Mercer Capital's Bank Watch | November 2022 | Community Bank Loan Portfolios Have Unrealized Losses Too

www.mercercapital.com
Second Quarter 2018
NOVEMBER 2022
Bank Watch
Community Bank Loan Portfolios Have Unrealized Losses Too
AND
Bond Portfolio Update
BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
In This Issue
ARTICLES
Community Bank Loan Portfolios
Have Unrealized Losses Too1
Bond Portfolio Update 4
Public Market Indicators 5
MA Market Indicators 6
Regional Public
Bank Peer Reports 7
About Mercer Capital 8

© 2022 Mercer Capital // www.mercercapital.com 1
Mercer Capital’s Bank Watch November 2022
Community Bank Loan Portfolios Have Unrealized Losses Too
Fixed income is undergoing one of the deepest bear markets in decades this year.
There has been a lot of discussion surrounding the impact of rising rates on bank
bond portfolios and bank stocks as rising rates have resulted in large unrealized
losses in bank bond portfolios. My colleague, Jeff Davis, provides an update to his
previous commentary on the topic based on third quarter Call Report data on page
4 of this newsletter.
If subjected to mark-to-market accounting like the AFS securities portfolio, most bank
loan portfolios would have sizable losses too given higher interest rates and wider
credit spreads; however, unrealized “losses” in loan portfolios do not receive much
attention because there is not an active market for most loans unlike most bonds
that populate bank portfolios. Further, accounting standards do not mandate mark-
to-market for loans other than those held-for-sale.
While the trend in loan portfolio fair values is harder to examine given the lack of
data, the following charts provide some perspective based on a survey of periodic
loan portfolio valuations by Mercer Capital. To properly evaluate a subject loan
portfolio, the portfolio should be evaluated on its own merits, but markets do provide
perspective on where the cycle is and how this compares to historical levels.
Fair value is guided by ASC 820 and defines value as the price received/paid by
market participants in orderly transactions. It is a process that involves a number of
assumptions about market conditions, loan portfolio segment cash flows inclusive
of assumptions related to expected prepayments and expected credit losses,
appropriate discount rates, and the like.
The fair value mark on a subject loan portfolio includes two components – an interest
rate mark and a credit mark. The interest rate mark is driven by the difference in the
weighted average discount rate and weighted average interest rate of the subject
portfolio. The discount rate that is applied to a subject loan should reflect a rate
consistent with the expectations of market participants for cash flows with similar
risk characteristics.The credit mark captures the risk that the borrower will default on
payments and not all contractual cash flows will be collected.
Since the end of 2021, rising market interest rates have been the predominant factor
driving the change (i.e., reduction) in loan portfolio fair values. As shown in Figure 1,
the median interest rate mark for our data sample has fallen from a modest 0.55%
premium at December 31, 2021 to a 5.65% discount as of September 30, 2022.
While bank earnings benefit from a higher rate environment and net interest margin
expansion, it takes time for the increase in market rates to be passed on to customers
via higher loan rates and for lower, fixed-rate loans to roll out of the portfolio. In talking
with Mercer Capital clients and in our loan portfolio valuation practice, so far it seems
that banks have been unable to fully pass on the increase in rates to loan customers.
WHAT WE’RE READING
Minutes from the FOMC’s meeting earlier this month indicate the pace of
rate increases may slow following four consecutive 75 basis point hikes
this year.
Republican Patrick McHenry is set to chair the House Financial Services
Committee following mid-term elections, and Banking Exchange reviews
the potential implications for banks.
The Treasury Department released a report this month calling for more
oversight of bank-fintech partnerships, noting compliance with consumer
protection laws as an area where more regulatory supervision is needed.

The shift in the valuation adjustment
attributable to interest rates reflects an
increase in market interest rates. Figure
2 depicts the LIBOR forward curve at
December 31, 2021, March 31, 2022,
June 30, 2022, and September 30,
2022. Relative to December 31, 2021,
forward LIBOR rates have increased
66 bps to 394 bps on average with the
largest increases occurring for periods
ranging from 1 to 12 months following
the valuation date.
Figure 1:Trends in Interest Rate Marks
Figure 2: LIBOR Forward Curve
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22
Median Interest Mark 1-year Treasury 3-year Treasury 10-year Treasury
Sources: Mercer Capital Federal Reserve Statistical Release H.15
Source: Bloomberg
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
0 12 24 36 48 60 72 84 96 108 120
December 31, 2021 March 31, 2022
June 30, 2022 September 30, 2022
Term Range
Change in
Forward Rate
12/31/2021 -
9/30/2022
1 - 12 Mos. 3.94%
13 - 24 Mos. 3.00%
25 - 36 Mos. 2.25%
37 - 60 Mos. 2.03%
61 - 84 Mos. 1.79%
85 - 120 Mos. 1.63%
121 - 240 Mos. 1.34%
241 - 360 Mos. 0.66%

