Strategic Options for Mutuals and Stocks

1
Strategic Options for Mutuals and Stocks An
Investment Banking Update
October 15, 2003
Remarks of Ben A. Plotkin Chairman
C.E.O. Telephone [phone] Email
ben.plotkin_at_ryanbeck.com
2
The Mutual Structure
The Declining Number of Mutuals
As of October 6, 2003 there were 19 mutuals with
over 1B in assets
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Strategic Alternatives for Mutuals

• The choices
• Mutuality
• MHC without Stock Issuance
• MHC with Minority Stock Issuance
• Full Conversion
• Conversion with Acquisition

• Advantages
• no external pressures
• lower returns on equity required
• quality of corporate life
• focus remains solely on customers employees
• Disadvantages
• limited external growth possibilities
• valuation clock keeps running (fluctuating
  appraisal values timing is an important factor)
• lack of stock-oriented benefits to attract
  qualified people
• regulatory uncertainty
• No foundation to supplement community giving

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Strategic Alternatives

• The choices
• Mutuality
• MHC without Stock Issuance
• MHC with Minority Stock Issuance
• Full Conversion
• Conversion with Acquisition

• Advantages
• ability to merge with institutions and keep them
  as a separate subsidiary
• formation process and proxy vote out of the way
  in the event rules change
• able to raise capital such as trust preferred as
  a middle-tier
• Disadvantages
• setup costs are a direct hit to PL
• proxy solicitation required may have to obtain
  vote again when issuing stock
• valuation clock keeps running
• no stock incentive plans
• no stock funded foundation

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Strategic Alternatives

• The choices
• Mutuality
• MHC without Stock Issuance
• MHC with Minority Stock Issuance
• Full Conversion
• Conversion with Acquisition

• Advantages
• more attractive valuation than conventional
  conversion
• initially, higher returns than full conversion
  less capital raised
• growth flexibility
• valuation clock partially stopped
• stock benefits to directors, management and
  employees
• able to make acquisitions with limits
• establishment of a foundation, funded with
  conversion stock
• Disadvantages
• less liquidity (stock float) and benefits than
  full conversion
• conscious of second step implications
• burdens of being a public company
• increased financial reporting
• benefit plan-related costs

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Strategic Alternatives

• The choices
• Mutuality
• MHC without Stock Issuance
• MHC with Minority Stock Issuance
• Full Conversion
• Conversion with Acquisition

• Advantages
• facilitates mergers acquisitions
• more stock-oriented benefits
• increased stock liquidity
• potential capital appreciation and dividends
• valuation clock is stopped
• establishment of a fully funded foundation,
  funded with conversion stock
• Disadvantages
• overcapitalization creates need for more
  changes in business plan
• external pressures
• lower returns on equity
• potential loss of control (short v. long-term)
• burden of being a public company
• less patient investors
• increased financial reporting
• benefit plan-related costs

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Strategic Alternatives

• The choices
• Mutuality
• MHC without Stock Issuance
• MHC with Minority Stock Issuance
• Full Conversion
• Conversion with Acquisition

• Advantages
• Provides strategic rationale for conversion
• increased stock liquidity
• potential capital appreciation and dividends
• establishment of a foundation, funded with
  conversion stock
• higher ROE than standalone conversion
• Disadvantages
• external pressures
• potential loss of control (short v. long-term)
• burden of being a public company
• non patient investors
• increased financial reporting
• benefit plan-related costs

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MHC Overview
The Enhanced MHC Structure A Unique Corporate
Vehicle
For an MHC, balancing different interests is
paramount.

• Minority Shareholders
• WANT MANAGEMENT TO
• Give them the best return on
• their invested money.

• Depositors / Members
• WANT MANAGEMENT TO
• Preserve their subscription rights in
• any subsequent conversion
• transaction.
• Preserve products and services
• available.

