Holdings, Inc. Boston, MA 6,388,823 5/24/2014 21,007 returning to a more Regent Bancorp, Inc. Davie, FL 357,408 5/5/2014 20,000 normal level Broadway Financial Corporation Los Angeles, CA 334,684 4/16/2014 9,713 Anchor BanCorp Wisconsin Inc. Madison, WI 2,121,249 4/10/2014 9,671 Prime Pacific Financial Services Lynnwood, WA 125,961 3/3/2014 9,228
$500MM $2B to < $500MM > $5B to $2B $5B
(1) Private placements of common equity since September 30, 2010 with at least $3mm raised; excludes rights offerings and IPOs Source: SNL Financial LC 11 Discussion Materials | November 2014 CAPITAL MARKETS ALTERNATIVES – SUBORDINATED DEBT
Commentary Bank Sub Debt Activity (1) • The capital markets 9 $500 are currently very 8 Number of Sub Debt Offerings receptive to community 7 $400 bank sub debt Total Amount Raised ($MM) 6 • In Q3 2014 alone, over 5 $300 $400 million of sub 4 debt was raised $200 3 • The emergence of 2 $100 Kroll ratings for bank 1 3 0 0 0 0 3 1 4 2 3 1 3 3 2 4 8 3 has helped open up 0 $0 the sub debt markets - In particular, Kroll’s 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 BBB- ratings (or “investment grade '10 2011 - Q 2012 - Q 2013 - Q 2014 - Q but for size”) allow Bank Sub Debt Activity since June 30, 2014 Company City, State Total Assets ($000s) Completion Date Amount Offered ($000s) insurance First Community Financial Partners, Inc. Joliet, IL 917,891 10/31/2014 9,800 New Hampshire Thrift Bancshares, Inc. Newport, NH 1,483,112 10/29/2014 17,000 companies to buy Presidio Bank San Francisco, CA 483,593 10/22/2014 10,000 bank sub debt BNC Bancorp High Point, NC 3,683,230 9/25/2014 60,000 United Financial Bancorp, Inc. Glastonbury, CT 5,159,478 9/18/2014 75,000 Brookline Bancorp, Inc. Boston, MA 5,587,486 9/11/2014 75,000 Pacific Premier Bancorp, Inc. Irvine, CA 1,921,525 8/29/2014 60,000 • Larger issuers can First Business Financial Services, Inc. Madison, WI 1,306,503 8/26/2014 15,000 Eagle Bancorp, Inc. Bethesda, MD 3,914,444 7/31/2014 70,000 raise sub debt at Greer Bancshares Incorporated Greer, SC 363,296 7/23/2014 3,975 5.50% to 7.50% while Independent Bank Group, Inc. McKinney, TX 2,353,675 7/17/2014 65,000 smaller issuers are typically closer to $500MM $2B to < $500MM > $5B 7.00% to 9.00% ? to $2B $5B
(1) Bank sub debt offerings completed since September 30, 2010 with at least $3mm raised Source: SNL Financial LC 12 Discussion Materials | November 2014 SUPERIOR SIZE AND SCALE LEAD TO SUPERIOR PROFITABILITY...
Commentary Size and Scale Provide Operational Advantages • Operational metrics reveal that scale is almost linearly Return on Average Assets Efficiency Ratio 1.20% 100% correlated with performance; 1.04% 83% this correlation is expected to 0.90% 75% 0.86% 0.90% 0.82% 75% 70% 68% further drive consolidation in 64% 62% the banking industry 0.67% 0.60% 0.53% 50% • Larger banks are typically more efficient than smaller 0.30% 25% banks
• The median bank with assets 0.00% 0% <$250M $250M - $500M - $1.0B - $2.5B - $5.0B - <$250M $250M - $500M - $1.0B - $2.5B - $5.0B - between $2.5 billion and $5 $500M $1B $2.5B $5.0B $15.0B $500M $1B $2.5B $5.0B $15.0B billion requires $0.11 less in operating expense to produce Return on Avg. Tang. Common Equity Net Operating Expense (1)
$1 of revenue compared to 15.0% 3.00% 2.81%
the median bank with assets 2.44% 11.7% between $250 million and 12.0% 2.20% 2.09% 9.9% 10.3% $500 million 9.5% 2.00% 1.87% 9.0% 1.60% 7.5% • Ultimately, larger size typically results in better profitability, as 6.0% 5.3% 1.00% measured by ROAA and ROATCE 3.0%
0.0% 0.00% <$250M $250M - $500M - $1.0B - $2.5B - $5.0B - <$250M $250M - $500M - $1.0B - $2.5B - $5.0B - $500M $1B $2.5B $5.0B $15.0B $500M $1B $2.5B $5.0B $15.0B
(1) Defined as non-interest expense as a percentage of average assets minus non-interest income as a percentage of average assets Source: SNL Financial LC; data for all publicly traded banks and thrifts; reflects LTM financials for the most recent reported period 13 Discussion Materials | November 2014 ...SUPERIOR PROFITABILITY LEADS TO SUPERIOR VALUATION
Commentary Median Pricing Multiples by Asset Size
• Valuation is driven by 200% 16.0x Price / Tang. Book 195% profitability, and profitability is 191% driven by size P / 2015E
180% • Larger size alone does not 15.0x result in a better valuation
• This graph illustrates that 160% 154% 153% price to forward earnings 13.9x 14.0x 146% multiples, regardless of asset 141% 142% 13.8x size bucket, are generally in 137% 140% Price / 13.3x 13.3x the 12.5x to 14.0x range 2015E EPS 13.1x 13.2x 127% 13.0x 12.8x • However, there is an 12.7x extremely strong correlation 120% 12.6x 111% between asset size bucket 106% and price to tangible book 11.9x 12.0x 12.0x 99% value multiples 100% 91%
80% 11.0x 80%
60% 10.0x
Source: SNL Financial LC; excludes banks with total assets greater than $10 billion; data as of November 11, 2014 14 Discussion Materials | November 2014
M&A ENVIRONMENT – WHAT HAS CHANGED
Pre-Recession Environment Current Environment
• Buyers were willing to take on significant book value • Buyers are focused on managing tangible book dilution and the market was willing to accept it value dilution (10% or less) and earning back the dilution taken in a reasonable period of time (3 to 4 • Buyers were willing to take earnings per share years) dilution in the first and sometimes second year of a transaction • Buyers want meaningful and immediate earnings per share accretion (10% or more) • Sellers were willing to accept high-priced stocks trading off of future growth prospects (often young • Sellers are focused on the quality of the buyer’s banks) with limited liquidity stock (liquidity, dividend, historical performance) and that it is trading at a reasonable valuation with • Wholesale funding was accepted as a way to potential upside leverage franchise value • Wholesale funding has fallen out of favor with • Trust preferred allowed buyers to pay high prices by regulators financing some or all of the transaction with low cost debt • Trust preferred does not exist; alternative sources of capital (preferred equity, sub debt) are significantly more expensive
• Regulators want higher capital levels, comprised mostly of common equity
15 Discussion Materials | November 2014
NORTH CAROLINA SNAPSHOT
Absolute Change 9/30/2014 9/30/2013 Change (%) Bank Statistics # of Banks 69 80 -11 -13.8% Acquisitions (Closed) 11 - - - Failures 0 - - - Banks with Texas ratio > 100% 2 5 -3 -60.0%
Financial Metrics - LTM Medians ROA 0.53% 0.45% 0.08 17.8% ROE 4.41% 4.14% 0.27 6.5% TCE 10.16% 9.96% 0.20 2.0% Leverage Ratio 10.12% 10.03% 0.09 0.9% NPAs 2.09% 2.49% -0.40 -16.1% LLR / Gross Loans 1.44% 1.72% -0.28 -16.0% LTM Loan Growth 5.39% 0.38% 5.01 1317.1%
Pricing Ratios (1) Price / TBV 105% 84% 21 25.4% Price / EPS 19.9x 14.1x 5.8 41.5%
(1) Excludes companies with over $10 billion in total assets Source: SNL Financial LC 16 Discussion Materials | November 2014
M&A ENVIRONMENT – WHAT HAS STAYED THE SAME?
• Level of profitability and earnings growth are significant drivers of value • Demonstrated loan growth is critical • Diversification in loan portfolio more important than ever • Core deposits and customer relationships are key • Growth markets remain attractive • Buyers wary of seller asset quality • Fee income only valuable if it is creating bottom-line earnings • Good management with strong culture creates attractive franchises • Mergers of peers remain financially attractive but difficult to consummate
17 Discussion Materials | November 2014
CURRENT M&A ENVIRONMENT
Buyer Perspective & Issues Seller Perspective & Issues
• Increased stock price allows higher offer • Pricing improving to attractive levels prices • Some still holding onto pre-recession pricing • No need to stretch as far • No relief from interest rate and regulatory • Seller expectations are rising faster than challenges bank values • Shareholder liquidity and ability to reinstate a • Prior purchase accounting accretion fading dividend
• Asset values more stable – NPAs less of a • Market becoming more competitive for concern attractive targets
• Regulatory focus on post-merge capital • Private equity backed banks and large levels require thorough analysis community banks very interested in making acquisitions • Length of time to close deal • Double dip opportunity • Comprehensive understanding of deferred taxed on NOLs necessary • Raising capital remains expensive / dilutive
18 Discussion Materials | November 2014
M&A ACTIVITY ON THE RISE AS FAILED BANK OPPORTUNITIES DISAPPEAR
Deal Volume is Increasing 250 200 200 176 166 175 153 150 102 102 121 100 87 63 105 48 57 Number of Deals of Number 50 28 22
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
180 Banks Failures are Decreasing 157 160 140 140 120 100 92 80 60 51 40 26 24 11 17 20 4 3 4 3 Number of Bank FailuresNumberBank of 0 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note: Excludes transactions with deal value less than $10 million and equity ownership acquired less than 100% Source: SNL Financial LC 19 Discussion Materials | November 2014
ACQUISITION PRICING IS IMPROVING
Pricing is Increasing 300 30 25x 22x 23x 23x 23x 22x 23x 250 22x 21x 25 20x 18x 253 19x 200 240 246 242 231 18x 18x 20 201 186 150 168 15 147 132
100 119 129 120 124 10
Price / TBV (%) TBV / Price Price / LTM EPS / LTM Price 50 5
0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Price / TBV (Seller ROAA > 0.75) 300 25 20x 20x 21x 21x 21x 20x 19x 250 18x 20 264 279 256 17x 17x 264 258 200 15x 15x 14x 14x 201 15 201 188 150 156 153 163 138 139 147 10
100
Price / TBV (%) TBV / Price Price / LTM EPS / LTM Price 50 5
0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Note: Excludes transactions with deal value less than $10 million and equity ownership acquired less than 100% Source: SNL Financial LC 20 Discussion Materials | November 2014
LARGER BANKS ARE SELLING FOR HIGHER PRICES
Banks Under $1.0B vs. Over $1.0B 400 Assets Over $1.0B 350 346 Assets Under $1.0B 300 250 301 237 241 275 200 219 188 150 171 165 172 135 143 Price / / (%) TBV Price 129 100 125 114 122 128 50 116 87 91 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Deals Since 2008 Over / Under $1.0B in Assets % Over $1.0B 93 Deals 19%
% Under $1.0B 81% 385 Deals
Note: Excludes transactions with deal value less than $10 million and equity ownership acquired less than 100% Source: SNL Financial LC 21 Discussion Materials | November 2014
M&A PRICING TRENDS ARE IMPROVING IN THE CAROLINAS
Commentary Price / Tang. Book Value of • Initial tangible book value 200% Carolinas Transactions Since January 1, 2011 dilution, the number of 180% years required to earn back that dilution, and 160% EPS accretion are key 2014 Median 141% drivers of acquirer 140% capacity-to-pay 120% • Increased bank stock 2013 Median 100% prices have increased 100% acquirer capacity-to-pay, 2012 Median 81% leading to higher M&A 80% pricing both nationwide 2011 Median 61% and in the Carolinas 60%
• Also, improving asset 40% quality, improving earnings, lower credit 20% marks, and an overall 0% better operating environment are making sellers more valuable
• The market is becoming
more competitive as more
Jan-14 VSB - YDKN Jan-14
Mar-12 CBF - SCMF - CBF Mar-12
May-13 HTBI - - BGVF HTBI May-13 HTBI BONC - Mar-14
Mar-11 PSTB CPBK - Mar-11 FNSE - OZRK Jan-13 - SCBT FFCHFeb-13
banks are looking to grow - NCFT BNCN Jun-12
Apr-11 FNBN - GRAN FNBN Apr-11 - SCBT - PBCE Dec-11
Sep-12CPSEPTOK -
May-12 PSTB - CSBC - PSTB May-12 ECBE CRFN Sep-12 - Dec-13BNCN SSFC -
Aug-13 CRLN - Forest - CRLN Aug-13
Sep-13 NCBC - Sep-13 Select
Jun-14 BNCN - - Harbor BNCN Jun-14
May-13 BNCN - - RDBN BNCN May-13
Jun-14 FCBN - FCNCA Jun-14 Oct-14 NBBC - Premier
through acquisitions BNCN - Sep-11 Regent
Nov-13 NBBC - CapStone NBBC - Nov-13
Oct-14 FHN - TrustAtlantic FHN Oct-14 -
Dec-11 BNCN - KeySourceBNCN Dec-11 - Apr-11 Westminster - CFOK Apr-11 Comm. BNCN First Dec-13 - Note: excludes investor recapitalizations, transactions without publicly available pricing, and transactions for which price to tangible book value is not meaningful 22 Source: SNL Financial LC Discussion Materials | November 2014
Q&A
Questions?
23 Overview of Raymond James RAYMOND JAMES RECENT NATIONWIDE ADVISORY TRANSACTIONS
Has agreed to Has entered into a Has acquired Has entered into a Has entered into a Has announced a merger Has entered into a acquire nine definitive agreement Has been acquired by definitive agreement to definitive agreement to of equals with definitive agreement to branches from to acquire be acquired by be acquired by be acquired by
Park Cities Financial Group, Inc. United Bancorp, Inc. Pending Pending Pending Pending Pending Pending August 2014 July 2014
South Street Finance Corp. Has completed a merger Has acquired Has acquired of equals with Has acquired Has acquired Has been acquired by Has been acquired by Has been acquired by
United Financial Banking Companies, Inc July 2014 April 2014 April 2014 February 2014 February 2014 January 2014 January 2014 January 2014
Southern Bancshares Lakeland Bancorp, Inc. (N.C.), Inc. Mid-Wisconsin Financial Services, Inc. Has acquired Has been acquired by Has acquired Has acquired Has acquired Has sold Has merged with two branches to Bulk Sale of Classified Loans
October 2013 October 2013 July 2013 May 2013 May 2013 April 2013 March 2013 February 2013
OCEANIC BANK Palmetto Bancshares Inc. Home Federal Savings BBCN Bancorp, Inc. HPK Financial Corp. Bank Has acquired has been acquired by Has been acquired by the subsidiary of Has acquired Has been acquired by has sold two branches to Bulk Sale of HMN Financial Inc. Piedmont Community Classified Loans has sold one branch to Bank Holdings, Inc.
February 2013 January 2013 January 2013 December 2012 September 2012 July 2012 March 2012 February 2012
Note: Blue box signifies North Carolina transactions Raymond James served as financial advisor to the first institution listed in each tombstone 24
Issues Facing Community Bank CFOs
Terry Early, Chief Financial Officer, Yadkin Bank
Tony VunCannon, Chief Financial Officer, HomeTrust Bank
Kirk Whorf, Chief Financial Officer, North State Bank
© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC
Economic Outlook: Cyclical Recovery, Structural Challenges Elliott Davis NC Forum
John E. Silvia, Chief Economist November 20, 2014 Where Are We Now?
Inflation Interest Rates
Growth Five benchmarks for good decision making
Profits The Dollar
Source:
Elliott Davis NC Forum 2 Wells Fargo vs. Consensus
Expectations for the Future
. Sustained-trend growth
. Employment—cyclical and structural change
. Still cautious on consumer segments
How do we differ from . Housing improving—multifamily especially consensus? . State and local governments—still restructuring
. Unsustainable long-run fiscal policy
. Europe exits recession
. China growth stable at 7 percent plus
Elliott Davis NC Forum 3 Upswing 2H 2014: One-off or Sustained?