Figure 3 depicts the trend in the credit mark for our data sample relative to credit
spreads. Credit spreads provide perspective on a number of factors, including where
the credit cycle has been and where we may be headed.
Over the period shown in Figure 3, credit marks peaked at the start of the pandemic
given the uncertainty and expectation of higher losses on loan portfolios.Credit marks
trended down from the March 31, 2020 peak through the first quarter of 2022, as did
banks’ loan loss provisions, as credit quality remained stable. While credit quality
continues to remain strong, both credit spreads and credit marks have ticked up in
2022 with the weakening economic outlook and concerns that the Federal Reserve’s
tightening interest rate policy may trigger a sharper downturn in economic activity.
Mercer Capital has extensive experience in valuing loan portfolios and other financial
assets and liabilities including depositor intangible assets, time deposits, and trust
preferred securities. Please contact us if we can be of assistance.
Mary Grace Arehart, CFA
arehartm@mercercapital.com | 901.322.9720
Figure 3:Trends in Credit Marks
Source: Mercer Capital Bloomberg
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22
Median Credit Mark Option Adjusted Spread - BBB Corp Option Adjusted Spread - BBB CMBS

Bond Portfolio Update
The U.S. bond market is undergoing its worst bear market in decades. Barclays U.S.
Aggregate Bond Market Index produced a total return of negative 14.5% through
September 30, 2022 and negative 16.0% through November 8, 2022. Excluding
coupon income, the year-to-date loss was 17.2% which speaks to how low coupon
income is given the nominal difference between price change and total return.
As shown in the figure below, U.S. commercial banks have suffered unrealized losses
in their bond portfolios equal to roughly 10% of the cost basis of both AFS and HTM
classified portfolios as of September 30, which compares to a price reduction of
15.6% in the Barclay’s index as of quarter end.
The less-worse performance by U.S. banks likely reflects less duration than the
index, which has an effective duration of 6.25 years and weighted average maturity
of 8.25 years. Our observation is that for the most part outsized losses among U.S.
banks reflect an outsized position in municipals and/or MBS. The index composition
is heavily skewed to U.S. Treasuries and U.S. Agency obligations given the heavy
issuance of government backed debt the past 15 years or so.
While management and directors at most banks are unhappy with their bond
portfolios, institutional investors have taken a more nuanced view of the impact of
rising rates based upon the tenor of third quarter earnings calls and the reaction of
most stocks upon the release of earnings. Rising rates have supported bank earnings
even though fixed-rate loan and bond portfolios are slow to reprice as floating-rate
loans have repriced and banks have lagged deposit rates.
Investor concern is more focused on liquidity risks. Some (or many) banks eventually
may have to raise deposit rates sharply to stem outflows and/or fund loan growth
because selling bonds is not a viable option given the magnitude of unrealized losses
that if realized will reduce regulatory capital.
Our prior commentary on bank bond portfolios following the release of the first and
second quarter Call Reports can be found here and here.
Asset Size # of Banks
Average
Assets
($Mil)
Lev
Ratio
(%)
Tier 1
Capital
(%)
AFS SEC/
Assets
(%)
AFS Gain / (Loss)
HTM Sec/
Assets (%)
HTM Gain / (Loss)
$250B 12 $1,061,112 7.8% 14.3% 15.1% -8.1% -20.1% 14.8% -11.9% -28.0%
$100B - $250B 17 $171,071 9.3% 13.4% 12.4% -9.5% -16.3% 8.5% -11.8% -17.2%
$10B - $100B 100 $26,497 9.7% 14.3% 17.2% -10.9% -23.2% 6.4% -11.5% -11.9%
$3B - $10B 194 $5,339 10.4% 14.4% 16.6% -10.9% -21.8% 4.2% -10.5% -11.3%
$1B - $3B 503 $1,681 10.6% 16.3% 17.6% -10.9% -24.3% 3.5% -8.3% -7.3%
$500M - $1B 661 $699 10.5% 16.4% 21.0% -10.2% -26.6% 2.9% -7.1% -7.1%
$100M - $500M 1,995 $253 11.2% 18.5% 23.0% -9.9% -27.8% 3.0% -6.2% -8.4%
$100M 712 $60 17.7% 46.2% 23.6% -7.4% -22.8% 4.6% -5.0% -10.3%
Cost (%) Cost (%)
T1 Capital (%) T1 Capital (%)
Jeff K. Davis, CFA
jeffdavis@mercercapital.com | 615.345.0350