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MHC Overview
The Enhanced MHC Structure A Unique Corporate
Vehicle
The MHC as a Stepping Stone

• Optimize Timing of Offerings
• Initial MHC offering when valuations are
  relatively low
• 2nd step when valuations are relatively high
• Leverage Capital
• Manage capital though internal and external
  growth, stock repurchases and dividends

• Maximize 2nd Step Exchange Ratio
• Reduce minority percentage through repurchases
  while enhancing earnings
• Utilize Dividend Waiver if available
• Promote Market Sponsorship

West Palm Beach, FL
Paramus, NJ

• NASDAQ FFFL
• Initial MHC offering in January 1994 of 46 and
  27.6 million
• Grew from 640 million to 1.9 billion and opened
  15 new branches since 1994
• Raised 28.8 million in trust preferred
  securities to assist in their growth in 1998
• Completed a 2nd step transaction, raising
  approximately 87 million had a minority
  exchange ratio of 2.4x

• NASDAQ HCBK
• Initial MHC offering of 545 million in 1999
• Leveraging capital through aggressive buyback
  programs and dividends
• Have bought back over 40 million shares and
  lowered their minority percentage to 36 from 47
• Appreciation of over 700 to date.

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MHC Overview
The Enhanced MHC Structure A Unique Corporate
Vehicle
The MHC as a Safe Harbor

• Maximize majority control
• Maximize benefit plans

• Initially, raise low (20 30)
• High dividend yield

• Waive dividends
• Low market visibility

Warren, PA
Bridgeport, CT

• NASDAQ NWSB
• Initial MHC offering in 1994 of 69 million
  offering (30)
• Have completed 6 bank acquisitions with 1 pending
  since its IPO
• Repeatedly state intention of remaining in the
  MHC structure
• Issued approximately 100 million in trust
  preferred offering conducted during 4th quarter
  2001
• Recently completed an incremental offering of
  115 million to increase their minority
  percentage and raise additional capital

• NASDAQ PBCT
• Initial MHC offering of 62 million in 1988
• Have grown from 5.8 billion to 10.9 billion
  since IPO
• Utilized convertible preferred securities to
  assist with growth
• Have completed several bank and non-depository
  acquisitions
• Repeatedly state intention to never leave the MHC
  structure

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MHC Overview
The Enhanced MHC Structure A Unique Corporate
Vehicle
The MHC as an Acquisition Vehicle

• Mutuals have acquisition capacity to use when
  going public. This involves a simultaneous
  acquisition/demutualization transaction.
• The MHC structure allows the mutual to have this
  capacity twice. One opportunity in the initial
  MHC offering (example Bank Mutual Corporation)
  and a second opportunity with the second-step
  offering (example Waypoint Financial).

Milwaukee, WI
Harrisburg, PA

• NASDAQ BKMU
• Simultaneously underwent initial MHC offering
  while acquiring First Northern of Wisconsin
• Offered 30 of minority offering to depositors
  and the remaining 49.9 to shareholders of First
  Northern
• The transaction was accounted for as a purchase
  with 60 of the consideration in cash and 40 in
  stock
• Currently undergoing a 2nd step conversion to
  convert to the fully public form of ownership

• NASDAQ WYPT
• Simultaneously underwent a second step offering
  and acquisition of York Federal in PA.
• Offered their majority of 74 to depositors and
  was able to offer a portion of the remaining
  unsold subscription shares to York shareholders
  adjusted minimum.
• The transaction was completed as a pooling.

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MHC Overview
The Enhanced MHC Structure A Unique Corporate
Vehicle
The Remutualization Transaction

• There is a unique opportunity for mutuals to
  acquire stock MHC's.
• The mutual acquiror pays only for the minority
  shares outstanding including all ESOP, MRP and
  Option shares. This allows the Mutual to pay a
  higher price per share than if it were required
  to pay for all of the shares of the company.
• Upon payment by the mutual for the minority
  shares, the MHC dissolves and their shares are
  cancelled. The entire institution becomes
  wholly-owned by the mutual.
• The acquired MHCs depositors continue their
  ownership rights with the right to subscribe for
  stock if the acquiring mutual converts.
• In August of 2001, the first MHC Minority
  Acquisition was announced, wherein using the same
  concept as the re-mutualization, a stock MHC can
  acquire another stock MHC paying only for the
  minority shares outstanding, and the rights of
  the depositors get transferred to the surviving
  MHC.
• Recently, regulators have imposed severe limits
  on acquisition prices.