U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change 10% 10% GDP - CAGR: Q3 @ 3.5% 8% GDP - Yr/Yr Percent Change: Q3 @ 2.3% 8%
6% 6% Forecast 4% 4%
Following a poor start to the 2% 2%
year, GDP growth has 0% 0% rebounded smartly. Solid -2% -2% growth prospects in the years ahead. -4% -4%
-6% -6%
-8% -8%
-10% -10% 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 4 Manufacturing & Services
ISM Manufacturing & Non-Manufacturing Composite Index 65 65
60 60
55 55
50 50
Indexes on business activity 45 45 suggest an improving near-term outlook 40 40
35 35
30 ISM Non-Manufacturing Index SA: Sep @ 58.6 30 ISM Manufacturing Index SA: Oct @ 59.0 25 25 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Institute for Supply Management and Wells Fargo Securities, LLC
Elliott Davis NC Forum 5 Productivity & Income
Labor Productivity and Income Average Annual Percent Change 4.0% 4.0% Labor Productivity 3.5% Real Disposable Income Per Capita 3.5%
3.0% 3.0%
2.5% 2.5% If labor productivity growth remains weak, the paltry pace of 2.0% 2.0% real income growth that the 1.5% 1.5% country has experienced in recent years is set to continue 1.0% 1.0%
0.5% 0.5%
0.0% 0.0% 1948-1973 1974-1995 1996-2004 2005-2013
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 6 Labor Force Participation
Labor Force Growth vs. Participation Rate 16 Years and Over, SA, Year-over-Year Percent Change 68% 6%
67% 5%
66% 4%
65% 3%
64% 2%
Labor force growth has slowed 63% 1% as the participation rate has 62% 0% come down 61% -1%
60% -2%
59% -3% Labor Force Participation Rate: Oct @ 62.8% (Left Axis) 58% -4% Labor Force Growth (3-MMA): Oct @ 0.6% (Right Axis) 57% -5% 60 65 70 75 80 85 90 95 00 05 10
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 7 Small Businesses
Wells Fargo Small Business Survey & NFIB Overall Situation, NFIB Small Business Optimism 1986=100 120 115
100 110
80 105
60 100
Small Businesses: 40 95 A full recovery in small business 20 90 optimism is still distant, taxes and regulation the two big issues 0 85
-20 80
-40 Wells Fargo Overall Situation: Q3 @ 49.0 (Left Axis) 75 Small Business Optimism: Q3 @ 95.7 (Right Axis) -60 70 04 05 06 07 08 09 10 11 12 13 14
Source: National Federation of Independent Businesses, Gallup, Wells Fargo Bank and Wells Fargo Securities, LLC
Elliott Davis NC Forum 8 Manufacturing: Production and Jobs Gap
Production & Jobs in Manufacturing Sector Index, 2007=100 on Left Axis, Right Axis in Millions 120 20
NAFTA China Joins WTO 100 18
The gap between jobs and 80 16 production in the manufacturing sector has
become massive – special role of 60 14 capital and manufacturing productivity 40 12
Manufacturing Production: Sep @ 100.5 (Left Axis) Manufacturing Employment: Oct @ 12.2 Million (Right Axis) 20 10 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Institute for Supply Management, U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 9 Initial Unemployment Claims: Cyclical
Initial Claims for Unemployment Seasonally Adjusted, In Thousands 700 700 Year-over-Year Percent Change: Nov-1 @ -18.5% 650 Initial Claims: Nov-1 @ 278.0 Thousand 650 4-Week Moving Average: Nov-1 @ 279.0 Thousand 600 52-Week Moving Average: Nov-1 @ 315.5 Thousand 600
550 550
500 500 Signaling continued, moderate 450 450 job gains ahead 400 400
350 350
300 300
250 250 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 10 Employment: Structural
Unemployment vs. Employment-Population Ratio 16 Years and Over, Seasonally Adjusted 11% 57% Unemployment Rate: Oct @ 5.8% (Left Axis) Employment-Population: Oct @ 59.2% (Right Axis - Inverted) 10% 58%
9% 59%
8% 60% Structural Change: A much lower employment base 7% 61% to support growth and spending, 6% 62% especially for entitlements 5% 63%
4% 64%
3% 65% 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 11 Employment: Structural
Full Time vs. Part Time Job Growth 3-Month Moving Average, December 2007 = 100 115 115 Full Time: Oct @ 98.0 Part Time: Oct @ 111.6 110 110
105 105
Part-time employment has stabilized, while full-time jobs 100 100 continue to recover—yet still not to 2008 peak 95 95
90 90
85 85 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 12 Consumer Spending
Real Personal Consumption Expenditures Bars = CAGR Line = Yr/Yr Percent Change 8% 8%
6% 6%
4% 4% Forecast
2% 2% Faster job growth, asset appreciation and more access to 0% 0% credit are supportive to the consumer spending outlook -2% -2%
-4% -4%
-6% -6% PCE - CAGR: Q3 @ 1.8% PCE - Yr/Yr Percent Change: Q3 @ 2.3% -8% -8% 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 13 Consumer Confidence: By Income Group
Bloomberg Consumer Comfort by Income 12-Week Moving Average 80 80
70 70
60 60
50 50
Confidence improves with 40 40 income, but remains historically low across all income ranges 30 30
20 20 Income Between $25K and $39.9K: Nov-02 @ 30.3 10 Income Between $50K and $74.9K: Nov-02 @ 42.7 10 Income Between $75K and $99.9K: Nov-02 @ 45.4 Income Over $100K: Nov-02 @ 56.9 0 0 2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg LP and Wells Fargo Securities, LLC
Elliott Davis NC Forum 14 Auto Lending
New Auto Sales As Percent of Total New Auto Sales by FICO Scores 110% 110% Prime (680 and above): Aug @ 59.6% 100% Sub Prime (619 and below): Aug @ 19.7% 100%
90% Near Prime (620-679): Aug @ 20.7% 90%
80% 80%
70% 70%
There has been an increase in 60% 60% auto sales to sub and near-prime 50% 50%
buyers 40% 40%
30% 30%
20% 20%
10% 10%
0% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CNW Research and Wells Fargo Securities, LLC
Elliott Davis NC Forum 15 Auto Lending
Used Auto Sales As Percent of Total Used Sales By FICO Scores 70% 70%
60% 60%
50% 50%
40% 40% The rise in sub-prime auto sales
has been most prevalent in the 30% 30% used auto sales market
20% 20%
Prime: Aug @ 40.3% 10% 10% Near Prime: Aug @ 33.7% Sub-Prime: Aug @ 26.0% 0% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CNW Research and Wells Fargo Securities, LLC
Elliott Davis NC Forum 16 Income Growth: Rising at Different Rates
Income Growth by Quintile Percent Change from 1984 to 2012, After-Tax Income 250% 250%
200% 200%
150% 150% After-tax nominal income has
increased the most for the 100% 100% lowest and highest income households since the mid-1980s 50% 50%
0% 0% Lowest 20 Second 20 Third 20 Fourth 20 Highest 20 percent percent percent percent percent
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 17 Income Growth: Rising at Different Rates
Income Growth by Quintile Percent Change in Nominal After-Tax Income 2007-2012 8% 8%
6% 5.6% 6% 4.7%
4% 3.5% 4%
2% 2% 1.2%
Since 2007, income growth has 0% 0% been clearly concentrated in the upper quintiles -2% -2%
-4% -3.4% -4%
-6% -6% Lowest 20 Second 20 Third 20 Fourth 20 Highest 20 percent percent percent percent percent
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 18 Personal Income: Varied Sources
Personal Income Sources Transfers Rental Income Receipts on Assets Proprietors Income Supplements to Wages Wages & Salary 100% 100% 11.3% 11.2% 11.6% 90% 17.0% 15.8% 90% 0.8% 0.6% 2.0% 3.0% 4.0% 80% 15.5% 18.7% 15.6% 80% 13.0% 13.4% 70% 6.9% 70% 6.7% 8.1% 7.7% 8.7% 60% 10.2% 60% Wages and salaries make up 11.3% 11.0% 11.8% 11.2% about half of personal income as 50% 50%
transfer payments make up a 40% 40% greater share of income over 30% 30% time 55.3% 51.6% 51.7% 47.5% 46.9% 20% 20%
10% 10%
0% 0% 1980 1990 2000 2010 Past 12 Months
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 19 Household Debt Delinquencies: Student Loans the Exception
Household Debt Delinquencies Percent of Balance 90+ Days Past Due 16% 16% Credit Card: Q2 @ 7.8% Other: Q2 @ 8.2% 14% 14% Student Loans: Q2 @ 10.9% Mortgage: Q2 @ 3.4% 12% Auto: Q2 @ 3.3% 12% HELOC: Q2 @ 3.3%
10% 10% Tighter credit standards and a
strengthening economy have 8% 8% helped to improve the credit position of households over the 6% 6% past 3 years 4% 4%
2% 2%
0% 0% 03 04 05 06 07 08 09 10 11 12 13 14
Source: Federal Reserve Bank of New York and Wells Fargo Securities, LLC
Elliott Davis NC Forum 20 Business Spending
On an improving global demand outlook and diminishing fiscal policy headwinds, business leaders are becoming more comfortable with capex plans.
Large-Ticket Spending Outlook Improves Intellectual Investment Has Been Stable
Real Equipment Investment Bars = CAGR Line = Yr/Yr Percent Change Real Intellectual Property Investment 40% 40% Bars = CAGR Line = Yr/Yr Percent Change 14% 14%
30% 30% 12% 12%
20% 20% 10% 10% Forecast 8% 8% 10% 10% Forecast 6% 6% 0% 0% 4% 4% -10% -10% 2% 2%
-20% -20% 0% 0%
-30% -30% -2% -2% -4% -4% -40% -40% -6% -6% -50% Equipment Investment - CAGR: Q3 @ 7.2% -50% Intellectual Property Products - CAGR: Q3 @ 4.2% -8% -8% Equipment Investment - Yr/Yr Percent Change: Q3 @ 7.7% Intellectual Property Products - Yr/Yr Pct Chg: Q3 @ 4.5% -60% -60% -10% -10% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 21 New Orders
Nondefense Capital Goods Orders, Ex-Aircraft Series Are 3-Month Moving Averages 40% 40% 3-Month Annual Rate: Sep @ 10.4% 30% Year-over-Year Percent Change: Sep @ 7.8% 30%
20% 20%
10% 10%
0% 0%
Signs of life appeared early in -10% -10% this recovery in capital goods -20% -20% orders—now the slowdown -30% -30%
-40% -40%
-50% -50%
-60% -60% 04 05 06 07 08 09 10 11 12 13 14
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 22 Inflation & Interest Rates
Core Monetary InflationInflation Policy Interest Rates
Yield Key GrowthReal Interest Curve Drivers Rates
Profits The Dollar Wage-Price Market Spiral Expectations
Elliott Davis NC Forum 23 Inflation: Rising – Not Low
PCE Deflator vs. Core PCE Deflator Year-over-Year Percent Change 5% 5%
4% 4%
3% 3%
2% 2% Inflation remains historically low, but should pick up as 1% 1% growth accelerates and excess slack lessens 0% 0%
-1% -1% PCE Deflator: Sep @ 1.4% "Core" PCE Deflator: Sep @ 1.5% -2% -2% 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 24 Inflation
Services continue to underpin overall inflation, led by rising shelter costs as the housing market has recovered. Between 2008 and 2013, total prices are up 8.2 percent vs. 16.8 percent for medical care.
Services vs. Goods Shelter Costs
U.S. "Core" CPI - Services vs. Goods Shelter, OER & Rent Costs Year-over-Year Percent Change Year-over-Year Percent Change 5% 5% 7% 7% Shelter: Sep @ 3.0% Rent: Sep @ 3.3% 4% 4% 6% 6% OER: Sep @ 2.7%
3% 3% 5% 5%
2% 2% 4% 4%
1% 1% 3% 3%
0% 0% 2% 2%
-1% -1% 1% 1%
-2% Core Services CPI: Sep @ 2.4% -2% 0% 0% Core Goods CPI: Sep @ -0.3% -3% -3% -1% -1% 92 94 96 98 00 02 04 06 08 10 12 14 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 25 Wage Growth: Rising
Average Hourly Wages Production & Nonsupervisory Employees, 3-Month Moving Average 6% 6% Fed Begins to 5% Tighten 5%
4% 4%
Wage growth remains fairly 3% 3% tepid, but is showing signs of firming in typical cyclical fashion 2% 2%
1% 1% 3-Month Annualized Rate: Oct @ 2.0% Year-over-Year Change: Oct @ 2.3% 0% 0% 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 26 Inflation
PCE Deflator Forecast Fed Central Tendency Forecast vs. Wells Fargo Forecast 4.5% 4.5% Central Tendency Forecast Range Q4-over-Q4 4.0% Historical PCE Deflator Percent Change 4.0% Wells Fargo Economics Forecast FOMC Sept. Forecast 3.5% 3.5%
3.0% 3.0% The Fed anticipates a gradual 2.5% 2.5% 2.2% firming of inflation, but for slack 2.0% in the labor market to keep 2.0% 2.0% inflation from overshooting in 1.5% 1.5% 1.5% the medium term 1.0% 1.0%
0.5% 0.5%
0.0% 0.0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 27 Inflation vs. Yields: Negative Real Yields – Three Non-market Buyers
Inflation and the Real Yield Percent 8% 8% 5-Year Treasury Note Yield: Oct @ 1.6% Median Inflation Expect. for 5-10 Yrs: Oct @ 2.8% 7% 7% October 2013 March 2008 Debt Ceiling Bear Stearns 6% Raised 6%
5% 5%
Inflation expectations exceed 4% 4% nominal returns, suppressed interest rates, not free market 3% 3%
2% 2%
1% 1%
1990-2009 Average Median Inflation Expectation for 5-10 Years: 3.2% 0% 0% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Federal Reserve Board, University of Michigan and Wells Fargo Securities, LLC
Elliott Davis NC Forum 28 Yield Curve: Rates Rise Without Fed
Yield Curve U.S. Treasuries, Active Issues 4.5% 4.5%
4.0% 4.0%
3.5% 3.5%
3.0% 3.0%
2.5% 2.5% The Fed will continue easy 2.0% 2.0% policy in 2014—shift mid-2015? 1.5% 1.5%
1.0% 1.0% November 7, 2014 0.5% October 10, 2014 0.5% November 8, 2013 0.0% 0.0%
Source: Bloomberg LP and Wells Fargo Securities, LLC
Elliott Davis NC Forum 29 U.S. Forecast
Wells Fargo U.S. Interest Rate Forecast 2014 Actual 0 0 2014 2015 2016 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Quarter End Interest Rates 0.0 q42014 0.0 0.0 0.0 q42014 q42014 0.0 q42014 0.0 q42014 0.0 q42014 0.0 q42014 q42014 0.0 q42014 0.0 q42014 0.0 q42014 0.0
Federal Funds Target Rate 0.25 q42014 0.25 0 0.25 0.25 q42014 q42014 0.25 q42014 0.50 q42014 0.75 q42014 1.00 q42014 q42014 1.25 q42014 1.75 q42014 2.25 q42014 2.75
3 Month LIBOR 0.23 q42014 0.23 0 0.24 0.24 q42014 q42014 0.38 q42014 0.75 q42014 1.00 q42014 1.25 q42014 q42014 1.50 q42014 2.00 q42014 2.50 q42014 3.00
P rime Ra t e 3.25 q42014 3.25 0 3.25 3.25 q42014 q42014 3.25 q42014 3.50 q42014 3.75 q42014 4.00 q42014 q42014 4.25 q42014 4.75 q42014 5.25 q42014 5.75
Conventional Mortgage Rate 4.34 q42014 4.16 0 4.16 4.26 q42014 q42014 4.31 q42014 4.44 q42014 4.46 q42014 4.62 q42014 q42014 4.84 q42014 5.07 q42014 5.47 q42014 5.91
3 Month Bill 0.05 q42014 0.04 0 0.02 0.08 q42014 q42014 0.20 q42014 0.54 q42014 0.78 q42014 1.02 q42014 q42014 1.28 q42014 1.77 q42014 2.28 q42014 2.79
6 Month Bill 0.07 q42014 0.07 0 0.03 0.09 q42014 q42014 0.24 q42014 0.58 q42014 0.80 q42014 1.03 q42014 q42014 1.29 q42014 1.80 q42014 2.30 q42014 2.80
