White Paper - M&A Boom

in Small & Mid-Cap Banks

Creates Opportunity

November 15, 2010

Prepared by:
FJ Capital Management
Executive Summary
 Emerging trends and pent-up demand suggest the banking industry is on the cusp of a
merger and acquisition boom in small- and mid- capitalization bank and thrifts that will ri-
val and possibly far exceed the previous record consolidation of the mid 1990s following
the savings and loan crisis. This paper examines the current banking environment and
opines on pricing and other factors that suggest an unprecedented level of bank transactions
during the next several years.

 Recent transactions have drawn little attention, but have produced outsized returns. In the
year-to-date period ended Oct. 31, 2010, 26 public transactions have been completed with
an average one-day stock price spike of 83 percent following the deal announcement. There
have been far more private transactions — 145 year to date. Although the economy is slug-
gish, M&A activity continues below investors’ radar screens and is steadily gaining mo-
mentum. Looking forward, as the economy improves and the Federal Deposit Insurance
Corporation (FDIC) opportunity fades, we expect record M&A activity, albeit with pricing
set below peak transaction pricing multiples.

 This paper looks at the banking landscape, past and present, and showcases recent acquisi-
tions which have produced extremely compelling shareholder returns. Moreover, today’s
banking climate will be compared and contrasted to the last major M&A cycle in the United
States.

 We will put you in the boardroom to better understand how bank directors are thinking and
reaching conclusions on what is next on the consolidation horizon. Management and direc-
tors are faced with many headwinds, including a tough economy, historic regulatory
changes and the resultant cost pressures, and declining loan demand. These factors place
considerable pressure on banks’ ability to earn acceptable returns for shareholders, a reality
that serves to add further fuel to the building M&A fire.

 The opportunity to acquire struggling banks through FDIC-assisted acquisitions is another

development that has garnered considerable attention in the last 18 months. This prospect
and its impact on traditional whole bank transactions will be discussed.

 Lastly, what about the acquirers? There should be no question that it will be a buyer’s mar-
ket in the bank sector for at least the next several quarters. In addition, buyers are paying
recessionary prices for target franchises and, as a result, should ultimately benefit from
above average earnings growth and stronger market multiples. Therefore, investors may
want to consider investing in demonstrated and potential acquirers.

We hope this white paper is informative, and would be happy to discuss in further detail how to
profit from the upcoming boom in small- and mid- cap bank and thrift mergers and acquisitions.

2
2010 Transactions in Review
Traditional bank M&A has taken a back seat to FDIC-assisted deals in this fragile economic envi-
ronment, with the government agency handling the disposition of problem banks. It is important to
note that, despite the FDIC focus, a steady flow of whole bank transactions is occurring.

As shown below, there have been 26 public transactions with positive one-day premiums for the
year-to-date period ended Oct. 31, 2010; over the same time period, there have been 145 private
transactions. Finally, there were three public transactions (in addition to the 26) that saw negative,
one-day premiums due to the troubled nature of the target institutions. The average one-day, posi-
tive premium for publicly traded takeover targets has been 83 percent thus far in 2010.
Public Whole Bank & Thrift M&A Transactions
(Does Not Include FDIC-Assisted Transactions)
1/1/2010 Through 10/31/2010

Deal Price/ 1 D ay
Seller Announcement Value Tangible Premium
Rank Buyer/Target State State Date ($M) Book (%) (%)
AVERAGES 108.2 92.6 83.0
MEDIAN S 38.5 120.9 59.8
1 Brookline Bancorp Inc./ First Ipswich Bancorp MA MA 10/27/2010 19.0 145.16 260.0
2 Continental Bank Holdings Inc/ First Resource Bk PA PA 05/12/2010 8.0 85.54 175.0
3 Old National Bancorp/ Monroe Bancorp IN IN 10/05/2010 81.3 146.06 169.5
4 Kearny Financial Corp. (MHC)/ Central Jersey Bancorp NJ NJ 05/25/2010 72.3 153.06 130.6
5 Naugatuck Valley Finl (MHC)/ Southern Connecticut Bancorp CT CT 02/22/2010 18.2 115.98 119.9
6 Liberty Bank/ CT River Community Bk CT CT 07/23/2010 16.1 114.73 115.0
7 Old Line Bancshares Inc/ Maryland Bankcorp Inc. MD MD 09/01/2010 20.0 65.85 111.9
8 Eastern Bank Corporation/ W ainwright Bank & Trust Co. MA MA 06/28/2010 158.3 200.21 106.1
9 Cheviot Financial (MHC)/ First Franklin Corp. OH OH 10/12/2010 24.8 111.97 85.4
10 California United Bank/ California Oaks State Bank CA CA 08/24/2010 17.3 126.39 74.6
11 Chemung Financial Corp./ Fort Orange Financial Corp. NY NY 10/14/2010 28.8 127.43 67.8
12 Chemical Financial Corp./ O.A.K. Financial C orp. MI MI 01/07/2010 77.5 108.70 65.2
13 F.N.B. Corp./ Comm Bancorp Inc. PA PA 08/09/2010 67.8 127.27 64.1
14 Community Bank System Inc./ W ilber Corporation NY NY 10/22/2010 101.8 140.53 55.5
15 Grandpoint Bk/ First Commerce Bancorp CA CA 07/14/2010 43.2 130.43 55.2
16 German American Bancorp Inc./ American Community Bancorp IN IN 10/04/2010 30.4 131.41 54.0
17 People's United Financial Inc./ LSB Corp. CT MA 07/15/2010 95.9 152.51 51.8
18 Roma Financial Corp. (MHC)/ Sterling Banks Inc. NJ NJ 03/17/2010 14.7 99.60 40.2
19 Donegal Group Inc./ U nion National Financial Corp. PA PA 04/19/2010 25.2 82.55 37.2
20 Steele Financial Corporation/ East Texas Financial Services TX 01/27/2010 23.5 122.20 33.3
21 First Niagara Finl Group/ NewAlliance Bancshares Inc. NY CT 08/18/2010 1,498.0 165.31 24.9
22 Trustmark Corp./ Cadence Financial Corp. MS MS 09/21/2010 54.7 32.54 24.9
23 Modern Capital Partners L.P./ Madison National Bancorp Inc. NY NY 10/20/2010 33.8 110.45 21.2
24 Community Bancorp LLC/ Cadence Financial Corp. TX MS 10/06/2010 67.8 39.25 20.2
25 Berkshire Hills Bancorp Inc./ Rome Bancorp Inc. MA NY 10/12/2010 73.3 119.61 13.9
26 People's United Financial Inc./ Smithtown Bancorp Inc. CT NY 07/15/2010 60.1 50.76 3.7