Avenel, NJ
Ridgewood, NJ

• Announced transaction with Provident for 15.00
  cash in Aug. 2000.
• Received a competing offer from Boiling Springs
  for 18.00 per share.
• The Boiling Springs offer was deemed superior and
  the transaction closed in June of 2001.

• Announced transaction with NSB Holding Corp. for
  26.50 cash in May 2002.
• This represents a multiple to book value of 275
  , 24.8x LTM earnings and over a 45 premium to
  market.
• The transaction was completed on December 31,
  2002.

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Summary of Simultaneous Transactions

• Simultaneous transactions can be done in tandem
  with all three forms of mutual to stock
  conversion
• Stock Mutual Holding Company Formations
• Full Conversions and
• Second Step Conversions.
• There are a number of reasons that simultaneous
  conversions are attractive, some of the main
  reasons are
• Provides immediate use of proceeds and gives a
  definite reason for the conversion to depositors,
  community and future shareholders
• Less excess capital will give a boost to return
  on equity and earnings per share
• Use of conversion stock in the consideration mix
  has tremendous value as currency for target
  companies recent simultaneous deals have seen
  the targets accepting stock trading considerably
  above the acquisition price
• Opportunities to offer benefit plans to
  management and employees of target company as
  strategic value in the consideration.

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Simultaneous Transactions
Conversion/Acquisition Transactions

• NASDAQ Pending
• Simultaneously undergoing a full conversion and
  dual acquisition of Connecticut Bankshares and
  Alliance of New England
• Connecticut Bankshares transaction is for 100
  cash, and Alliance transaction is for up to 100
  stock
• The transactions are expected to close
  simultaneously in the first quarter of 2004

New Haven, CT
Milwaukee, WI

• NASDAQ FNFG
• Simultaneously underwent a second step offering
  and acquisition of Finger Lakes Bancorp in NY
• Offered their majority of 61 to depositors and
  issued an additional 3.3 million shares to Finger
  Lakes shareholders
• The transaction was accounted for as a purchase
  with 50 of the consideration in cash and 50 in
  stock
• 410 million was raised in the conversion

• NASDAQ BKMU
• Simultaneously underwent initial MHC offering
  while acquiring First Northern of Wisconsin
• Offered 30 of minority offering to depositors
  and the remaining 49.9 to shareholders of First
  Northern
• The transaction was accounted for as a purchase
  with 60 of the consideration in cash and 40 in
  stock
• Currently undergoing a 2nd step conversion to
  convert to the fully public form of ownership

Lockport, NY
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Benefits of Simultaneous Transactions

• Ability to Significantly Help Manage Long-Term
  Capital Position.
• Ongoing Performance Ratios Enhanced.
• Opportunity to Acquire Additional Management.
• Franchise Building Transaction.
• Larger Market Capitalization and Increased
  Liquidity Could Lead to Trading Multiple
  Expansion.

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Timeline of Simultaneous Transactions
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Current Conversion Environment

• Over the past year thirteen conversions have been
  completed, six of which were second step
  transactions.
• The First Niagara transaction was the largest 2nd
  step transaction ever. Institutional demand for
  the First Niagara deal was strong.
• New Haven Savings Bank is the largest and most
  complex conversion ever. Total number of shares
  assumed at the Super Maximum offering is
  85,962,500 or 859.6M. New Haven is
  simultaneously acquiring Connecticut Bancshares
  Inc. and Alliance Bancorp of New England Inc.
• Second step conversion transactions are favorable
  during strong MHC trading markets in order to get
  the highest exchange ratio possible for minority
  shareholders. As of October 9, 2003, the SNL MHC
  Index has appreciated 60.1 for the last 12
  months, and the top ten MHCs are trading at
  median multiples of 28.5x earnings, and 233.5 of
  book.
• Recent conversions have performed well in the
  aftermarket, with conversions completed within
  the last 12 months trading at an average of
  nearly 60 above their IPO price.
• Appraisal values for conversions are at an all
  time high, with many recent conversions being
  priced as the most expensive ever.
• Providing guidance on pricing to potential
  institutional investors has become critical to
  the success of large second step transactions.