1 Year Bill 0.13 q42014 0.11 0 0.13 0.10 q42014 q42014 0.25 q42014 0.59 q42014 0.83 q42014 1.08 q42014 q42014 1.33 q42014 1.84 q42014 2.32 q42014 2.82
2 Y ear Note 0.44 q42014 0.47 0 0.58 0.53 q42014 q42014 0.66 q42014 0.98 q42014 1.18 q42014 1.39 q42014 q42014 1.61 q42014 2.09 q42014 2.57 q42014 3.06
5 Y ear Note 1.73 q42014 1.62 0 1.78 1.68 q42014 q42014 1.71 q42014 1.93 q42014 2.00 q42014 2.06 q42014 q42014 2.15 q42014 2.50 q42014 2.86 q42014 3.25
10 Year Note 2.73 q42014 2.53 0 2.52 2.45 q42014 q42014 2.50 q42014 2.71 q42014 2.79 q42014 2.86 q42014 q42014 2.96 q42014 3.32 q42014 3.57 q42014 3.75
30 Year Bond 3.56 q42014 3.34 3.21 3.31 q42014 q42014 3.39 q42014 3.57 q42014 3.60 q42014 3.66 q42014 q42014 3.74 q42014 3.95 q42014 4.05 q42014 4.20
0 0 q42014 0 0 0 q42014 q42014 0 q42014 0 q42014 0 q42014 0 q42014 q42014 0 q42014 0 q42014 0 q42014 0 Forecast as of: November 12, 2014 0 0 0 0 0 0 0 0 0 0 0
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
Elliott Davis NC Forum 30 Corporate Spreads: Positive for Issuance
Aaa and Baa Corporate Bond Spreads Over 10-Year Treasury, Basis Points 700 700 Baa Spread: Oct @ 238 Bps Aaa Spread: Oct @ 161 Bps 600 600
Bear Stearns 500 March 2008 500
400 400 Spreads have returned to a more
normal level; bond issuance is 300 300 strong
200 200
100 100
0 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 31 Investment Grade Corporate Bonds
Investment Grade Corporate Issuance 3-Month Moving Average, Billions of USD $30 $30
$27 $27
$24 $24
$21 $21
$18 $18
Businesses are taking advantage $15 $15
of low interest rates $12 $12
$9 $9
$6 $6
$3 $3 Investment Grade Corporate: Aug @ $19.8 Billion $0 $0 04 05 06 07 08 09 10 11 12 13 14
Source: IFR Markets and Wells Fargo Securities, LLC
Elliott Davis NC Forum 32 High Yield Corporate Bonds
High Yield Corporate Issuance 3-Month Moving Average, Billions of USD $50 $50 High Yield Corporate Issuance: Sep @ $23.4 Billion $45 $45
$40 $40
$35 $35
$30 $30 As investors search for yield among exceptionally low $25 $25
interest rates, bond issuance has $20 $20 gained momentum $15 $15
$10 $10
$5 $5
$0 $0 04 05 06 07 08 09 10 11 12 13 14
Source: IFR Markets and Wells Fargo Securities, LLC
Elliott Davis NC Forum 33 M&A Volume
U.S. M&A Volume and S&P 500 Index Billions of Dollars; Index $500 2000 U.S. M&A Volume: Q3 @ $476.4B (Left Axis) S&P 500 Performance: Q3 @ 1972.3 (Right Axis)
$400 1800
$300 1600
U.S. M&A and the S&P 500
remain correlated over time $200 1400
$100 1200
$0 1000 2010 2011 2012 2013 2014
Source: Thomson Reuters, Capital IQ and Wells Fargo Securities, LLC
Elliott Davis NC Forum 34 Business Lending
Commercial and Industrial Loans At Commercial Banks in the United States 40% 40%
30% 30%
20% 20%
Commercial and industrial 10% 10% lending has surged over the past quarter, helped by easier credit 0% 0% and increased demand -10% -10%
-20% -20% Year-over-Year Change: Sep @ 12.3% 3-Month Annualized Rate: Sep @ 10.9% -30% -30% 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 35 Corporate Profits: Increasing Role of Global Profits
Corporate Profits As a Percent of GDP 14% 14%
NAFTA 12% 12%
10% 10%
Profits as a percentage of GDP 8% 8% are historically high and are being boosted by profits earned 6% 6% abroad post NAFTA 4% 4%
China 2% 2% Rest of World: Q2 @ 2.3% Joins WTO Domestic: Q2 @ 9.8% 0% 0% 47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 36 Corporate Profits from Abroad
U.S. Companies listed in the S&P 500 with Greater Than 50 Percent of Sales Abroad (A Sample) . Goodyear Tire . Merck . BorgWarner . Boeing . Priceline.com . Eaton Corp. . Nike . Emerson Electric . Coca-Cola . Fluor . Heinz . GE Many U.S. companies rely on . Proctor & Gamble . 3M the health of international economies . Avon . Caterpillar . Exxon Mobil . Cisco . AFLAC . Qualcomm . Intel . Apple . Applied Materials . eBay . Oracle . IBM . Johnson & Johnson . Symantec
Elliott Davis NC Forum 37 Interest Expense
Non-Fin. Corporate Business: Corporate Interest As a Percentage of Pre-Tax Profits 120% 120% Corporate Interest: Q2 @ 17.6%
100% 100%
80% 80%
Corporate interest expenses 60% 60% remain low amid the low-rate environment 40% 40%
20% 20%
0% 0% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 38 Corporate Profit Growth
After-Tax Corporate Profit Growth Year-over-Year Percent Change, 2-Year Moving Average 35% 35%
30% 30%
25% 25%
20% 20%
15% 15%
Corporate profit growth remains 10% 10% firm—typical mid-cycle 5% 5% slowdown 0% 0%
-5% -5%
-10% -10%
-15% -15% After-Tax Profits: Q2 @ 7.3% -20% -20% 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 39 Corporate Profits: Domestic Profits
Domestic Profits Financial and Nonfinancial Corporations, Billions of Dollars $1,400 $1,400 Nonfinancial Corporations: Q2 @ $1,260.2B $1,200 Financial Institutions: Q2 @ $452.0B $1,200
$1,000 $1,000
$800 $800
Big gains in profits have been $600 $600 from nonfinancial corporations $400 $400
$200 $200
$0 $0
-$200 -$200 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 40 Housing: A New Model for Housing
U.S. Housing Starts Millions of Units 2.4 2.4
2.1 2.1
1.8 1.8
Forecast 1.5 1.5
Continued improvement 1.2 1.2 ahead—multifamily a greater share 0.9 0.9
0.6 0.6
0.3 0.3
0.0 0.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 41 Housing Demographics
Median Home Size vs. Average Household Size Square Feet; Number of Persons 2,600 2.80
2,400 2.75
2,200 2.70
Secular Shift? 2,000 2.65 Households were living in
smaller homes with more people 1,800 2.60 after the recession, but longer
term trends have won out 1,600 2.55
1,400 2.50 Median Square Footage: 2013 @ 2,384 (Left Axis) Number of Persons per Household: 2013 @ 2.54 (Right Axis) 1,200 2.45 80 84 88 92 96 00 04 08 12
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 42 Housing: Emergence of Renters as Occupants
U.S. Homeowners vs. Renters Annual Change in Occupied Units, In Thousands 2,500 2,500 Renters: 2013 @ 525.5 Thousand Homeowners: 2013 @ -76.5 Thousand 2,000 2,000
1,500 1,500
1,000 1,000 The number of renters has been accelerating steadily since 2007, 500 500
while homeowners have been 0 0 Series declining Break -500 1981 -500
-1,000 -1,000
-1,500 -1,500 66 70 74 78 82 86 90 94 98 02 06 10
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 43 Housing: Overcoming the Rise in Rates
Overview
. Housing affordability: Still historically high
. Rental costs rising faster than cost of ownership
. Consumer confidence, jobs and income rising What is the housing environment looking like now? . Negative equity declining
. Smaller families since 1982 suggests smaller homes, more apartments
Elliott Davis NC Forum 44 Housing
Negative Equity Share By State As a Percent of Mortgages Outstanding Maine 4.3% 10.4% Q2-2014 New York 5.1% 7.6% Q2-2011 Colorado 5.4% 22.5% Oregon 5.8% 21.0% Washington 6.3% 19.9% North Carolina 7.2% 14.9% South Carolina 8.0% 20.1% Negative equity in homes has Massachusetts 9.1% 16.7% contributed to foreclosures and California 9.7% 32.2% reduced labor mobility, but Virginia 10.0% 23.8% much improvement has been New Hampshire 12.0% 20.9% New Jersey seen since 3 years ago 12.8% 18.3% Maryland 13.5% 26.0% Florida 24.3% 48.3%
National 10.7% 24.8%
0% 10% 20% 30% 40% 50% 60%
Source: CoreLogic and Wells Fargo Securities, LLC
Elliott Davis NC Forum 45 Commercial Real Estate: Divergence
Apartments have seen the greatest improvement in operating fundamentals but are also seeing intense new development. The industrial market has also improved quite significantly.
Apartment Supply & Demand Industrial Supply & Demand
Apartment Supply & Demand Industrial Supply & Demand Percent, Thousands of Units Percent, Millions of Square Feet 9% 100 12% 80
8% 75 11% 60
10% 40 7% 50
9% 20 6% 25 8% 0 5% 0 7% -20
4% -25 6% -40
Apartment Net Completions: Q3 @ 47,293 Units (Right Axis) Industrial Net Completions: Q3 @ 22.6M SF (Right Axis) 3% -50 5% -60 Apartment Net Absorption: Q3 @ 37,691 Units (Right Axis) Industrial Net Absorption: Q3 @ 34.6M SF (Right Axis) Apartment Vacancy Rate: Q3 @ 4.2% (Left Axis) Industrial Vacancy Rate: Q3 @ 7.0% (Left Axis) 2% -75 4% -80 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Reis, Inc., PPR, U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 46 Commercial Real Estate
Office and retail commercial real estate have not seen the same type of improvement as apartments and industrial space, as vacancy rates remain somewhat elevated.
Office Supply & Demand Retail Supply & Demand
Office Supply & Demand Retail Supply & Demand Percent, Millions of Square Feet Percent, Millions of Square Feet 21% 30 14% 20 Retail Net Completions: Q3 @ 1.4M SF (Right Axis) Retail Net Absorption: Q3 @ 2.7M SF (Right Axis) 18% 20 12% Retail Vacancy Rate: Q3 @ 10.3% (Left Axis) 16
15% 10 10% 12
12% 0 8% 8
9% -10 6% 4
6% -20 4% 0
3% Office Net Completions: Q3 @ 5.8M SF (Right Axis) -30 2% -4 Office Net Absorption: Q3 @ 8.0M SF (Right Axis) Office Vacancy Rate: Q3 @ 16.8% (Left Axis) 0% -40 0% -8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Reis, Inc., PPR, U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 47 Fed Balance Sheet: Challenge to Asset Values
Federal Reserve Balance Sheet vs. S&P 500 Index Trillions, Index $5.5 2,200 Agencies & MBS: Nov @ $1,757.6B (Left Axis) $5.0 Treasuries: Nov @ $2,461.6B (Left Axis) 2,000 Other Securities: Nov @ $225.9B (Left Axis) $4.5 S&P 500 Index: Nov @ 2,031.6 (Right Axis) 1,800
$4.0 1,600
$3.5 1,400
We have seen a strong $3.0 1,200
correlation in the expansion of $2.5 1,000 the Fed’s balance sheet and the rise in the S&P 500 $2.0 800 $1.5 600
$1.0 400
$0.5 200
$0.0 0 2007 2008 2009 2010 2011 2012 2013 2014
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 48 Federal Government Spending: Entitlements in the Driver’s Seat
U.S. Federal Government Mandatory Outlays Trillions of U.S. Dollars, Projections Begin in 2014 $4.0T $4.0T Other Programs: 2024 @ $0.2T Income Security: 2024 @ $0.3T $3.5T $3.5T Social Security: 2024 @ $1.5T Healthcare Programs: 2024 @ $1.6T $3.0T $3.0T
$2.5T $2.5T The unfunded liabilities of the
entitlement programs reflect a $2.0T $2.0T commitment to spend in the future $1.5T $1.5T
$1.0T $1.0T
$0.5T $0.5T
$0.0T $0.0T 2013 2015 2017 2019 2021 2023
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Elliott Davis NC Forum 49 U.S. Government Debt: Who Holds Our Debt?
Top Holders of U.S. Treasuries Billions of Dollars $1,400 $1,400 Aug-12 Aug-13 $1,200 Aug-14 $1,200
$1,000 $1,000
$800 $800 Japan and China hold an unprecedented amount of U.S. $600 $600 debt $400 $400
$200 $200
$0 $0 Japan China U.K. OPEC Taiwan Caribbean
Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC
Elliott Davis NC Forum 50 Global Growth
2014 2013
Wells Fargo Blue Chip Economics Consensus Historical Global (year-over-year unless otherwise specified)
Global Real GDP 3.2% 3.6%* 3.0%
Eurozone Real GDP 0.8% 0.8% -0.4%
United Kingdom Real GDP 3.0% 3.0% 1.7%
The global recovery is being China Real GDP 7.3% 7.3% 7.7% driven by emerging markets, Japan Real GDP 0.9% 0.9% 1.5% downshift ahead Canada Real GDP 2.4% 2.3% 2.0%
Mexican Real GDP 1.9% 2.4% 1.1%
* IMF Estimate
Source: International Monetary Fund and Wells Fargo Securities, LLC
Elliott Davis NC Forum 51 Global Economies: A Strong Dollar Policy?
U.S. Dollar Index Broad Index 130 130 Mexican Peso Asian Financial Crisis Crisis 120 120
110 110
Economic fundamentals and 100 100 risks abroad will drive the dollar upward? 90 90
80 80 US$ Broad Index: Q3 @ 85.7 Long-run Average (1982-2012): 96.99 70 70 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 52 U.S. Trade Weighted Currency Indexes
U.S. Trade Weighted Currency Indexes March 1973=100 150 120
140 110
130 100
120 90 The dollar has experienced
recent strength against both 110 80 major and emerging currencies
100 70
90 60 "Other ITP" Index: Oct @ 132.7 (Left Axis) Major Currency Index: Oct @ 80.8 (Right Axis) 80 50 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Federal Reserve Board and Wells Fargo Securities, LLC
Elliott Davis NC Forum 53 Global Economies: A Strong Dollar Policy?
Euro, Pound & Yen Exchange Rates USD per Euro, USD per Pound Yen per USD 2.20 40
2.00 60
1.80 80
1.60 100
1.40 120 The euro and the pound have depreciated recently as the yen 1.20 140 continues to decline as well 1.00 160
0.80 180 Dollars per Euro: Oct @ 1.26 (Left Axis) 0.60 Dollars per Pound: Oct @ 1.61 (Left Axis) 200 Yen per Dollar: Oct @ 107.66 (Right Axis, Inverted) 0.40 220 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Bloomberg LP and Wells Fargo Securities, LLC
Elliott Davis NC Forum 54 Global Economies: A Strong Dollar Policy?
Dollar Exchange Rates: Canada & Mexico Foreign Currency per U.S. Dollar 16.70 1.45 Mexican Pesos/U.S. Dollar: Oct @ 13.48 (Left Axis) Canadian Dollars/U.S. Dollar: Oct @ 1.12 (Right Axis) 15.50 1.35
14.30 1.25
The Canadian dollar and Mexican peso have both seen 13.10 1.15 recent depreciation against the U.S. dollar 11.90 1.05
10.70 0.95
9.50 0.85 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg LP and Wells Fargo Securities, LLC
Elliott Davis NC Forum 55 Federal Fiscal Policy: When Will We Discount Future Liabilities?
U.S. Budget Gap CBO Baseline Scenario Projections, Percent of GDP 26% 26%
24% 24%
22% Avg. Outlays 22% 1973-2012 The federal government faces some significant fiscal 20% 20% challenges—the current path is not sustainable 18% 18%
Avg. Revenues 1973-2012 16% 16% Outlays: 2024 @ 22.4% Revenues: 2024 @ 18.4% 14% 14% 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Elliott Davis NC Forum 56 Federal Fiscal Policy
The composition of federal spending has shifted dramatically. The CBO projects that the debt-to-GDP ratio will reach nearly 80 percent by 2024.
