Chart of the Week

The Weekly Musings Trusted Advisor for Banks and Investors February 21, 2017 How Will Deposits React to Higher Rates? Chart of the Week: Examining The Composition Of Deposits At 4Q16 State-by-State Guide To Taxes On Retirees Source: Partners FIG Research, State Tax Departments, CCH and Tax the Foundation With two rate hikes in the books and more expected prospectively the Our Chart below shows the best and worst states to protect your retire- days of cheap funding are likely over. Price competition is expected to ment nest egg from taxes. An analysis of 2016 state taxes shows that intensify as customers seek better returns. Nobody knows for sure how the Southeast remains the most tax friendly region, while the Northeast their Deposit Base will react to higher rates; however, Banks with better and the West are the least tax friendly. Notably, 50% of the Top 10 Core Deposits should be better positioned entering a rising rate cycle. most tax friendly states are in the Southeast. We reviewed the Deposit Composition of all publicly traded banks with Assets between $1—$50 Billion highlighting Core Deposit levels and funding cost data. We also examined recent trends in Deposit Betas. Averages by size bucket via 2016 EPS estimates on: 2/17/2017 1-Week 2016 P/E Price-to- Market Cap ROTCE Change Multiple T.Book Large 3.0% 19.3x 220% 12.4% Mid 2.8% 21.3x 238% 11.9% Small 2.8% 19.5x 196% 9.5% Micro 1.2% 19.6x 149% 7.6% See Our Last Word Analysis On Differentiating Core Deposits Via Page 6 Please see important disclosures regarding FIG Partners’ equity ratings, distribution of ratings, and other report disclosures on the last Page of this report. www.figpartners.com | 404-601-7200 Atlanta | Chicago | Jacksonville | Los Angeles | New York | Raleigh | San Francisco Research Director: Christopher Marinac, CFA FIG Partners LLC Analysts: David Bishop, CFA, Timothy Coffey, Brian Martin CFA, John Rodis Member of FINRA/SIPC Weekly Musings | 2-21-17 How Will Banks Deposit Bases React to a Rising Rate Environment? Examining The Composition Of Banks Deposits At 4Q16. Plus Recent Trends in Deposit Betas In anticipation of further rate increases, we examine the composition of Deposits at Banks sorting them by Core Deposits All else equal, Banks with the greatest level of Core Deposits are expected to fare better entering a Rising Rate Cycle We also examine funding costs and recent trends in Deposit Betas In our view, great Banks have great Deposits. With two rate increases under our belt (December 2015/2016) and more expected in 2017 as the economy continues to strengthen, the days of cheap funding appear to slowly be coming to an end. To date, most Banks have largely held off on passing the benefit of higher rates along to their customers as many of them have been awash with funding. The Loan-to-Deposit ratio for the industry at 4Q16 approximated 77% versus a higher mid 90’s level a decade ago. Going forward, pricing competition for Deposits is expected to intensify as customers increasingly look for better returns on their funds. This is expected to result in some Deposit runoff or migration of Deposits from non maturity sources to Time Deposits. Non Maturity Deposits as a percentage of Total Deposits have jumped since the financial crisis given little incentive to hold Time Deposits which offered similar yields given the low rate environment. Nobody knows for sure how their Deposit Base will react to higher rates; however, we believe Banks with greater levels of Core Deposits (Deposits sans CD’s) are better positioned entering a rising rate cycle. In this week’s Musings, we reviewed at all publicly traded Banks with Total Assets between $1 and $50 Billion breaking out their Deposits into five segments; Noninterest bearing, Now, Savings, Money Market, an CDs. We then broke out the Banks into four size buckets: Large, Mid, Small and Source: Partners FIG Research, SNL Financial Micro sorting them by levels of Core Deposits. We also examined funding costs and recent trends in Deposit Betas. We calculate Deposit Betas by dividing the change in Deposit Rate since late 2015 by the change in Fed Funds Rate over the same period. See our tables and charts on Pages 3-5 for additional analysis. Our Appendix on Pages 7-10 highlights the top 25 Banks by Asset Size sorted by the greatest level of Core Deposits. Medians Medians Core Deposit Core % of # of Banks Growth