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Current Conversion Environment

• Bank Mutuals current 2nd Step transaction is
  being resolicited after demand was higher than
  anticipated.
• Bank Mutuals appraiser increased the valuation
  by 15 to 410.6M at the Super Max after the
  offering period ended to reflect both the level
  of interest in the offering and the increase in
  the pricing of the valuation peer group.
• At the new Super-Max appraisal level, Bank
  Mutual would be the largest 2nd Step transaction
  ever.
• Clifton Savings Bank recently had its appraisal
  increased by the OTS by 67. The Super-Max
  price to pro forma book would be 83.9, making it
  the most expensive standard conversion ever.
• Northwest Bancorp has recently completed an
  incremental offering of shares representing
  ownership of the MHC, shifting additional
  ownership to minority shareholders and raising
  115 million in capital.
• This was the first significant transaction of
  this type, and gives MHCs another option to
  raise capital without doing a 2nd Step
  transaction.

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Recent Conversion Environment
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Strategic Options for Public Banks/Thrifts
Standard Conversions
Second Step Conversions
Mutual Holding Companies
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Strategic Options for Public Banks/Thrifts
Community Bank/Thrift
De Novo/Internal Growth
Become an Acquiror
Sell
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What Investors are Looking For In Public
Bank/Thrift Stocks
To state the obvious, investors look for those
institutions with an ability to build Shareholder
Value!
What Investors Find Attractive

• Proximity to large acquirers
• Capital Strength
• Solid Management Team
• Credibility/integrity
• Consistency of earnings business strategy
• Sustainability of earnings
• Quality of earnings
• Corp. Governance/Board Oversight
• Sound Acctg. Standards Practices

• High ROE
• Consistent above average earnings and revenue
  growth
• Niche businesses
• Businesses which are tough to replicate or have
  high hurdle rates for entry
• Strong markets, demographics and growth
  projections
• Strong core deposit base, solid loan book
• Credit quality history (No credit time bombs)
• Healthy cross-sell success across its businesses

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Building Shareholder Value
Four separate, complementary approaches must be
simultaneously pursued to build Shareholder Value.
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First ROE

• Push Return on Equity to consistently exceed the
  cost of capital.
• Requires focus on ROA (operating strategies) and
  equity leverage strategies.

Non-Interest Income
Interest Income
ROA
Interest Expense
Overhead Expense
Provision
Taxes
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Equity Leverage Strategies

• Dividend Policy
• Stock Repurchases
• Acquisition (banks and/or bank-branches)
• Diversification into Non-Banking through Cash
  Acquisition
• Arbitrage
• Internal Growth

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Second Adopt Big Picture Strategy

• There are only two successful strategies for
  community banks and thrifts. Always have both as
  part of an overall strategy
• 1. Balanced Growth and Profitability
• achieve ROA in top tier of peer group
• achieve asset growth sufficient to keep capital
  leveraged at the targeted level
• 2. Sell
• From a financial point of view, a commitment to
  master Strategy 1 can only be justified when the
  present value of anticipated future benefits
  (stock price and dividends per share) exceeds the
  current value of Strategy 2. Thus,
  strategy 2 becomes the benchmark. Beware the
  trap!

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Third Stock Price Perspective

• Stock Price derives from perception regarding
  future earnings and growth rates in absolute
  terms and relative to other investment
  opportunities.
• Perception Drivers Include
• Industry trends/outlook/attractiveness
• Demographic dynamics of geographic markets served
• Lines of business/business designs/target market
  segments
• Brand strength/weakness
• Past financial performance/trends/volatility
• Leadership and management
• Economic trends/outlook
• Takeover vulnerability/attractiveness
• Owner/investor composition/concentration
• Competitive advantage(s)/disadvantage(s) value
  propositions business design
• Core competencies
• Corporate culture ability to attract and retain
  superior people
• Poor/negatively perceived corporate communication

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Fourth Corporate Culture Perspective

• This perspective is based upon the premise that
  exceptional leadership at all levels of an
  organization builds the strong positive corporate
  cultures which are essential in attracting and
  retaining the special people needed to build
  loyal, profitable customer relationships which,
  in turn produce the continuous cash-flow which
  create shareholder value.