Composition of Federal Spending Federal Debt Continues to Rise
Federal Spending U.S. Debt Held By The Public Percent of Total CBO Baseline Projections Begin in 2014, Percent of GDP 80% 80% Discretionary Mandatory Net Interest Baseline Debt: 2024 @ 77.2%
1970 62% 31% 7% 70% 70%
Total Spending 1970: 19 percent of GDP 60% 60%
2013 35% 59% 6% 50% 50%
Total Spending 2013: 21 percent of GDP 40% 40%
2050 18% 60% 22% 30% 30%
Total Spending 2050: 29 percent of GDP 20% 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024
Source: Congressional Budget Office and Wells Fargo Securities, LLC
Elliott Davis NC Forum 57 North Carolina North Carolina – Labor Market
North Carolina’s unemployment rate has plummeted over the past year, but has recently seen a slight uptick
Employment Unemployment
North Carolina Nonfarm Employment North Carolina vs. U.S. Unemployment Rate 3-Month Moving Averages Seasonally Adjusted 6% 6% 12% 12% North Carolina: Sep @ 6.7% 4% 4% United States: Oct @ 5.8% 10% 10% 2% 2%
0% 0% 8% 8%
-2% -2%
6% 6% -4% -4%
-6% -6% 4% 4% 3-Month Annual Rate: Sep @ 3.3% -8% -8% North Carolina: Sep @ 2.2% Household: Yr/Yr Pct. Change: Sep @ 0.6% -10% -10% 2% 2% 90 92 94 96 98 00 02 04 06 08 10 12 14 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 59 North Carolina – Labor Market
North Carolina has seen broad-based employment gains. Stronger job growth has led to increased population growth.
Employment Population Growth
North Carolina Employment Growth By Industry North Carolina Population Growth Year-over-Year Percent Change, 3-MMA In Thousands 240 240 Total Nonfarm September 2014 Trade, Trans. & Utilities 200 200 Government More Educ. & Health Services 160 160 Prof. & Bus. Svcs. Number of Employees Manufacturing 120 120
Leisure and Hospitality Less
Financial Activities 80 80
Construction 40 40 Other Services
Information 0 0 -4% -2% 0% 2% 4% 6% 8% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: U.S. Department of Labor , U.S. Department of Commerce and Wells Fargo Securities, LLC
Elliott Davis NC Forum 60 North Carolina – Labor Market
Raleigh, Charlotte and Wilmington lead the state in employment growth
Employment Unemployment
North Carolina Job Growth North Carolina Unemployment Rates Year-over-Year Percent Change, Not Seasonally Adjusted Not Seasonally Adjusted
Raleigh 3.2% Fayetteville 7.1%
Wilmington 2.8% Greensboro 6.3%
Charlotte 2.6% Charlotte 6.2% North Carolina: Asheville 2.4% Wilmington 6.0% Sep @ 7.0%
Durham 1.9% Winston 5.6%
North Carolina: Winston 0.9% Durham 4.9% Sep @ 2.2%
Greensboro 0.6% Raleigh 5.0%
Fayetteville 0.2% Sep-14 Asheville 4.6% Sep-14
0.0% 1.0% 2.0% 3.0% 4.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 61 North Carolina
North Carolina Employment Growth: Sept. 2014 3-Month Moving Averages
1.5% Recovering Expanding Jacksonville Asheville
Raleigh-Cary 1.0% Durham- Chapel Hill Wilmington Charlotte
0.5% Winston-Salem Burlington
Greensboro 0.0%
Hickory Month Percent Change MonthPercent -
3 Population Size -0.5% Less than 200,000 200,000-500,000
Fayetteville More than 500,000 Contracting Decelerating -1.0% -1% 0% 1% 2% 3% 4% 5%
Year-over-Year Percent Change
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 62 North Carolina
North Carolina Employment Growth by Industry 3-Month Moving Averages, September 2014 10% Recovering Expanding
8% Financial Information Activities
6% Other Services
4% Educ. & Health Svcs. Construction Manufacturing 2% Trade, Trans. & Government Utilities 0% Percent of Total Employees Leisure and Less than 5% Month Annualized Percent Change MonthAnnualized Percent - Hospitality 5 % to 10% 3 -2% More than 5%
Contracting Decelerating -4% -1% 0% 1% 2% 3% 4% 5% 6% 7% Year-over-Year Percent Change
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Elliott Davis NC Forum 63 North Carolina – Housing Market
Home prices have picked up in past months, and are now close to their prerecession peak
Housing Permits Home Prices
North Carolina Housing Permits CoreLogic HPI: NC vs. U.S. Thousands of Permits, Seasonally Adjusted Annual Rate Index, 2000=100, Not Seasonally Adjusted 120 120 220 220 Single-Family: Sep @ 35,796 United States: Aug @ 175.0 Single-Family, 12-MMA: Sep @ 34,520 200 North Carolina: Aug @ 138.7 200 100 Multifamily, 12-MMA: Sep @ 15,502 100 Single-Family Average (1998-2003): 62,968 180 180
80 80 160 160
140 140 60 60 120 120
40 40 100 100
80 80 20 20 60 60
0 0 40 40 90 92 94 96 98 00 02 04 06 08 10 12 14 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: U.S. Department of Commerce, CoreLogic and Wells Fargo Securities, LLC
Elliott Davis NC Forum 64 Outlook Risks
Potential Challenges to the Outlook
. Fitful Fed exit brings questions for the dollar, inflation and interest rate outlook/ volatility/ confidence
. Fiscal policy: tax increases and/or spending cuts face unsustainable long-run outlook
What are the primary risks to . Housing: able to sustain growth on its own if rates the outlook? rise?
. European debt crisis weighs on global growth and global credit stagnation over the long-run
. China/global trade weakness hits U.S. exports, foreign earnings of U.S. corporations
. Ebola: Unknown unknown. The unquantifiable risk
Elliott Davis NC Forum 65 U.S. Forecast
Wells Fargo U.S. Economic Outlook
Actual Forecast Actual Forecast 2014 2015 2012 2013 2014 2015 2016 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Real Gross Domestic Product 1 -2.1 4.6 3.5 1.6 2.4 2.6 2.8 2.9 2.3 2.2 2.2 2.7 3.0 Personal Consumption 1.2 2.5 1.8 2.5 2.5 2.6 2.5 2.6 1.8 2.4 2.2 2.4 2.6
Inflation Indicators 2 PCE Deflat or 1.1 1.6 1.5 1.4 1.4 1.3 1.5 1.9 1.8 1.2 1.4 1.5 2.0 Consumer Price Index 1.4 2.1 1.8 1.5 1.5 1.3 1.6 2.2 2.1 1.5 1.7 1.7 2.4
Industrial Production 1 3.9 5.5 3.2 5.9 5.0 4.9 4.9 4.9 3.8 2.9 4.1 5.0 4.2 Corporate Profits Before Taxes 2 -4.8 0.1 3.8 4.0 4.1 4.2 4.4 4.5 11.4 4.2 0.9 4.3 3.4 Trade Weighted Dollar Index 3 76.9 75.9 81.3 82.5 83.0 83.8 84.5 85.5 73.5 75.9 79.1 84.2 87.2 Une mplo y me nt Ra t e 6.7 6.2 6.1 5.8 5.7 5.6 5.5 5.4 8.1 7.4 6.2 5.6 5.2 Housing Starts 4 0.93 0.99 1.02 1.00 1.06 1.13 1.21 1.24 0.78 0.92 1.01 1.16 1.26
Quarter-End Interest Rates 5 Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 0.25 0.25 0.25 0.63 2.00 Conventional Mortgage Rate 4.34 4.16 4.16 4.26 4.31 4.44 4.46 4.62 3.66 3.98 4.23 4.46 5.32 10 Year Note 2.73 2.53 2.52 2.45 2.50 2.71 2.79 2.86 1.80 2.35 2.56 2.71 3.40 Forecast as of: November 12, 2014 1 Compound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage Change 3 Federal Reserve Major Currency Index, 1973=100 - Quarter End 4 Millions of Units 5 Annual Numbers Represent Averages
Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, Freddie Mac and Wells Fargo Securities, LLC
Elliott Davis NC Forum 66 Appendix Wells Fargo Economics Group Publications
Recent Special Commentary
Date Title Authors U.S. Macro Oc tober-30 U.S. Economy Grew at a Solid Pace in Q3 2014 Bryson Oc tober-29 Income Growth: The Taxman Cometh Silvia & Nelson Oc tober-23 Corp. Profits: Reward, Incentive & That Standard of Living Silvia Oc tober-23 Hourly Earnings Underperform - As an Indicator of Spending Silvia & House
U.S. Regional November-03 Florida Ec onomic Outlook: November 2014 Vitner, Wolf & Moehring Oc tober-17 California Employment Conditions: September 2014 Vitner & Wolf Oc tober-17 Texas Payrolls Charge Ahead Vitner & Wolf To join any of our research Oc tober-17 Florida Payrolls Push Higher Vitner & Wolf
distribution lists please visit our Global Economy website: Oc tober-31 Taiwan GDP Growth Edges Up in Q3 Bryson & Griffiths Oc tober-31 BoJ Eases Again Despite Positive Growth in Q3 Bryson http://www.wellsfargo.com/ Oc tober-28 Swedish Riksbank Cuts Rates to Zero Percent Bryson economics Oc tober-27 U.K. GDP Growth Slows in Line With Expectations Bryson & Griffiths
Interest Rates/Credit Market Oc tober-29 FOMC: So Begins the Era of Normalizing Interest Rates Silvia & Miller Oc tober-29 Esc ape from Alc atraz: Ending Financ ial Repression Silvia, Vitner & Brown Oc tober-14 Support for Economic Growth: Bank Lending Improves Silvia & Griffiths Oc tober-08 Federal Deficits Expected to Grow Along with Higher Rates Silvia, Vitner & Brown
Real Estate November-05 Housing Data Wrap-Up: October 2014 Vitner & Khan Oc tober-31 Nonresidential Construction Recap: October Khan Oc tober-28 The S&P Case-Shiller HPI Moderates in August Vitner & Moehring Oc tober-27 Pending Home Sales Edge Higher Vitner & Moehring
Elliott Davis NC Forum 68 Wells Fargo Securities, LLC Economics Group
Global Head of Research and Economics Economists Azhar Iqbal, Econometrician………………… ……………[email protected] Diane Schumaker-Krieg ………………… ………[email protected] Global Head of Research & Economics Tim Quinlan, Economist …………………… ……………[email protected]
Eric J. Viloria, Currency Strategist [email protected] Chief Economist Sarah Watt House, Economist …………… …………[email protected]
John E. Silvia … ...... … [email protected] Michael A. Brown, Economist ……………… … [email protected]
Michael T. Wolf, Economist ………………… … [email protected] Senior Economists
Economic Analysts
Mark Vitner, Senior Economist……………....………. . [email protected] Zachary Griffiths, Economic Analyst [email protected] Mackenzie Miller, Economic Analyst [email protected] Jay H. Bryson, Global Economist …………………....…… …[email protected] Erik Nelson, Economic Analyst [email protected] Sam Bullard, Senior Economist [email protected] Alex Moehring, Economic Analyst [email protected] Nick Bennenbroek, Currency Strategist ……[email protected] Administrative Assistants Eugenio J. Alemán, Senior Economist… …………[email protected] Donna LaFleur, Executive Assistant. [email protected] Anika R. Khan, Senior Economist … . [email protected] Cyndi Burris, Senior Administrative Assistant [email protected]
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2014 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.
Elliott Davis NC Forum 69 2014 Community Banking Forum
Thursday November 20, 2014
© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC
Attorney Panel Discussion
Tony Gaeta, Attorney, Wyrick Robbins Yates & Ponton, LLP
Bill Lathan, Partner, Ward & Smith, PA
Bob Singer, Partner, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP
© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC
Complete ALM Solutions Empowering Your ALCO with the Tools & Critical Information for Successful Strategy Development North Carolina Community Banking Forum
November 20, 2014 Mark A. Haberland, Managing Director [email protected]
Page 1 Key Take Aways
Understand your true long-term interest rate risk profile
Bank-specific assumptions provide the most accurate profile Regulatory focus Requires time, resources and $$ to derive
ALCO’s focus should be on forward-looking strategies, not historical review Manage risk Maximize earnings
Page 2
Identifying True Risk Profile
Page 3 Profit Margins Declining
Page 4 Economic Value of Equity Long and Short of It
RATE SHOCK SCENARIOS
Book Value -100BP 0 Shock +100BP +200BP +300BP +400BP ASSETS Investments 406,471 412,854 406,399 398,487 390,739 383,256 376,059
Loans 2,029,532 2,075,769 2,043,546 1,999,157 1,956,987 1,917,306 1,879,243
Other Assets 91,735 91,735 91,735 91,735 91,735 91,735 91,735
TOTAL ASSETS (EVA) 2,527,738 2,580,359 2,541,680 2,489,379 2,439,462 2,392,297 2,347,038 % Chg from 0 Shock -0.55% 1.52% -2.06% -4.02% -5.88% -7.66%
LIABILITIES Non Maturity Deposits 1,586,719 1,576,656 1,517,102 1,481,884 1,449,166 1,418,911 1,390,594
Time Deposits 531,026 537,991 534,438 528,581 522,868 517,294 511,856
Borrowings 157,323 161,477 157,974 153,990 150,135 146,403 142,790
Other Liabilities 16,567 16,567 16,567 16,567 16,567 16,567 16,567
TOTAL LIABILITIES (EVL) 2,291,635 2,292,690 2,226,082 2,181,023 2,138,737 2,099,176 2,061,806 % Chg from 0 Shock 2.94% 2.99% -2.02% -3.92% -5.70% -7.38%
ECONOMIC VALUE OF EQUITY (EVE) 236,103 287,669 315,598 308,356 300,725 293,121 285,231
% Chg from 0 Shock -8.8% -2.3% -4.7% -7.1% -9.6% Policy Limits -15.0% -15.0% -25.0% -30.0%
EVE Ratio (EVE/EVA) 9.34% 11.15% 12.42% 12.39% 12.33% 12.25% 12.15%
BP Chg from 0 Shock -127 -3 -9 -16 -26
Page 5
Economic Value of Equity Long and Short of It
RATE SHOCK SCENARIOS
Book Value -100BP 0 Shock +100BP +200BP +300BP +400BP ASSETS Investments 406,471 412,854 406,399 398,487 390,739 383,256 376,059
Loans 2,029,532 2,075,769 2,043,546 1,999,157 1,956,987 1,917,306 1,879,243
Other Assets 91,735 91,735 91,735 91,735 91,735 91,735 91,735
TOTAL ASSETS (EVA) 2,527,738 2,580,359 2,541,680 2,489,379 2,439,462 2,392,297 2,347,038 % Chg from 0 Shock -0.55% 1.52% -2.06% -4.02% -5.88% -7.66%
LIABILITIES Non Maturity Deposits 1,586,719 1,576,656 1,517,102 1,481,884 1,449,166 1,418,911 1,390,594
Time Deposits 531,026 537,991 534,438 528,581 522,868 517,294 511,856
Borrowings 157,323 161,477 157,974 153,990 150,135 146,403 142,790
Other Liabilities 16,567 16,567 16,567 16,567 16,567 16,567 16,567
TOTAL LIABILITIES (EVL) 2,291,635 2,292,690 2,226,082 2,181,023 2,138,737 2,099,176 2,061,806 % Chg from 0 Shock 2.94% 2.99% -2.02% -3.92% -5.70% -7.38%
ECONOMIC VALUE OF EQUITY (EVE) 236,103 287,669 315,598 308,356 300,725 293,121 285,231
% Chg from 0 Shock -8.8% -2.3% -4.7% -7.1% -9.6% Policy Limits -15.0% -15.0% -25.0% -30.0%
EVE Ratio (EVE/EVA) 9.34% 11.15% 12.42% 12.39% 12.33% 12.25% 12.15%
BP Chg from 0 Shock -127 -3 -9 -16 -26
Page 6
EVE Analyses
Conflicting Perspectives Regulatory Bank
2.5 Yrs 7.5 Yrs
Page 7 Perform a Deposit Study to ObtainSimulation: Bank-Specific Time Assumptions Horizon
Deposit Study Average Life Assumptions Economic Value of Equity Model Decay & Average Life
Core Non-Core Account Percent* Percent** Decay Rate Avg Life DDA 96.56% 3.44% 13.40% 5.77 MMDA 97.71% 2.29% 7.70% 7.86 MMDA - Access Plus 97.46% 2.54% 8.75% 7.41 NOW 97.49% 2.51% 11.55% 6.39 NOW - IOLTA 81.97% 18.03% 9.26% 6.07 NOW - Other 81.72% 18.28% 19.66% 3.63 NOW - Platinum 96.02% 3.98% 8.58% 7.36 Public Savings 37.03% 62.97% 0.00% 4.79 Public Savings - State Treasurer 100.00% 0.00% 0.00% 12.50 Savings 97.19% 2.81% 12.85% 5.97 Savings - Brokered 78.44% 21.56% 0.00% 9.86 Savings - Other 96.09% 3.91% 17.59% 4.69 Savings - Platinum Blue High Rat 82.16% 17.84% 5.47% 7.50 Savings - Platinum Blue HY 95.41% 4.59% 20.19% 4.14 Savings - Platinum Blue HY Busin 92.40% 7.60% 8.20% 7.24 Savings - Preferred Business 76.90% 23.10% 16.68% 3.93 Savings - Premium 97.48% 2.52% 23.74% 3.62 Savings - Premium Business 92.40% 7.60% 6.07% 8.13 Savings - Top Rate Business 30.24% 69.76% 0.00% 3.95 *Based on 12/31/2013 deposit study *Use 12.5Y Final Decay for Core Funds **Use 6 Month Final Decay and 3 Month Avg Life for Non-Core Funds
Page 8 EVE Analyses
What is Your Exposure to Rising Rates?