© 2022 Mercer Capital // Data provided by SP Capital IQ Pro. 5
Mercer Capital’s Public Market Indicators November 2022
Mercer Capital’s Bank Group Index Overview Return Stratification of U.S. Banks
by Market Cap
Total Return Regional Index Data as of November 25, 2022
Month-
to-Date
Quarter-
to-Date
Year-
to-Date
Last
12
Months
Price /
LTM
EPS
Price /
2022 (E)
EPS
Price /
2023 (E)
EPS
Price /
Book
Value
Price /
Tangible
Book Value
Dividend
Yield
Atlantic Coast Index 2.4% 7.0% -4.1% -4.2% 10.7x 10.1x 8.1x 131% 146% 2.7%
Midwest Index 4.8% 12.0% 5.8% 8.4% 9.9x 9.9x 9.1x 113% 145% 3.0%
Northeast Index 2.7% 10.4% 5.2% 7.1% 8.9x 9.4x 8.2x 131% 137% 2.9%
Southeast Index 0.8% 7.5% 5.0% 5.3% 9.8x 10.5x 9.7x 130% 137% 2.7%
West Index 5.1% 13.1% 0.4% 3.0% 10.2x 10.3x 8.7x 120% 138% 2.5%
Community Bank Index 3.4% 10.3% 2.3% 4.0% 9.7x 9.9x 8.8x 128% 140% 2.9%
SP U.S. BMI Banks 4.3% 17.6% -10.8% -12.1% na na na na na na
SP U.S. Banks
Market Cap Under
$250 Million
SP U.S. Banks
Market Cap
Between $250
Million - $1 Billion
SP U.S. Banks
Market Cap
Between $1 Billion
- $5 Billion
SP U.S. Banks
Market Cap Over
$5 Billion
Month-to-Date 7.17% 1.93% 1.13% 4.88%
Quarter-to-Date 14.48% 12.61% 13.57% 18.43%
Year-to-Date 7.21% -2.33% -2.63% -12.34%
Last 12 Months 6.60% -4.06% -6.47% -17.54%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
As
of
November
25,
2022
70
80
90
100
110
120
1
1
/
2
6
/
2
0
2
1
1
2
/
2
6
/
2
0
2
1
1
/
2
6
/
2
0
2
2
2
/
2
6
/
2
0
2
2
3
/
2
6
/
2
0
2
2
4
/
2
6
/
2
0
2
2
5
/
2
6
/
2
0
2
2
6
/
2
6
/
2
0
2
2
7
/
2
6
/
2
0
2
2
8
/
2
6
/
2
0
2
2
9
/
2
6
/
2
0
2
2
1
0
/
2
6
/
2
0
2
2
November
26,
2021
=
100
MCM Index - Community Banks SP U.S. BMI Banks SP 500
Source: SP Capital IQ Pro.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 18.4%12.0% 6.9% 6.3% 5.4% 4.3% 5.5% 7.5% 7.5% 6.1% 10.0% 9.6% 9.3% 5.5% 6.9% 7.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Core
Deposit
Premiums
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 228% 196% 145% 141% 132% 130% 134% 155% 148% 143% 170% 178% 168% 150% 152% 168%
0%
50%
100%
150%
200%
250%
Price
/
Tangible
Book
Value
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 22.1 19.9 19.3 21.7 21.9 17.0 16.5 17.5 18.8 18.1 19.5 22.4 16.3 13.9 14.5 14.2
0
5
10
15
20
25
30
Price
/
Last
12
Months
Earnings
Regions
Price /
LTM
Earnings
Price/
Tang.
BV
Price /
Core Dep
Premium
No.
of
Deals
Median
Deal
Value
($M)
Target’s
Median
Assets
($000)
Target’s
Median
LTM
ROAE
Atlantic Coast 13.8x 195% 9.6% 13 117.7 608,600 9.9%
Midwest 14.2x 157% 7.8% 53 84.0 212,761 9.7%
Northeast 12.6x 123% 3.3% 7 60.7 442,468 9.3%
Southeast 14.2x 172% 6.9% 18 102.6 333,421 10.9%
West 15.1x 189% 9.8% 14 82.1 367,929 12.4%
National Community
Banks
14.2x 168% 7.8% 105 94.7 290,026 10.2%
Median Valuation Multiples for MA Deals
Target Banks’ Assets $5B and LTM ROE 5%, 12 months ended November 25, 2022
Median Core Deposit Premiums
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Tangible Book Value Multiples
Median Price/Earnings Multiples

Updated weekly, Mercer Capital’s Regional Public Bank Peer Reports offer a
closer look at the market pricing and performance of publicly traded banks
in the states of five U.S. regions. Click on the map to view the reports from
the representative region.
© 2022 Mercer Capital // Data provided by SP Global Market Intelligence 7
Mercer Capital’s
Regional Public
Bank Peer Reports
Atlantic Coast Midwest Northeast
Southeast West

Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements,
transaction advisory services, and other strategic decisions.
Mercer Capital pairs analytical rigor with industry knowledge to deliver unique insight into issues facing banks. These insights underpin the valuation analyses that are at the
heart of Mercer Capital’s services to depository institutions.
» Bank valuation
» Financial reporting for banks
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» Tax compliance
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Depository Institutions Team
MERCER CAPITAL
Depository Institutions Services
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES
Jeff K. Davis, CFA
615.345.0350
jeffdavis@mercercapital.com
Andrew K. Gibbs, CFA, CPA/ABV
901.322.9726
gibbsa@mercercapital.com
Jay D. Wilson, Jr., CFA, ASA, CBA
469.778.5860
wilsonj@mercercapital.com
Eden G. Stanton, CFA, ASA
901.270.7250
stantone@mercercapital.com
Mary Grace Arehart, CFA
901.322.9720
arehartm@mercercapital.com
William C.Tobermann, CFA
901.322.9783
tobermannw@mercercapital.com
Heath A. Hamby, CFA
615.457.8723
hambyh@mercercapital.com
Copyright © 2022 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged.
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Bank Watch is published monthly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
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