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MA Trends -- Number of Transactions
annualized
As of October 7, 2003
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MA Trends -- Price to LTM EPS
As of October 7, 2003
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MA Trends -- Price to Book Value
As of October 7, 2003
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MA Trends -- Premium to Core Deposits
As of October 7, 2003
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MA Decision Process

• Does my Business Plan Maximize Value?
• Does my Business Plan Create Future MA Value?
• Do Those Values Exceed Todays MA Value?
• Does an Acquirors Stock Offer Superior Growth
  and Double Dip Potential?
• How Would an Acquisition Affect my Employees,
  Customers and the Community?

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Buyer Motivations

• Deploy Excess Capital
• Grow Net Income and EPS Through Synergies
• Improvement of Efficiency Ratio
• Enhance Products and Services Offered
• Increase Franchise Value
• Quicker Means of Developing Meaningful
  Shareholder Value
• Means of Acquiring More Management Talent
• Attract Stronger Levels of Revenue Growth as a
  Larger Institution
• Flexibility for Future Transactions
• Reduce Competition

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Seller Motivations

• Concern About the Ability to Grow Earnings and
  Market Value
• Issues of Management Succession
• Age of Board and/or Management Causes Search for
  Exit Strategy
• Proactive Stockholders Seeking Accelerated
  Returns
• Performance and/or Regulatory Challenges for
  Institution
• Disinterest in Listing Stock on an Exchange and
  Dealing with Public Company Demands
• Overwhelming Need for Larger Bank Resources
  Technology Credit Risk Management, etc.
• Competitive Threats

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Factors That Affect the MA Market

• Level of Interest Rates
• Inflation Outlook
• Acquiror Stock Valuations
• Acquiror Motivations
• Market Dynamics
• For Buyers
• For Sellers
• Pricing Trends

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Corporate Summary
Ryan Beck has maintained its tradition of
excellence for nearly 60 years

• Founded in 1946 by John J. Ryan as a brokerage
  firm specializing in municipal bonds, the
  tradition of excellence and service that started
  over a half century ago is still the foundation
  of our business today meeting client goals and
  objectives is our primary focus.
• The firm initiated specialized financial
  institution advisory services in the 1960s, and
  has maintained this industry focus in its
  investment banking, research, trading and market
  making areas.
• In April 2002, the firm significantly expanded
  its scope and distribution capabilities through
  an acquisition that added additional capital
  markets-related businesses and increased its
  private client group fivefold.

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Corporate Summary
The firm is organized around four key areas
Private Client Group
Investment Banking
Capital Markets
Research
60 professionals Market maker in over 700 equity
and debt securities Cover 1,000 institutional
accounts Equity Fixed Income Trading
20 investment bankers Investment Banking
Groups Financial Institutions Middle
Market Public Finance
Nearly 500 financial consultants focused on
serving over 150,000 high net worth client
accounts 18 billion under management Provide
new and innovative investment ideas to clients
15 professionals Financial Institutions
General Markets Research Nearly 100 companies
under coverage Daily distribution, annual
investor conferences, management road
shows Investment Strategy Joseph
Battipaglia Kevin Caron
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Financial Institutions Group
Providing custom solutions for all clients

• We are client driven. Ryan Beck strongly
  believes in developing and maintaining long-term
  relationships and alliances with our clients.
• The Financial Institutions team has well over 200
  combined years of industry experience through
  both good and bad market cycles.
• To meet clients investment banking needs, Ryan
  Beck offers public and private equity and debt
  financing, merger and acquisition services, and a
  full complement of other corporate finance
  advisory services including fairness opinions,
  due diligence assistance and takeover and
  anti-takeover strategies. The firm also is a
  leading specialist in mutual-to-stock
  conversions, including standard conversions, MHC
  reorganizations and second-step transactions.
• Ryan Becks investment banking relationships are
  best served by providing informed and creative
  insights in our advisory assignments, as well as
  the highest quality execution in market driven,
  relationship-oriented engagements.
• The firm actively provides continuous support to
  its public clients through research, distribution
  and market making activities.