2.5 Yrs 5.6 Yrs 7.5 Yrs (Deposit Study)
Page 9 EVE is NOT a Useful Indicator Simulation:of Interest Rate Time Risk HorizonExposure
What is Your Exposure to Rising Rates?
Page 10 And the Funny Thing is. . .
Net Interest Income ($000) 16,400
14,625
12,850
11,075
9,300
7,525 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP
No matter the life assumption for EVE – same NII result!!!
Page 11
Often Times Your RiskSimulation: Management Time Tools HorizonDisagree
Earnings at Risk Value at Risk EVE Ratio (EVE/EVA) 14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Page 12 Analyzing Your Risk Profile
NII simulations provide the most complete analysis of your
interest rate risk profile, but rely heavily on: Net Interest Income ($000) 16,400 Quality of data inputs 14,625 Utility of scenarios reviewed 12,850
Assumptions 11,075
9,300 Backtesting of model
7,525 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Stress testing of key assumptions Base Down 100BP Up 200BP
How results are presented to decision makers
. Simulation horizon
Page 13
Net InterestSimulation: Income Simulation Time Horizon – 1Year
One Year NII Simulations Are Insufficient
Quick Conclusions 1. Worst Case Rising Rates 2. Margin Pressure Sustained Beyond Year 1 3. Margin Pressure Worsens Beyond Year 1
Page 14 Net InterestSimulation: Income Simulation Time Horizon – 5 Year
Managing Planning Horizon Horizon
Page 15 Other Scenarios: Rate Shocks Instantaneous Rate Movements
SHOCK ANALYSIS Net Interest Income ($000) 11,750
10,300
8,850
7,400
5,950
4,500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Shock Down 100BP Shock Up 100BP Shock Up 200BP Shock Up 300BP Shock Up 400BP
Page 16
MONTHLY Changes in Fed Funds…Since 1970
Avg. Monthly Change in Fed Funds (1970-2010) = 30bps
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7 Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-06 Jan-08 Jan-10 Jan-02 Jan-04
Page 17 Extraordinary Rate Shifts (e.g. +400bp over 24mos)
Net Interest Income ($000)
2,554
2,354
2,154
1,954
+400bp Parallel Rate Shifts 1,754
1,554
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Flat Up 500BP Page 18
Flattening of the Yield Curve (Back to 2007)
Net Interest Income ($000)
2,554
2,354
2,154
1,954
1,754
1,554 Up 500bp w/ Flattening Curve Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Flat Up 500BP Page 19
“Yield Curve Twist” Scenario
4.50
4.00
3.50
3.00 3. Curve Flattens in Months 19-36 as Fed Tightens: Short end up 3.75% 2.50
2.00 2. Curve Steepens 1.50 Over Next 18 Months as 2015 Fed Target for 1.00 Tightening Nears: Long end up 1% 0.50 1. Current Rates
0.00 3mo 6mo 1yr 2yr 3yr 5yr 10yr Oct 2014 CMT Rates Apr 2016 (18 Months) Oct 2017 (36 Months)
Page 20 Yield Curve Twist vs. Other Rising Rate Ramp Scenarios
Yield Curve Twist Net Interest Income ($000) 11,075
Less actual rising rate Great earnings risk due to timing of 3- 10,000 environment as curve 5 year loan resets steepens
8,925
7,850
6,775
5,700 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Up 200BP Up 400BP 24M Flat Up 500BP Yield Curve Twist
NII SUMMARY
Base Up 200BP Up 400BP 24M Flat Up 500BP Yield Curve Twist
Year-1 NII 31,431 29,726 29,732 28,966 31,708
Year-2 NII 31,128 30,754 29,082 26,744 32,043
Year-3 NII 31,150 33,277 32,507 29,071 30,045
Year-4 NII 31,364 35,417 37,058 32,952 31,020
Year-5 NII 31,790 36,884 39,958 35,015 32,315
Yield curve steepens over the first 18 months (10Y CMT = 3.75%) and flattens over months 19-36 to the average slope from 2005-2007 (Fed Funds targeted @ 4.00%).
Page 21 Identifying True Risk Profile
Simulations provide most accurate risk profile
Identify timing and degree of sensitivity
Gauge exposure under a variety of rate scenarios
Dependent upon inputs (data, assumptions) and must focus on right information when developing strategies
Assumptions have a HUGE impact!
Page 22
Bank-Specific Assumptions
Page 23 Critical Model Assumptions
1. Deposit sensitivity/lives
2. Replacement/new volume
3. Prepayment
They Should Be Stress Tested Regularly
Page 24 Prepayment Assumptions
Page 25 New Volume Assumptions: Loans
Page 26 New Volume Assumption: Loans
Page 27 Deposit Assumptions
Key assumptions: Rate sensitivity factors or “betas” . Rates paid on non-maturity deposits (NMD) have greatest impact . Rising and falling not likely symmetrical Core versus “hot” money . Potential disintermediation or shift due to changing market conditions . Particularly important under rising rates Retention/decay on non-maturity deposits . Potential cash flows from non-maturity . Needed for valuation analysis (EVE)
Critical to formulate reliable deposit assumptions, perform deposit studies and stress test results!
Page 28 Non-Maturity Deposits…Key Assumptions
Potential for Reductions in NMD Balances (“Surge,” “Parked,” etc.) Disintermediation (leave “banking” system) Migrate/Shift Back to CDs Public Funds Etc. Sensitized Customers (“Smarter”/More Aware/Less Loyal?)
Important Consideration: > “Normal” Growth Can be “CORE” Local Market Bank Failures/Troubled Institutions In-Market Mergers (Large and/or Out-of-Market Banks) Some Simply DO BETTER JOB @ Increasing Market Share
Page 29 Validating Deposit Assumptions
“Core deposit study” Internal or externally performed Many different flavors Higher cost <> more accurate results Can provide meaningful information…but Will NOT provide answers with any certainty Analyzing historical activity can tell you a lot Balances, rates, # of accounts, open/closed activity Provides perspective – can serve as reference point Should relate quantitative results with qualitative experience No single right answer – range of possible outcomes Too many influencing factors Applying “optimistic” and “pessimistic” assumptions is best practice
Page 30 Validating Deposit Assumptions
MMDA - Personal MMDA - Personal Balances & Rates MMDA - Personal Opened and Closed 300 6 35,000 800 700 250 5 30,000 25,000 600 200 4 500 20,000 150 3 400 Millions 15,000 300 100 2 10,000 200 50 1 5,000 100 0 0 0 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Balance Rate LIBOR Count Opened Closed
Per Acct Balances Vs Spread to LIBOR, MMDA - Personal Market Values, MMDA - Personal 12 8 300,000 10 6 250,000 4 8 200,000 2 6 150,000 0 Thousands
4 Thousands -2 100,000 2 -4 50,000
0 -6 0 -400 -300 -200 -100 0 100 200 300 400 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Dec-01 Dec-03 Dec-04 Dec-06 Dec-07 Dec-09 Dec-10 Dec-11 Dec-12 Dec-02 Dec-05 Dec-08 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Per Acct Balance Rate LIBOR Spread Market Value
Beta Estimates Account Information Baseline 12 Mo. Scenario Valuation Rising Type Balance Rate Func. Cost Scenario Value Premium Prem% Full Rising Cycle 437bp Increase from March 2004 - June 2006 MMDA - Personal 260,565,421 0.13% 0.86% -400 269,511,795 -8,946,374 -3.4% Beta R-Sq Beta Sign R-Sq Rank Func Res Reason -300 269,511,795 -8,946,374 -3.4% 35% 98% 1 High Yes High R-Squared Decay Estimates -200 265,317,231 -4,751,810 -1.8% Falling Baseline Stress -100 256,437,797 4,127,624 1.6% Full Falling Cycle 537bp Decrease from August 2007 - December 2009 12Mo 14.1% 12Mo 14.4% 0 246,171,150 14,394,271 5.5% Beta R-Sq Beta Sign R-Sq Rank Func Res Reason 36Mo 13.4% 36Mo 15.1% 100 240,062,281 20,503,140 7.9% 31% 90% 1 High Yes High R-Squared 200 234,440,502 26,124,919 10.0% 300 229,259,554 31,305,867 12.0% Volatility 400 224,477,968 36,087,453 13.8% Non-Core % Core % Non-Core $ Core $ Baseline 12 Mo. 1.4% 98.6% 3,668,221 256,897,200 Average Lives Baseline 36 Mo. 2.0% 98.0% 5,261,411 255,304,010 Baseline Stress Stress 12 Mo. 4.5% 95.5% 11,763,139 248,802,283 12Mo 5.7 12Mo 5.4 Stress 36 Mo. 6.1% 93.9% 15,815,559 244,749,862 36Mo 5.9 36Mo 4.2 Page 31 The Future of Deposit Analysis – GET INTO THE DATA
Page 32 Stress-Testing Recommendations
Quarter 1 (As of date: January, February, March) Option Risk Stress Test – Alternative prepayments in various rate environments.
Quarter 2 (As of date: April, May, June) Asset Pricing/Mix Stress Test – Alternative product pricing and/or mix in different rate simulations (e.g. asset spreads, investment mix, etc.).
Quarter 3 (As of date: July, August, September) Deposit Sensitivity Stress Test – Retail deposit migration, alternative elevated betas, etc.
Quarter 4 (As of date: October, November, December) Alternative EVE Stress Test – Significant changes to non-maturity deposit average life assumptions.
Page 33 Stress Testing Example – NMD Migration
Page 34 Stress Testing Example – Alt NMD Pricing
Identifying risk exposure drives strategy development
Page 35 Liquidity
Must be measured and monitored closely
Page 36 How Much Liquidity Do We Have?
Liquidity Defined
“the ability to raise cash quickly with minimal principal loss and at a reasonable cost.”
Page 37 Liquidity Funds Management Process
Plan Needs to Include Balance Sheet Liquidity • Cash and Securities
Just in Time Inventory • FHLB
Strategic Reserve • Brokered CDs
Catastrophe Insurance • FRB
Contingency Liquidity Policy/Plan •What if/Stressed Scenarios •Pre-Emptive Funding Gameplan(s)
Page 38 Detailed Liquidity Analysis: The Basic Surplus Approach
I. LIQUID ASSETS
Overnight Funds Sold & Short-Term Investments (avg. balance, if wide daily fluctuations) 51,809 TOTAL ASSETS = Short2 Term
UST & Agency MBS / CMOs / ABS Cash Investments Security Collateral Agency Backed Private Label Collateral Value 100% 95% 90% Total Market Value of Securities 168,910 65,182 7,613 Less Securities Pledged to: FHLB 0 0 0 Fed Discount/Other Secured -10,133 0 0 Wholesale Repos 0 0 0 Retail Repos/Sweeps -50,284 0 0 Investment Collateral Municipal Deposits 0 0 0 Other 0 0 0 Available / Unencumbered Security Collateral 108,493 61,923 6,852 177,268
Over Collateralized Securities Pledging Position 45,558
Government Guaranteed Loans 0 Other Readily Available
Cash flow (< 30 Days) from Securities not listed above 6,872 Cash Resources
Other Liquid Assets (Int. Bearing Deposits, MM Mutual Funds, etc.) 33,840 Pct. Of Assets
TOTAL LIQUID ASSETS 315,346 12.5%
II. SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES Maturing Unsecured Liabilities (< 30 Days) 0 Fed Funds Purchased Deposit Coverages 25% of Regular CDs Maturing < 30 Days 9,284 35% of Jumbo CDs Maturing < 30 Days 8.0% 645
10% of Other Deposits of Total Deposits 158,672 Deposit Contingency/Reserve
TOTAL SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES 168,601
BASIC SURPLUS 146,745 5.8%
Page 39
Detailed Liquidity Analysis: The Basic Surplus Approach
BASIC SURPLUS 146,745 5.8%
III. QUALIFYING FHLB LOAN COLLATERAL
A. Maximum Borrowing Line at FHLB is Not Available B. Qualifying Loan Collateral at the FHLB (net of haircut) 800,072 FHLB - Loan Collateral C. Excess Loan Collateral (if A < B)
Maximum Borrowing Capacity (Lesser of A or B) 800,072 Collateral Currently Encumbered by Outstanding Advances/Letters of Credit 142,464
REMAINING FHLB LOAN BASED BORROWING CAPACITY 657,608
BASIC SURPLUS W/ FHLB 804,353 31.8% IV. BROKERED DEPOSIT ACCESS Brokered CD Capacity Maximum Board Authorized Brokered Deposit Capacity (15% of Total Assets) 379,161 4.5% of Assets Current Brokered Deposit Balances 1,586
REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS 377,575
BASIC SURPLUS W/ FHLB & BROKERED DEPOSITS 1,181,928 46.8%
Page 40 Contingency Liquidity: Risk Monitor
Page 41 Contingency Liquidity: Stress Testing
Page 42 New Capital Requirements
The Phase in of Basel III
Page 43 Do We Have Adequate Capital?
ALCO Objective = Stability & Growth in Capital How Much Growth Can Be Supported?.. GROWTH CAPACITY ( $ IN THOUSANDS) 9/30/2014 9/30/2015 9/30/2016 Tier 1 Leverage 9.79% 9.94% 10.28% Excess Tier 1 Leverage Capital @ 8.00% $11,899 $13,593 $16,717 Cumulative Grow th Capacity @ 8.00% $148,738 $169,917 $208,965 Implied Compound Growth Rate (vs. 2013) 23.02% 12.38% 9.45%
Risk-Based Ratio 13.73% 13.96% 14.42% Excess RBC @ 12.00% $8,998 $10,704 $13,857 Cumulative Grow th Capacity @ 12.00% / 75% RWA $99,973 $118,938 $153,966 Implied 75% RWA Loan Grow th Rate (vs. 2013) 21.65% 12.14% 10.07%
How Much Loss Can Be Absorbed?... ABSORPTION CAPACITY 9/30/2014 9/30/2015 9/30/2016 Tier 1 Leverage 9.79% 9.94% 10.28% Excess Capital @ 8.00% $11,899 $13,593 $16,717 * Pre-Tax Loss Capacity $15,865 $18,125 $22,290 Risk-Based Ratio 13.73% 13.96% 14.42% Excess Capital @ 12.00% $8,998 $10,704 $13,857 …Without Violating Capital Standards * Pre-Tax Loss Capacity $11,997 $14,273 $18,476
* Provisions, charge-offs & losses
Page 44 Do We Have Adequate Capital?