Deposit Beta Total # of Core % of Core Deposit Deposit (YR/YR) Banks Total Growth (YR/YR) Beta MID-ATLANTIC 92 77% 13% 6% LARGE 36 91% 7% 4% MIDWEST 113 78% 9% 6% MID 94 82% 11% 8% NORTHEAST 36 71% 11% 5% SMALL 140 79% 12% 4% SOUTHEAST 92 77% 11% 4% MICRO 137 71% 10% 2% SOUTHWEST 31 81% 8% 8% *Buckets Broken Down: Large > $5B, Mid $1B-$5B, Small $200M-$1B, Micro < $200M WEST 59 85% 13% 0% FIG Partners LLC 2 Weekly Musings | 2-21-17 4Q16 Deposit Segment Medians By Asset Size 100% 90% 80% 70% Source: Partners FIG Research, SNL Financial 60% 50% 40% 30% 20% 10% 0% Non-Interest Now & Other MMDA CD's Core Adjusted Core Bearing Savings (Core Minus MM) LARGE MID SMALL MICRO Non- Adjusted Other Interest NOW MMDA CD's Core Core (Core Savings Bearing Minus MM) LARGE 30.5% 1.4% 10.6% 52.7% 9.1% 90.9% 38.2% MID 25.8% 2.5% 18.0% 43.0% 17.7% 82.4% 39.4% SMALL 20.6% 2.9% 22.1% 30.4% 21.6% 78.4% 48.0% MICRO 17.9% 5.1% 19.7% 20.6% 30.4% 70.6% 50.0% FIG Partners LLC 3 Weekly Musings | 2-21-17 Funding Costs—4Q16 0.40 0.35 0.30 Source: Partners FIG Research, SNL Financial 0.25 0.20 0.15 0.10 0.05 0.00 Above 70bps 50 to 70bps 30 to 50bps 10 to 30 bps Below 10bps Interest Deposit Costs Cost of Funds Our Table above highlights all Banks in our study (389) sorted by Cost of Interest Bearing Deposits and Cost of Funds. FIG Partners LLC 4 Weekly Musings | 2-21-17 Deposit Mix Change Since 2005 Median Deposit Totals 40% 35% Source: Partners FIG Research, SNL Financial 30% 25% 20% 15% 10% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Non-Interest Bearing NOW & Other Savings MMDA CDs FDIC data shows the Banking Industry has experienced a surge in Deposits since 2008. Deposit Mix has changed as well with all non maturity segments (Non-Interest Bearing, Now/Savings, and MMDA) expanding while Time Deposits have declined over the same period. FIG Partners LLC 5 Weekly Musings | 2-21-17 TOTAL THE LAST WORD: MMDA & Ticker Bank DEPOSITS Savings % of Do All Core Deposits React The Same As Rates Rise? ($000) Total Dep Taking our work on Deposits one step further, we took a deeper dive on CFR Cullen/Frost Bankers Inc. 25,881,842 87.9% Core Deposits. In particular, we broke out Core Deposits by segment RBCAA Republic Bancorp Inc. 3,256,447 87.1% given the industry’s belief that all Core Deposits may not react the same BPFH Boston Private Financial 6,152,028 86.5% in a Rising Rate Environment. Specifically, we broke out Money Market CUNB CU Bancorp 2,617,104 85.6% Deposits from Total Core Deposits as many industry experts believe STI SunTrust Banks Inc. 162,368,587 85.3% these deposits could be more sensitive to rate increases than other Core Source: Partners FIG Research, SNL Financial KEY KeyCorp 107,452,468 85.1% Deposits. OPB Opus Bank 6,687,435 85.0% A bank with 80% Core Deposits where all of the Core Deposits are Mon- HBAN Huntington Bancshares Inc. 77,582,768 84.3% ey Market would likely have a higher Deposit Beta than a Bank with 80% WABC Westamerica Bancorp. 4,708,199 84.2% Core Deposits all of which were Noninterest Bearing, Interest Bearing WBS Webster Financial Corp. 19,460,175 83.3% Checking or Savings. Our summary tables below show which size Banks SBNY Signature Bank 31,863,527 83.2% have the greatest concentration of Money Market Deposit balances. Fur- COLB Columbia Banking System Inc. 8,067,346 82.5% ther, we highlight the 20 Banks with the largest percentage of Money GCBC Greene County Bncp Inc. (MHC) 777,259 82.3% Market Balances. Time will tell if these Deposits carry a higher Beta than other Core Deposit categories in a rising rate cycle. WAL Western Alliance Bancorp 14,563,903 82.1% SYBT Stock Yards Bancorp Inc. 2,527,656 82.1% GBNK Guaranty Bancorp 2,708,786 82.1% TCBI Texas Capital Bancshares Inc. 17,237,330 82.1% ZION Zions Bancorp. 53,819,075 82.0% CCNE CNB Financial Corp. 2,019,648 81.9% # of Banks % of Banks CHMG Chemung Financial Corp. 1,460,174 81.7% # of Banks MMDA > 50% MMDA > 50% of Total Dep of Total Dep LARGE 36 18 50% MID 94 41 44% SMALL 141 40 28% MICRO 137 8 6% Source: FIG Partners Research, SNL Financial LC FIG Partners LLC 6 Weekly Musings | 2-21-17 Core Deposits: Banks $20B to $50B in Assets Appendix: Page 1 of 4 D Nonint- Other DEPOSIT TOTAL DNOW % MMDA % CDs as % Core % LOANS-to- Cost of bear Dep/ Savings % BETA Ticker Institution Name DEPOSITS Aof Total of Total of Total of DEPOSITS Int.

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