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Financial Institutions Group
Recent Financial Institutions Group Transactions
August 25, 2003 7,255,520 Shares COMMON
STOCK Price 15.85 per Share Incremental
Offering of Common Stock
Pending COMMON STOCK Price 10.00 per
Share Second Step Transaction
Pending COMMON STOCK Price 10.00 per
Share Full Conversion with Concurrent
Acquisition of Two Institutions
June 27, 2003 2,875,000 Shares COMMON
STOCK Price 20.75 per Share
Pending COMMON STOCK Price 10.00 per
Share Second Step Transaction
January 27, 2003 Bluefield, Virginia has
signed a definitive agreement to
acquire Commonwealth Bank Richmond, Virginia
February 10, 2003 1,080,000 Units CONSISTING
OF ONE SHARES OF COMMON STOCK ONE
WARRANT Price 10.75 per Unit
February 20, 2003 800,000 Shares COMMON
STOCK Price 21.50 per Share
April 30, 2003 Sky Financial Group, Inc. Bowling
Green, Ohio has acquired Highland Hills,
Ohio
May 31, 2003 New Bedford, Massachusetts has
acquired Bay State Bancorp, Inc. Brookline,
Massachusetts
Resource Bankshares Corporation
January 8, 2003 2,040,816 Shares COMMON
STOCK Price 10.00 per Share Second Step
Transaction Subscription Community Offering
January 17, 2003 41,000,000 Shares COMMON
STOCK Price 10.00 per Share Second Step
Transaction Subscription, Community Syndicated
Offering
November 12, 2002 960,000 Units CONSISTING
OF ONE SHARE OF COMMON STOCK ONE
WARRANT Price 8.25per Unit
January 17, 2003 Lockport, New York has
acquired Finger Lakes Bancorp, Inc. Geneva, NY
December 31, 2002 NSB Holding Corp. Staten
Island, New York has acquired Avenel, New
Jersey
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Key Contact Information
FIG Investment Banking Offices Headquarters Bost
on Philadelphia West Palm Beach Richmond 220 So.
Orange Avenue 183 State Street 20 Ash Street 222
Lakeview Ave. 700 E. Main St. Livingston, NJ
Boston, MA Conshohocken, PA West Palm Beach,
FL Richmond, VA 07039 02109 19428 33401 23219 Ch
icago New York 70 West Madison Street 380 Madison
Avenue Chicago, IL New York, NY 60602 10022
Professional Email Address Direct Number FIG
Investment Banking Blair Brantley blair.brantley_at_
ryanbeck.com 804-213-4303 Christopher
Choate chris.choate_at_ryanbeck.com 804-213-4302 Mark
B. Cohen mark.cohen_at_ryanbeck.com 212-651-2725 Mic
helle Darcey michelle.darcey_at_ryanbeck.com 610-567-
1909 David Downs david.downs_at_ryanbeck.com 973-597-
6030 Christopher Gastelu chris.gastelu_at_ryanbeck.co
m 973-597-6041 Kristi Lutes kristi.lutes_at_ryanbeck.
com 973-597-6037 Bruce Miller bruce.miller_at_ryanbec
k.com 973-597-6045 Paul OConnor paul.oconnor_at_rya
nbeck.com 312-269-0346 Gary Penrose gary.penrose_at_r
yanbeck.com 804-213-4301 Ben Plotkin ben.plotkin_at_r
yanbeck.com 973-597-6025 Michael
Rasmussen michael.rasmussen_at_ryanbeck.com 973-597-6
046 Dwayne Safer dwayne.safer_at_ryanbeck.com 973-597
-6028 Michael Schechter michael.schechter_at_ryanbeck
.com 973-597-6026 Fred Schluter fred.schluter_at_ryan
beck.com 617-589-9004 Robin Suskind robin.suskind_at_
ryanbeck.com 973-597-6036 Robert
Troke robert.troke_at_ryanbeck.com 973-597-6031 Ban
k Services Group Guy Malaby guy.malaby_at_ryanbeck.co
m 973-597-5777 Scot Orzillo scot.orzillo_at_ryanbeck.
com 973-597-6833
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