Phase-in Schedule Item Curre nt 2015 (%) 2016 (%) 2017 (%) 2018 (%) 2019 (%) Minimum Tier 1 Leverage Capital Ratio 3.0 / 4.0 4.0 Minimum Common Equity Tier 1 Risk-based Capital Ratio N/A 4.5 Minimum Tier 1 Risk-based Capital Ratio 4.0 6.0 Minimum Total Risk-based Capital Ratio 8.0 8.0 B uffe r Capital Conservation Buffer N/A 0.625 1.25 1.875 2.50 Minimum Common Equity Tier 1 Plus Capital Conservation Buffer 4.5 5.125 5.75 6.375 7.00 Minimum Tier 1 Capital Plus Capital Conservation Buffer 6.0 6.625 7.25 7.875 8.50 Minimum Total Capital Plus Conservation Buffer 8.0 8.625 9.25 9.875 10.50 Deductions/Adjustments Phase-in of certain deductions and adjustments 40 60 80 100 100
Page 45 Purpose of ALCO
ALCO should be a PROFIT CENTER, not a regulatory check box
Page 46 Which ALCO Are You?
Financial Regulatory Performance Compliance
Page 47 Which ALCO Are You?
Page 48 Forward-Looking Strategy Development
Manage Risk. . .
Maximize Earnings
Page 49 ALCO Agenda ̶ Example
I. Current Position Summary 1. Earnings 2. Liquidity 3. Interest Rate Risk 4. Capital 5. Important Operating Trends/Issues and Implications
II. Strategy Formulation 1. Objectives 2. Strategy Elements 3. Interest Rate Environment/Yield Curve
III. Potential Strategies (Actions/Results/Risks)
IV. Action Plan 1. Recommended Strategies/Actions 2. Implementation: Timetable & Responsibilities
V. Other Items Page 50 Assess Risk and Need for Action
Policy Risk Assessment Guidelines 6/30/2014 3/31/2014 12/31/2013 9/30/2013 6/30/2013 LOW MODERATE HIGH LIQUIDITY Basic Surplus (Min.) 6.4% 7.5% 6.3% 7.8% 5.0% Basic Surplus w/ FHLB (Min.) 4.00% 16.7% 15.8% 19.4% 17.6% 24.7% Basic Surplus w/ FHLB & Brokered (Min.) 8.00% 21.5% 21.6% 26.1% 24.3% 32.4%
Borrowings / Assets (Max.) 35.00% 14.8% 16.5% 13.6% 14.8% 7.6% Brokered Deposits / Assets (Max.) 10.00% 5.2% 4.2% 3.3% 3.3% 2.3% Total Wholesale Funds / Assets (Max.) 45.00% 20.1% 20.6% 16.9% 18.1% 9.9%
INTEREST RATE RISK Earnings at Risk (Max.) Pct.(%) Change in Net Interest Income with +/- 200bps ramp (12 Mths) Year 1 NII (% Change from Year 1 - Base) -10.00% Down 100BP -0.3% 0.1% 0.1% -0.2% 0.1% Up 200BP -5.4% -5.8% -5.4% -7.0% -3.4% Year 2 NII (% Change from Year 1 - Base) -15.00% Base -1.0% -1.9% -2.0% -1.5% -0.9% Down 100BP -5.8% -5.7% -5.7% -5.0% -4.1% Up 200BP -2.2% -4.5% -3.6% -6.3% -0.7% Core Funding Utilization (Max.) Base 44.1% 43.4% 42.4% 45.5% 40.2% Down 100BP 33.3% 33.4% 34.1% 35.1% 35.1% Up 200BP 51.0% 50.8% 49.6% 53.6% 45.2% EVE Analysis Pre-shock EVE ratio 10.39% 11.06% 11.93% 11.67% 12.30% Post-shock EVE ratio 8.00% 9.26% 8.99% 9.05% 9.56% 9.79% Basis Point Change in EVE -113 -208 -288 -210 -251 Percentage Change in EVE -10.00% -9.36% -25.89% -31.10% -22.11% -27.35% Policy Guidelines are for -100 scenario. See EVE report for detail. -100 +400 +400 +200 +400 NOTE: Net Income Policy - Projected Net Income over the next twelve months will not be reduced by more than 45% in a +/-200bp ramp in rates (60% for year 2).
CAPITAL RATIOS Tier 1 Leverage (Min.) 5.00% 9.51% 10.14% 10.62% 11.25% 12.30% Total Risk Based (Min.) 10.00% 12.21% 12.76% 13.91% 14.52% 15.95%
NOTE #1: Consolidated Tier 1 Leverage and Total Risk Based Capital ratios as of 06/30/2014: Tier 1 Leverage = 11.25% - Total Risk Based Capital = 14.26%. NOTE #2: Tier 1 Leverage and Total Risk Based Capital limits reflect regulatory minimums for well capitalized institutions. OTHER BALANCE SHEET INFORMATION Balance Sheet Spread 2.62% 2.63% 2.69% 2.75% 2.77% Total Assets (Millions) $1,220.7 $1,168.5 $1,054.1 $1,022.5 $907.9 Investments (Millions) $203.5 $211.5 $185.4 $197.9 $150.4 Gross Loans (Millions) $989.1 $929.4 $841.3 $798.1 $732.3 Deposits (Millions) $908.6 $844.3 $781.2 $743.3 $711.6 Borrowings (Millions) $183.1 $194.6 $145.3 $154.3 $72.4 Net Loans / Assets 80.9% 79.4% 79.6% 77.8% 80.4% Net Loans / Deposits 108.7% 109.9% 107.4% 107.0% 102.5% Loan Loss / Loans 0.87% 0.90% 0.95% 0.92% 0.94%
NOTE: All Risk Assessment Sliders are based on the Bank's position relative to current policies.
Page 51 Strategy Development & Documentation
Potential Strategy Expected Results Risks • Describe the purpose • Summarize the • Describe the various of the potential specific impact on: risks such as: strategy and the IRR Opportunity costs nature of the Liquidity Prepayment transaction Capital/Earnings Extension • Provide the financial Other? Credit characteristics or Etc. details
Page 52 Reduce Exposure to Rising Rates
Base Simulation as of 6/30/2014
Net Interest Income ($000) 15,150
13,950
12,750
11,550
10,350
9,150 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Flat Up 500BP
NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Flat Up 500BP
Year-1 NII 47,703 48,153 49,445 49,472 47,752
Year-2 NII 46,732 47,878 47,317 48,136 45,206
Year-3 NII 45,512 47,404 46,369 44,391 41,499
Year-4 NII 44,182 47,181 48,019 47,696 44,224
Year-5 NII 43,209 47,578 51,443 54,538 50,748
Page 53
Extend Short-term FHLB into Long-term Ladder
Base Simulation as of 6/30/2014 Alternate FHLB Replacement
Net Interest Income ($000) Net Interest Income ($000) 15,150 15,150
13,950 13,950
12,750 12,750
11,550 11,550
10,350 10,350
9,150 9,150 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Flat Up 500BP Base Down 100BP Up 200BP Up 400BP 24M Flat Up 500BP
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Flat Up 500BP Down 100BP Base Up 200BP Up 400BP 24M Flat Up 500BP
Year-1 NII 47,703 48,153 49,445 49,472 47,752 Year-1 NII 47,623 47,977 49,306 49,333 47,675
Year-2 NII 46,732 47,878 47,317 48,136 45,206 Year-2 NII 46,139 46,170 45,819 48,055 46,208
Year-3 NII 45,512 47,404 46,369 44,391 41,499 Year-3 NII 44,882 45,566 44,741 45,565 44,181
Year-4 NII 44,182 47,181 48,019 47,696 44,224 Year-4 NII 43,559 45,343 46,373 48,782 46,808
Year-5 NII 43,209 47,578 51,443 54,538 50,748 Year-5 NII 42,624 45,741 49,719 54,596 52,194
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Flat Up 500BP
Year-1 NII -80 -176 -139 -139 -77
Year-2 NII -593 -1,708 -1,497 -81 1,002
Year-3 NII -630 -1,838 -1,627 1,174 2,682
Year-4 NII -622 -1,838 -1,646 1,086 2,584
Year-5 NII -586 -1,838 -1,724 58 1,445
FHLB advances are replaced by a ladder of 3, 4, and 5 year advances. In the Base simulation, FHLB advances are replaced by overnight advances.
Page 54 Strong Loan Pipeline – How to Fund?
Base Simulation as of 06/30/2014
Net Interest Income ($000) 11,025
9,950
8,875
7,800
6,725
5,650 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 28,993 29,135 29,580 29,636 29,330
Year-2 NII 28,026 28,865 30,074 30,654 29,829
Year-3 NII 27,139 28,684 30,568 31,825 30,390
Year-4 NII 26,557 28,697 31,898 34,355 30,968
Year-5 NII 26,669 29,170 33,628 37,459 32,927
Page 55
Loan Growth Funded Short
Base Simulation as of 06/30/2014 Loan Growth - Funded Short
Net Interest Income ($000) Net Interest Income ($000) 11,025 11,025
9,950 9,950
8,875 8,875
7,800 7,800
6,725 6,725
5,650 5,650 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 28,993 29,135 29,580 29,636 29,330 Year-1 NII 30,450 30,648 30,921 30,977 30,950
Year-2 NII 28,026 28,865 30,074 30,654 29,829 Year-2 NII 30,937 31,906 32,627 32,644 33,031
Year-3 NII 27,139 28,684 30,568 31,825 30,390 Year-3 NII 30,028 31,718 33,197 33,464 32,348
Year-4 NII 26,557 28,697 31,898 34,355 30,968 Year-4 NII 29,442 31,734 34,599 36,240 32,322
Year-5 NII 26,669 29,170 33,628 37,459 32,927 Year-5 NII 29,549 32,208 36,382 39,535 34,430
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 1,458 1,513 1,341 1,341 1,620
Year-2 NII 2,911 3,041 2,554 1,990 3,202
Year-3 NII 2,890 3,033 2,628 1,638 1,958
Year-4 NII 2,886 3,038 2,701 1,886 1,355
Year-5 NII 2,880 3,038 2,754 2,075 1,503
Fund $84 milliion of Loan growth over the next 12 months (mix of CRE fixed, C&I Floating and Auto Loans - WAR: 3.92%) funded by short term advances @ 31bps
Page 56 Loan Growth Funded Long
Base Simulation as of 06/30/2014 Loan Growth - Funded Long
Net Interest Income ($000) Net Interest Income ($000) 11,325 11,325
10,175 10,175
9,025 9,025
7,875 7,875
6,725 6,725
5,575 5,575 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 28,993 29,135 29,580 29,636 29,330 Year-1 NII 29,886 29,941 30,463 30,519 30,096
Year-2 NII 28,026 28,865 30,074 30,654 29,829 Year-2 NII 29,926 30,483 31,990 32,861 31,453
Year-3 NII 27,139 28,684 30,568 31,825 30,390 Year-3 NII 29,021 30,298 32,561 34,538 32,688
Year-4 NII 26,557 28,697 31,898 34,355 30,968 Year-4 NII 28,434 30,315 33,963 37,315 33,761
Year-5 NII 26,669 29,170 33,628 37,459 32,927 Year-5 NII 28,542 30,788 35,746 40,610 35,868
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 894 806 883 883 765
Year-2 NII 1,900 1,618 1,916 2,207 1,624
Year-3 NII 1,882 1,613 1,993 2,713 2,298
Year-4 NII 1,878 1,618 2,065 2,960 2,793
Year-5 NII 1,873 1,618 2,118 3,150 2,941
Fund $84 milliion of Loan growth over the next 12 months (mix of CRE fixed, C&I Floating and Auto Loans - WAR: 3.92%) funded by 5 Year FHLB advances @ 1.97%
Page 57 Loan Growth Funded with Barbell
Base Simulation as of 06/30/2014 Loan Growth - Funded with Barbell Advances
Net Interest Income ($000) Net Interest Income ($000) 11,125 11,125
10,025 10,025
8,925 8,925
7,825 7,825
6,725 6,725
5,625 5,625 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 28,993 29,135 29,580 29,636 29,330 Year-1 NII 30,309 30,471 30,806 30,863 30,737
Year-2 NII 28,026 28,865 30,074 30,654 29,829 Year-2 NII 30,684 31,551 32,468 32,698 32,636
Year-3 NII 27,139 28,684 30,568 31,825 30,390 Year-3 NII 29,776 31,363 33,038 33,732 32,433
Year-4 NII 26,557 28,697 31,898 34,355 30,968 Year-4 NII 29,190 31,379 34,440 36,509 32,682
Year-5 NII 26,669 29,170 33,628 37,459 32,927 Year-5 NII 29,298 31,853 36,223 39,804 34,789
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 1,317 1,336 1,227 1,227 1,406
Year-2 NII 2,658 2,686 2,394 2,044 2,807
Year-3 NII 2,638 2,678 2,470 1,907 2,043
Year-4 NII 2,634 2,683 2,542 2,154 1,714
Year-5 NII 2,628 2,683 2,595 2,344 1,862
Fund $84 milliion of Loan growth over the next 12 months (mix of CRE fixed, C&I Floating and Auto Loans - WAR: 3.92%) funded by (75%) Short term advances @ 31bps and (25%) 5 Year FHLB advances @ 1.97%, WAR: 73bps.
Page 58 Protect Against Worst Case – Flat/Falling Rates
Base Simulation as of 7/31/2014
Net Interest Income ($000) 55,625
48,925
42,225
35,525
28,825
22,125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 137,511 139,187 148,226 147,522 140,142
Year-2 NII 128,873 135,672 157,705 153,274 142,424
Year-3 NII 120,813 131,980 163,303 164,653 151,885
Year-4 NII 115,942 130,186 170,061 179,782 165,419
Year-5 NII 112,490 128,871 176,197 194,110 176,572
Page 59
Extend Cash into 3-Year Treasuries
Base Simulation as of 7/31/2014 Purchase $100 Million in 3 YR Treasuries
Net Interest Income ($000) Net Interest Income ($000) 55,625 55,625
48,925 48,925
42,225 42,225
35,525 35,525
28,825 28,825
22,125 22,125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 137,511 139,187 148,226 147,522 140,142 Year-1 NII 138,439 139,984 147,924 147,221 140,939
Year-2 NII 128,873 135,672 157,705 153,274 142,424 Year-2 NII 129,913 136,468 156,467 150,935 142,849
Year-3 NII 120,813 131,980 163,303 164,653 151,885 Year-3 NII 121,853 132,776 162,072 161,393 149,832
Year-4 NII 115,942 130,186 170,061 179,782 165,419 Year-4 NII 116,182 130,983 170,830 180,523 165,314
Year-5 NII 112,490 128,871 176,197 194,110 176,572 Year-5 NII 112,729 129,667 176,966 194,851 176,467
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 928 797 -301 -301 797
Year-2 NII 1,040 796 -1,238 -2,338 425
Year-3 NII 1,040 797 -1,231 -3,259 -2,052
Year-4 NII 240 797 769 741 -106
Year-5 NII 240 797 769 741 -106
Assumes $100MM of excess cash is redeployed into 3 YR Treasuries @ 1.05%.
Page 60 Extend Cash into 15-Year MBS
Base Simulation as of 7/31/2014 Purchase $100 Million in 15 YR MBS
Net Interest Income ($000) Net Interest Income ($000) 55,425 55,425
48,775 48,775
42,125 42,125
35,475 35,475
28,825 28,825
22,175 22,175 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist Base Down 100BP Up 200BP Up 400BP 24M Yield Curve Twist
NII SUMMARY NII SUMMARY
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 137,511 139,187 148,226 147,522 140,142 Year-1 NII 139,717 141,284 149,269 148,566 142,257
Year-2 NII 128,873 135,672 157,705 153,274 142,424 Year-2 NII 131,094 137,768 158,006 152,521 144,265
Year-3 NII 120,813 131,980 163,303 164,653 151,885 Year-3 NII 122,931 134,076 163,816 163,387 151,450
Year-4 NII 115,942 130,186 170,061 179,782 165,419 Year-4 NII 117,969 132,283 170,755 178,911 164,308
Year-5 NII 112,490 128,871 176,197 194,110 176,572 Year-5 NII 114,437 130,967 177,051 193,587 175,716
CHANGE / DIFFERENCE IN RESULTS
Down 100BP Base Up 200BP Up 400BP 24M Yield Curve Twist
Year-1 NII 2,206 2,097 1,043 1,043 2,115
Year-2 NII 2,220 2,096 302 -753 1,841
Year-3 NII 2,118 2,097 513 -1,265 -434
Year-4 NII 2,027 2,097 694 -871 -1,112
Year-5 NII 1,947 2,097 854 -523 -856
Assumes $100MM of excess cash is redeployed into 15 YR MBS @ 2.35%.
Page 61 Key Take Aways
Understand your true long-term interest rate risk profile
Bank-specific assumptions provide the most accurate profile Regulatory focus Requires time, resources and $$ to derive
ALCO’s focus should be on forward-looking strategies, not historical review Manage risk Maximize earnings
Page 62
Thank You!
Page 63 DARLING CONSULTING GROUP Who We Are
ALM Pioneer Since 1980s Trusted Advisors – Assess Risk, Evaluate Alternatives, Decisions & Execution Educators – Management, Boards, and Regulators . Clients, Associations & Networks, Graduate Schools, FFIEC, …
Client Base Nationwide Reach 300+ Retainers Clients (Quarterly on-site ALCO Meetings) 150-200 Project Clients
INDEPENDENT PARTNER in ALCO Function 12 Retainer Consultants w/ Variety of Backgrounds – Regulators, Bank Executives, Auditors/Accountants 70+ Analysts & Project Consultants Varied Roles – Advisor, Collaborator, Devil’s Advocate
Value System… Integrity + Quality + Teamwork = Success Promote/Advocate BALANCE (Risk vs. Return)
Page 64 DCG Resources Available
White Papers ALM & ALCO Liquidity Risk Management ALM Modeling & Audits ALCO Performance
E-Mail Newsletters (Complimentary) ALM Insights DCG Bulletin
DCG Website – DarlingConsulting.com
Page 65 About DCG
DCG provides balance sheet management solutions for banks, thrifts and credit unions across the United States. Our nearly 90 person professional team offers a unique and comprehensive approach to balance sheet management that incorporates specialized tools, educational programs, and unbiased advice for institutions between $20 million and $200 billion in assets. Working in partnership with senior management and boards of directors, we produce significant, quantifiable results for hundreds of financial institutions throughout the country.
DCG’s menu of products and services include: Timely and informative educational programs for executives and professional associations Customized and pro-active advisory and consulting services in the areas of balance sheet management, investments and financial and strategic planning Cost-effective outsourcing of the risk management and modeling process Comprehensive model and assumption validation services in support of OCC Bulletin 2011-12 compliance
Page 66 About DCG (cont’d)
Find out more about balance sheet management by visiting our website DarlingConsulting.com:
DCG WEB SITE Articles on bank profit and risk management . Gateway to additional banking industry information/research . Register for the annual balance sheet management conference . Upcoming educational events around the country
ALM Insights & DCG Bulletin – DCG’s complimentary e-newsletters that address a variety of topical balance sheet and risk management issues
To register: . Visit us: DarlingConsulting.com . E-mail us: [email protected] . Call us: 978.463.0400
Page 67 Regulatory Panel Discussion
Jeff Burgess, Territory Supervisor, Federal Deposit Insurance Corporation
Jim Euge, National Bank Examiner, Office of the Comptroller of the Currency
Paul Frey, Supervisory Examiner, Federal Reserve Bank of Richmond
Ray Grace, NC Commissioner of Banks
© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC
Investment Banking Update
Bill Sammon Managing Director, Raymond James & Associates, Inc.
William F. Sammon, Managing Director of Financial Institutions Sales and Trading with Raymond James and Associates. Mr. Sammon has over 17 years of experience in the investment business focusing on Financial Institutions. His background includes institutional sales, capital formations of public and private instruments and private equity. He currently manages the Financial Institutions Sales and Trading Group which makes principal markets in over 600 banks. He is a member of the advisory board for the HBI Private Equity Fund I, HBI Private Equity Fund II and ICBA Private Equity Fund I and is a director of HBI Funds LLC. Mr. Sammon is a graduate of the University of Iowa with a Bachelor's degree in Economics.
Bill Wagner Managing Director, Raymond James & Associates, Inc.
Mr. Wagner joined Raymond James as part of the Howe Barnes acquisition in 2010. Mr. Wagner is a Managing Director, heading up the Financial Institutions Group in Raleigh, NC which focuses on community depository businesses. Mr. Wagner has been an investment banker to financial institutions in the Southeast since 1992 and has represented both buyers and sellers in merger transactions as well as capital raising transactions involving all forms of capital; including, common equity, preferred equity and subordinated debt.
In addition, Mr. Wagner works closely with numerous community banks providing strategic advisory services regarding capital management, shareholder value creation and acquisition strategy. He began his career with Deloitte & Touche in Columbus, OH. Mr. Wagner holds a B.S. degree from Miami University and an M.B.A. degree from the Fuqua School of Business at Duke University. Mr. Wagner is also a Certified Public Accountant.
Issues Facing Community Bank CFO’s
Terry Early Chief Financial Officer, Yadkin Bank
Terry Earley has served as Chief Financial Officer of VantageSouth Bancshares, Inc. and VantageSouth since February 2012. As Chief Financial Officer, he is responsible for the implementation of financial strategies, including investment management, financial accounting and reporting, oversees enterprise risk management, compliance and strategy and development functions of the Bank. Prior to joining our team, Earley was the Chief Financial Officer and Chief Operating Officer of RBC Bank (USA), where he worked for 18 years. A leader in his community, Earley attends Colonial Baptist Church, Cary and is a former board member of Faith Christian School, Rocky Mount, North Carolina. He holds a bachelor’s degree from the University of North Carolina at Chapel Hill in business administration.
Tony VunCannon Chief Financial Officer, Home Trust Bank
Tony J. VunCannon is a certified public accountant and has served as Senior Vice President, Chief Financial Officer, and Treasurer of HomeTrust Bancshares, Inc.(HTBI), Asheville, NC since its mutual to stock conversion in July 2012. He has served as Senior Vice President, Chief Financial Officer and Treasurer of HomeTrust Bank since July 2006. From March 1997 to June 2006, Mr. VunCannon served as Vice President and Treasurer of HomeTrust Bank and from April 1992 to February 1997, Mr. VunCannon served as Controller of HomeTrust Bank. Previously, Mr. VunCannon was employed by KPMG in Charlotte, North Carolina serving on the external audit team for various community and regional banks in the Carolinas.
Kirk Whorf Chief Financial Officer, North State Bank
Mr. Whorf has been with North State Bank since it’s founding in June 2000. He is the Bank’s Chief Financial Officer and a Senior Executive Vice President. He is responsible for internal and external reporting, capital planning, funds management, investment portfolio management and the ALCO process in the Bank. Mr. Whorf has been a speaker at BAI conferences as well as a speaker for the North Carolina Bankers Association and North Carolina School of Banking on balance sheet, investment and interest rate risk management.
Mr. Whorf received his BSBA degree in accounting from East Carolina University and is a graduate from the Graduate School of Banking of the South located in Baton Rouge, La. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Economic Update
John Silvia Chief Economist, Wells Fargo Securities, LLC
John Silvia is a managing director and the chief economist for Wells Fargo. Based in Charlotte, N.C., he has held his position since he joined Wachovia, a Wells Fargo predecessor, in 2002 as the company’s chief economist.
Prior to his current position, John worked on Capitol Hill as senior economist for the U.S. Senate Joint Economic Committee and chief economist for the U.S. Senate Banking, Housing and Urban Affairs Committee. Before that, he was chief economist of Kemper Funds and managing director of Scudder Kemper Investments, Inc.
John currently serves as the vice president of the National Association for Business Economics (NABE) and was awarded a NABE Fellow Certificate of Recognition in 2011 for outstanding contributions to the Business Economics Profession and Leadership Among Business Economists to the Nation. For the second time in three years, he was awarded the best overall forecast by the Federal Reserve Bank of Chicago, as well as the best unemployment rate forecast for 2011. John is on the Bloomberg Best Forecast list for his forecasts of GDP, the ISM manufacturing index, housing starts and the unemployment rate.
John holds B.A. and Ph.D. degrees in economics from Northeastern University in Boston, and has a master’s degree in economics from Brown University. John’s first book, Dynamic Economic Decision Making, was published by Wiley in August 2001. His second book, Economic & Business Forecasting, was published in 2014, also by Wiley.
A&A Update
Garry Rank Shareholder, Elliott Davis
Garry focuses on corporate auditing and accounting as well as consultation regarding governance, financial systems and internal controls. With more than 34 years of experience, his industry concentrations include financial services, manufacturing and Securities and Exchange Commission (SEC) reporting. Additional professional experience includes the management of complex engagements, mergers and acquisitions, projects involving subsidiary companies and the application of accounting and reporting standards.
Attorney Panel Discussion
Tony Gaeta Attorney, Wyrick Robbins
Tony practices in the areas of securities law, mergers & acquisitions, and corporate law. His practice includes public and private offerings of securities for both financial institutions and business corporations, regulatory matters affecting banks, thrifts and their holding companies, the formation of banks, thrifts and trust companies and their reorganization into the holding company form of organization, mergers & acquisitions of financial institutions and other corporate entities, and counseling boards of directors as to their duties.
Tony received his B.A. from Wesleyan University, where he was a Davenport Scholar. He received his J.D. from the College of William and Mary, where he was Articles Editor for the William and Mary Law Review and a member of Omicron Delta Kappa. Tony is an Adjunct Professor of Law at the University of North Carolina School of Law, teaching a course in mergers & acquisitions. During June 2013, he taught his course in mergers & acquisitions at Augsburg University, Federal Republic of Germany, as a visiting law professor.
Prior to joining the firm, Tony was the founder of Gaeta & Eveson, P.A. He has also practiced in the New York office of Simpson Thacher & Bartlett, the New Bern and Raleigh offices of Ward & Smith, and the Raleigh office of Moore & Van Allen. Tony also served as Vice President, General Counsel to United Carolina Bancshares Corporation (now BB&T Corporation).
Bill Lathan Partner, Ward & Smith, PA
Mr. Lathan's practice experience encompasses the formation, regulation, and operation of banks and bank holding companies; securities offerings and reporting; mergers and acquisitions; and corporate governance matters pertaining to publicly-held companies. He has been rated by his peers as being "preeminent" in his fields of law. Prior to joining the Firm, Mr. Lathan served as vice president and general counsel/corporate secretary for one of North Carolina's multi-bank holding companies.
Bob Singer Partner, Brooks Pierce McLendon Humphrey & Leonard, LLP
Bob has practiced in the areas of banking, mergers and acquisitions, public and private securities offerings, 1934 Act reporting, venture capital transactions, and general corporate matters since 1979. He has been involved in over forty public offerings either as primary attorney or as our firm's securities review partner. He has been primary attorney or review partner on over one hundred mergers, and has directed numerous private equity placements. Since 2000, Bob served as issuer's or underwriter's counsel in public securities offerings in excess of $1.0 billion.
Bob maintains an active practice in the representation of banking organizations and the North Carolina Bankers Association. He also provides securities and corporate advice to a number of publicly-traded corporations. Bob also advises our litigation practice in the defense of directors, auditors and others in securities cases. He serves on the boards of directors of a number of private companies headquartered in North Carolina, New York or Hong Kong. Bob is listed in The Best Lawyers in America (Woodward/White) in Banking and Finance Law, Financial Services Regulation Law, Corporate Law and Mergers & Acquisitions Law, recognized in Chambers USA: America's Leading Lawyers for Business in Corporate Law/Mergers & Acquisitions and Banking and Finance, and recognized by North Carolina Super Lawyers in the areas of Banking and Finance. Bob is also on the Board of Trustees of the North Carolina Center for Banking and Finance of the University of North Carolina at Chapel Hill.
Empowering Your ALCO with the Tools & Critical Information for Successful Strategy Development
Mark Haberland Managing Director, Darling Consulting Group
Mark is a Managing Director at Darling Consulting Group. In this role, Mark works directly with financial institutions to strengthen their asset liability management process. He provides support and direction to clients in the areas of liquidity risk management, capital, ALM modeling and reporting and regulatory compliance. He is a top rated speaker and frequent author on numerous balance sheet management topics and conducts customized executive and board level workshops to enhance understanding and involvement in the ALCO process.
Mark has been with DCG since 1997 and oversaw the operations of the company’s Financial Analytics Group for many years. He has over 20 years of experience in the banking industry in the areas of asset liability management and bank auditing.
Regulatory Panel Discussion
Jeff Burgess Territory Supervisor, Federal Deposit Insurance Corporation
Mr. Burgess is the Field Supervisor for the FDIC's Charlotte Territory. The Charlotte Territory is responsible for all examination activities of state nonmember institutions in the Western half of North Carolina and all of South Carolina. Prior to this role, Mr. Burgess served as a Supervisory Examiner responsible for supervision of the Territory’s large banks. Mr. Burgess began his career with the FDIC in 1991 as an Assistant Examiner in the Hollywood, Florida Field Office.
In 1998, Mr. Burgess joined the Comptroller of the Currency as a National Bank Examiner in the agency's Southeast Territory. While in this position he served on a number of large bank teams in the Southeast ranging in size from $20 billion to several hundred billion. Mr. Burgess led a number of complex examinations around the U.S. and overseas at foreign locations of large U.S. banks. Mr. Burgess eventually returned to the FDIC in 2007 where he was promoted to Senior Examiner and, ultimately, to his current position. Mr. Burgess holds a Bachelor of Science degree in Financial Management from Clemson University.
Jim Euge National Bank Examiner, Office of the Comptroller of the Currency
Mr. James Euge is National Bank Examiner with the Comptroller of the Currency. He is currently assigned to the Carolina’s Field Office in Charlotte, North Carolina. He has over 30 years’ experience examining community, midsize, and large banks. He is an asset quality subject matter expert, and has developed and taught various training classes for the OCC. Prior to moving to Charlotte in 2006, he was the examiner-in-charge of a midsize bank in Los Angeles from 2001 to 2006. Between when he started with the OCC in 1984 until 2001, he was a field examiner in the Los Angeles and Orange County Field Offices’ where he examined banks in California, Arizona, and Nevada.
Paul Frey Supervisory Examiner, Federal Reserve Bank of Richmond
Paul is a Managing Examiner for the Federal Reserve Bank of Richmond. He works in the Supervision, Regulation & Credit Department and is based out of the Charlotte, North Carolina office. Paul’s primary responsibilities include managing the regulatory relationships of a portfolio of large and complex holding companies across the Fifth District. Paul has over twenty one years of regulatory experience serving in a variety of capacities and started his career with the Federal Reserve Bank of Philadelphia. Paul is a native of the Philadelphia, Pennsylvania area, and received his Bachelors of Science degree in Accounting from the Pennsylvania State University, and his Masters of Business Administration degree from Saint Joseph’s University.
Ray Grace Commissioner of Banks, State of NC Commissioners of Banks
Ray Grace is North Carolina Commissioner of Banks and oversees the regulation of banks, savings and loans, trust companies, mortgage lending, consumer finance lending, and other non-bank lenders. Grace was named Chief Deputy Commissioner in 2010, after serving as Deputy Commissioner since 2009.
Grace joined the U.S. Marine Corps in 1966, served in the Vietnam War from 1967 to 1968, and was honorably discharged in 1969. He graduated from Niagara University, Niagara Falls, New York, in December 1973, with a B.S. in Commerce, and began his career at NCCOB as an examiner trainee on July 1, 1974. For 40 years, he has dedicated his service to our State, serving in various capacities at the N.C Office of the Commissioner of Banks, including Commercial Bank Examiner, Special Supervisory Examiner (responsible for supervision of troubled banks), Director of Bank Applications, Chief Deputy Commissioner and his current role - Commissioner.
Robert Beckwith, CPA Shareholder
Services: Tax | Industries: Financial Services
Professional Overview Bob focuses on providing tax consulting services to clients in the financial services industry. Bob has more than 40 years of bank tax consulting and compliance experience, including 20 years at a Big Four accounting firm. He assists clients with financial reporting in accordance with FASB ASC 740 and planning and analysis of C corporation tax issues including mergers and acquisitions, tax benefit limitations upon Sec. 382 change-of-control, compensation and golden parachutes, and accounting methods and periods. Bob has served multi-billion dollar organizations, 200 East Broad Street filing complex consolidated and multi-state returns. He also possesses expertise in Suite 500 Greenville, SC 29601 planning for the election to be an S corporation bank and the resulting compliance issues. Direct: 864.552.4763 Office: 864.242.3370 Education, Credentials and Special Training Fax: 864.241.5713 Certified Public Accountant M.S., Accounting, Colorado State University [email protected] B.S., Business Administration with emphasis in accounting, University of Nebraska
Professional Affiliations American Institute of Certified Public Accountants South Carolina Association of Certified Public Accountants
Thought Leadership Panelist, Bank Tax Institute Community Banking Panel Co-instructor, Co-Community Bank Tax Workshop
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William (Bill) J. Bossong, CPA, CBA Shareholder Financial Institutions Group Consulting
Services: Consulting | Industries: Financial Services
Professional Overview Bill has more than eight years of public accounting experience with an emphasis in financial institutions and SEC registrants. He leads the firm’s Financial Institution Consulting Practice for merger and acquisition matters. These services include due diligence projects, Day 1 valuations, Day 2 accounting, internal audits over other Day 2 providers, and accounting policy creation and review. This team has developed ValuCastTM, a proprietary solution
designed to assist banks with Day 1 and 2 accounting in accordance with the Accounting 1901 Main Street Standards Codification (ASC). Bill has led numerous FDIC-assisted and whole bank valuation Suite 900 Columbia, SC 29201 projects including valuing various net assets acquired to include but not limited to the loan portfolio, core deposit intangible, time deposits, borrowings and other long term debt, and Direct: 803.255.1497 share based payment awards. In addition to the Day 1 valuations and Day 2 experience, Bill Office: 864.242.3370 and his team have assisted their clients by developing projection and other financial Fax: 803.255.0733 planning models and reports. Bill also has a significant amount of experience related to the Allowance for Loan and Lease Losses (ALLL) under ASC 450-20 and ASC 310-10 to include [email protected] building an ALLL model for a large regional bank.
Bill has also worked closely with the valuation team for various financial service line of business acquisitions to include leasing companies, mortgage companies, and broker dealer/investment companies. He provides consulting services to numerous clients ranging in size from $400 million in assets to over $20 billion in assets.
Education, Credentials and Special Training Certified Public Accountant Certified Bank Auditor Master of Accountancy, University of South Carolina B.S., Accounting, University of South Carolina SEC Reporting, AICPA
Professional Affiliations American Institute of Certified Public Accountants South Carolina Association of Certified Public Accountants
Civic and Community Activities Walk Team Captain, Juvenile Diabetes Research Foundation Board of Directors, Midlands March of Dimes Deacon and Former Member of the Finance Committee, First Baptist Church of Columbia
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R. Jason Caskey, CPA Shareholder and Financial Services Practice Leader
Services: Assurance | Industries: Financial Services
Professional Overview As leader of the firm’s Financial Services practice, Jason focuses on serving financial institutions and SEC registrants. With more than 24 years of experience, he serves community banking clients in both the private and public sector. Jason has assisted clients with public stock offerings, mergers and acquisitions, and SEC filings including comfort letters. In addition, he also serves clients with a number of consulting engagements including outsourced internal audit, external loan reviews and Bank Secrecy Act reviews. Jason recently completed six years as an elected member of the 1901 Main Street firm’s Executive Committee. He recently completed four years as the managing Suite 900 Columbia, SC 29201 shareholder of the firm’s Columbia office.
Direct: 803.255.1203 Education, Credentials and Special Training Office: 803.256.0002 Certified Public Accountant Fax: 803.255.0714 B.S., Accounting, University of South Carolina University of Virginia National Banking School [email protected] Professional Affiliations American Institute of Certified Public Accountants South Carolina and North Carolina Association of Certified Public Accountants State Bankers Associations in South Carolina, North Carolina, Georgia and Virginia Independent Bankers Association of South Carolina
Civic and Community Activities Board of Directors and Audit Committee, United Way of the Midlands Board of Directors and Audit Committee, Navigating from Good to Great Board of Advisors and Audit Committee, USC Business Partnership Foundation Member, Greater Columbia Chamber of Commerce Finance Committee Deacon, First Baptist Church of Columbia Columbia Chamber of Commerce Committee of 100 Former Board of Directors and Audit Committee, Central Carolina Community Foundation Former Member Board of Directors, Children’s Trust of South Carolina Former Board of Directors, South Carolina Student Loan Corporation Former Board of Directors and Audit Committee, SC Economics Former Member Board of Trustees, Charleston Southern University Former Member Board of Directors, Juvenile Diabetes Research Foundation 2011 Heart Ball Chair, American Heart Association, Columbia 2008 Distinguished Young Alumnus, USC Moore School of Business Class of 2006 "20 Under 40,” The State elliottdavis.com © Elliott Davis LLC © Elliott Davis PLLC
Lee E. Haynes, CPA Shareholder
Services: Assurance | Industries: Financial Services
Professional Overview Lee has more than 20 years of combined experience in public accounting and accounting/management positions in publicly held companies. He has participated in the audits of larger entities, including multinational and multistate operations. Lee concentrates his time in the financial services industry serving both publicly traded as well as privately held community banks located in North Carolina, South Carolina and Virginia.
In addition to financial services expertise, Lee has extensive experience with 700 East Morehead Street preparation of consolidated financial statements, Securities and Exchange Suite 400 Commission (SEC) filings and Sarbanes-Oxley compliance. This experience is Charlotte, NC 28202 complemented by Lee’s experience with engagements involving internal controls
within an organization. Lee works on audits of the design and effectiveness of Direct: 704.808.5208 Office: 704.333.8881 internal controls of service organizations under SSAE 16 (formerly SAS 70) SOC1 Fax: 704.749.7908 Type 1 and Type 2 engagements as well as AT101 SOC2 Type 1 and Type 2 engagements and has also overseen audits of internal control over financial [email protected] reporting as required by Sarbanes-Oxley and FDICIA for audit clients as well as assisted in the design, documentation and implementation of internal control programs for non-audit clients.
Education, Credentials and Special Training Certified Public Accountant B.A., Accounting, Furman University National Banking School, McIntire School of Commerce at the University of Virginia
Professional Affiliations American Institute of Certified Public Accountants North Carolina Association of Certified Public Accountants South Carolina Association of Certified Public Accountants Georgia Society of Certified Public Accountants North Carolina Bankers Association South Carolina Bankers Association Virginia Bankers Association Independent Bankers Association of South Carolina Georgia Bankers Association
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F. Andrew Mitchell, CPA Shareholder
Services: Assurance, Consulting | Industries: Financial Services, Manufacturing & Distribution, Professional Services
Professional Overview Andy focuses on providing clients with corporate strategy, transaction, finance and auditing services. With 40 years of accounting experience, including 20 years with a Big Four accounting firm, his extensive background includes significant work with public companies and merger and acquisition transactions in the financial services, professional services, manufacturing and distribution industry sectors. As an audit 200 East Broad Street partner, Andy served numerous public company clients and was the partner for Suite 500 more than a dozen initial public offerings. He recently completed five years as an Greenville, SC 29601 elected member of the firm’s Executive Committee and currently serves as the
managing shareholder for the Greenville office assurance practice. Direct: 864.242.2691 Office: 864.242.3370 Fax: 864.241.5798 Andy also served as chief financial officer for a publicly held company and two large private companies. In this capacity, he was responsible for all financial areas [email protected] including accounting, acquisitions, budgeting, forecasting, credit, cash management, borrowings, information systems and stock offerings for these companies. Andy participated in the completion of an initial public offering and a secondary offering for the public company which owned numerous retail stores, then negotiated the sale of the company. He also participated in the acquisition of a large operating subsidiary in the aviation service industry where he was actively involved in the completion of an underwritten bond offering and subsequent registration of those securities. For the third company, he was responsible for the reorganization and ultimate sale of the company which was involved in the sale of hardware and software development and integration services for national retail chains.
Since joining Elliott Davis in 2004, Andy has been responsible for the formation and development of the firm’s transaction services practice and serving financial institutions as a client service shareholder, including several public reporting companies.
Education, Credentials and Special Training Certified Public Accountant B.B.A., Accounting, University of Cincinnati
Professional Affiliations American Institute of Certified Public Accountants South Carolina Association of Certified Public Accountants Ohio Society of Certified Public Accountants
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George Noonan, CPA Shareholder
Services: Tax | Industries: Financial Services
Professional Overview With more than 18 years of experience in public accounting, George has worked extensively in the banking and related industries. He provides his clients with a variety of services including tax planning and research, ASC 740 consultation, FIN 48 analysis, tax return preparation, quarterly estimate preparation, forecasts and projections. His experience includes tax preparation and consulting of numerous
700 East Morehead Street financial institutions. George has served multi-billion dollar financial institutions Suite 400 filing complex consolidated and multi-state income tax returns. Charlotte, NC 28202 Education, Credentials and Special Training Direct: 704.808.5293 Certified Public Accountant Office: 704.333.8881 B.S., Accounting and Finance, Wright State University Fax: 704.749.7993 Bank Tax Institute, Annually [email protected] Professional Affiliations American Institute of Certified Public Accountants North Carolina Association of Certified Public Accountants North Carolina Bankers Association South Carolina Bankers Association
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Paul M. Pickett, CPA Shareholder
Services: Assurance | Industries: Financial Services
Professional Overview Paul focuses on providing professional accounting services to the financial services industry, specifically community banks. With more than 20 years of public accounting experience, he has served on audit engagements for more than 40 community banks and bank holding companies in Virginia, West Virginia, North Carolina and South Carolina. Paul has extensive knowledge of GAAP and SEC policies and assists clients with the preparation of consolidated financial Riverfront Plaza statements, quarterly reviews and assistance with SEC filings and reporting, and West Tower, Suite 1000 merger and acquisition reporting. In addition, he serves as an instructor for a 901 E. Byrd Street number of continuing education courses relating to financial institution accounting Richmond, VA 23219 and auditing.
Direct: 804.887.2256 Education, Credentials and Special Training Office: 804.612.4380 Certified Public Accountant Fax: 877.803.0432 University of Virginia National Banking School and National Banking Conference, [email protected] American Institute of Certified Public Accountants B.B.A., Accounting, Radford University
Professional Affiliations American Institute of Certified Public Accountants Virginia Society of Certified Public Accountants North Carolina Bankers Association Virginia Association of Community Banks Virginia Bankers Association West Virginia Bankers Association
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Christopher R. Purvis, CPA Shareholder
Services: Assurance | Industries: Financial Services
Professional Overview Chris has more than a decade of experience providing audit and consulting services for financial institutions. Chris leads the firm’s Compliance Consulting Services group. Training relevant to compliance includes the North Carolina Bankers Association's Regulatory Compliance School.
Prior to joining Elliott Davis in August 2009, Chris was employed as the Controller 700 East Morehead Street of American Founders Bank, a mid-sized community bank headquartered in Suite 400 Lexington, Kentucky. Chris' prior experience in public accounting was with BKD, Charlotte, NC 28202 LLP in Louisville, Kentucky and Dean, Dorton & Ford PSC in Lexington, Kentucky. Chris' primary focus in public accounting has been in providing services for Direct: 704.808.5216 community banks, including external audit, internal audit, regulatory compliance, Office: 704.333.8881 external loan reviews, Bank Secrecy Act reviews and Interest Rate Risk testing. Fax: 704.749.7916
Education, Credentials and Special Training [email protected] Certified Public Accountant B.S., Accounting, University of Kentucky B.B.A., Finance, University of Kentucky General School of Banking, Kentucky Bankers Association Regulatory Compliance School, North Carolina Bankers Association
Professional Affiliations American Institute of Certified Public Accountants North Carolina Association of Certified Public Accountants North Carolina Bankers Association
Civic and Community Activities Board of Directors, Charlotte Steeplechase Association/Charlotte Queen’s Cup
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Garry A. Rank, CPA Shareholder
Services: Assurance | Industries: Financial Services, SEC Reporting
Professional Overview Garry focuses on corporate auditing and accounting as well as consultation regarding governance, financial systems and internal controls. With more than 34 years of experience, his industry concentrations include financial services, manufacturing and Securities and Exchange Commission (SEC) reporting. Additional professional experience includes the management of complex engagements, mergers and acquisitions, projects involving subsidiary companies 200 East Broad Street and the application of accounting and reporting standards. Suite 500 Greenville, SC 29601 Education, Credentials and Special Training
Certified Public Accountant Direct: 864.242.2638 Office: 864.242.3370 Graduate, American Bankers Association, Business of Banking School Fax: 864.241.5819 B.S., Accounting, University of Akron [email protected] Professional Affiliations American Institute of Certified Public Accountants, Center for Audit Quality Small Firm Task Force South Carolina Bankers Association North Carolina Bankers Association Georgia Bankers Association
Civic and Community Activities Past President and Past Treasurer, Habitat for Humanity of Greenville County Alumnus, Leadership Greenville, Greenville Chamber of Commerce Past President and Past Treasurer, Greenville Breakfast Rotary Club
Thought Leadership Speaker on audit committee responsibilities SCBA/FDIC Directors College, 2003-2012 NCBA Bank Directors Assembly, 2004, 2007-2012 Presentations on SEC, corporate governance and new accounting pronouncements Elliott Davis CFO forum, 2003-2013 Authored various articles for publication regarding corporate governance, Sarbanes-Oxley Act of 2002 and ethics
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Barbara S. Rushing, CPA Shareholder
Services: Assurance | Industries: Financial Services
Professional Overview Barbara focuses on providing services to SEC clients in the financial services industry. With more than 20 years of experience, including several years at a Big Four accounting firm, Barbara has extensive knowledge of GAAP and SEC policies. She works with SEC registrant clients with complex accounting issues, comment letters, stock offerings and merger and acquisition reporting. Barbara has serviced more than 40 public offerings. 200 East Broad Street Suite 500 Barbara is Vice Chairperson of the Firm’s Assurance & Advisory Committee, a Greenville, SC 29601 technical committee that oversees quality control policies and risk management of
the Firm’s attest practice. Direct: 864.242.2625 Office: 864.242.3370 Fax: 864.241.5830 Education, Credentials and Special Training [email protected] Certified Public Accountant B.S., Accounting, University of South Carolina
Professional Affiliations American Institute of Certified Public Accountants South Carolina Association of Certified Public Accountants
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Beverly A. Seier, CPA, CPCU Shareholder
Services: Tax | Industries: Financial Services and Insurance
Professional Overview With more than 20 years of experience, Bev focuses on serving financial institutions, insurance companies and SEC registrants. She provides both public and private clients with a wide range of services, including tax planning and compliance, ASC 740 and SSAP 101 tax provision consulting, federal and state audit examinations assistance, mergers and acquisitions tax planning and Sec. 382 change-in-control and 280G golden parachute studies. 1901 Main Street Suite 900 Prior to joining Elliott Davis, Bev was a Tax Partner at a Northeast-based Columbia, SC 29201 accounting firm. Direct: 803.255.1214 Office: 803.256.0002 Education, Credentials and Special Training Fax: 864.241.5808 Certified Public Accountant [email protected] Chartered Property Casualty Underwriter B.S., Business Administration/Accounting and Mathematics, magna cum laude, University of Mary Washington
Professional Affiliations American Institute of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants
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Stacy S. Stokes, CPA Shareholder
Services: Tax | Industries: Closely Held Businesses, Personal Financial Services
Professional Overview With more than 18 years of experience, Stacy focuses on providing comprehensive tax services to a diverse client base which includes closely held businesses, pass- through entities and high net worth individuals. He has extensive experience in the area of wealth management solutions for family owned businesses and high net worth individuals.
Education, Credentials and Special Training 1901 Main Street Certified Public Accountant Suite 900 Columbia, SC 29201 Masters of Taxation, University of South Carolina B.S., Accounting, University of South Carolina Direct: 803.255.1472 Office: 803.256.0002 Professional Affiliations Fax: 803.255.0730 American Institute of Certified Public Accountants South Carolina Association of Certified Public Accountants [email protected] Civic and Community Activities President, Habitat for Humanity - Central South Carolina Chapter Treasurer, Congaree Land Trust Past Board Member, Family Connection of SC Past President, University of South Carolina Friends of Accounting Past Board Member, Juvenile Diabetes Research Foundation Past Treasurer, Satchel Ford Elementary PTO Past President, Kiwanis Young Professionals of Columbia Riley Institute for Diversity Leadership Class Participant
elliottdavis.com © Elliott Davis LLC © Elliott Davis PLLC North Carolina Community Banking Forum Thursday, November 20, 2014 Grandover Resort Greensboro, North Carolina
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