Source: SNL Financial LC and FJ Capital Research

Why the numerous significant, one-day premiums shown above? In our view, market prices
do not fully reflect the franchise values of most small- and mid- cap banks and thrifts. Put
differently, the compelling upside is driven by extremely low, pre-deal, market valuation
multiples.

As shown in the following chart, since Nov. 30, 2006, the average market multiple has drifted be-
low tangible book value and is off by 60 percent for banks and thrifts with market caps below $250
million. All transactions are not created equal, however. The ultimate deal premium or discount
will be based on the relative health of the financial institution and its capital/regulatory situation.

3
 Banks & Thrifts with Market Caps < $250 Million
(12/31/1994 – 10/31/2010)

-60%

Source: SNL Financial LC and FJ Capital Research

As the recent recession drove bank stocks to recent lows, the ensuing stock market recovery
still left many smaller banks’ stocks at considerably lower valuations than their larger bank
peers. In fact, since the market hit its March 2009 lows, the broad market and large cap banks
have increased 66 percent and 73 percent, respectively, while small banks and thrifts are down
1.1 percent. Small bank equity prices are plagued by many factors, including lack of access to
the capital markets, relative trading liquidity and an overhang from the deep recession.

It is worth noting that while the large cap bank universe is up substantially from the March
lows, most of those equities were trading as if the government was ready to privatize the entire
industry. While the government effectively back-stopped the largest banks, the smaller banks
received no such treatment. This dynamic played no small part in helping create a negative
market psychology toward the latter, which is further fueled as troubled small banks are seized
weekly by the government.

We will later examine other factors that drive M&A and draw conclusions on the next great
consolidation boom. But first, let’s review some of the recent transactions that highlight the
compelling opportunity we foresee during the next several years.

4
Cheviot Financial Buys First Franklin
 On Oct. 12, 2010, First Franklin (FFHS), a Cincinnati, OH-based thrift with $281 million
in assets, announced that it would be acquired by Cheviot Financial Corp. (CHEV) for
$14.50 per share, or 112 percent of tangible book value – in line with recessionary pric-
ing. Like the majority of sellers in this environment, FFHS was capital constrained and
its credit quality was less than pristine.

 FFHS went public in 1988 and at its peak traded for nearly $18 per share. As the reces-
sion started, asset quality deteriorated, leading to losses in 2008 and 2009. In addition to
fundamental issues, public perception or sentiment for small caps was at an all-time low,
with FFHS consequently trading below $2 per share. During the next nine months, the
stock traded between its low and $13 per share. With the bank’s fundamentals failing to
improve, the stock most recently traded at $7.82 just before the merger was announced.
The following trading day, the stock surged 81 percent, reflecting the substantial pre-
mium paid by the acquirer.

Old National Bancorp Buys Monroe Bancorp

 On Oct. 5, 2010, Monroe Bancorp (MROE), an $838 million asset bank headquartered in
Bloomington, IN, declared it would be acquired by Old National Bancorp (ONB) for 146
percent of tangible book value. Again, this was within M&A transaction pricing range
for the present time period. MROE, not surprisingly, also was plagued with a capital
shortfall and asset quality issues, sporting a stock chart similar to that of FFHS above,
with the stock peaking at nearly $20 per share, then beginning a steady decline to reflect
deteriorating fundamentals and investor sentiment. The stock closed at $5.38 per share
prior to the deal announcement. On the day of the acquisition announcement, the stock
closed at $11.25, an impressive 109 percent one-day price jump.

 Why pay such a premium? Speaking to this very point, Bob Jones, CEO of ONB ($7.5
billion in assets), said on the deal announcement conference call that the premium to
Monroe’s Oct. 5, 2010 closing stock price of $5.38 was justified. He noted that Mon-
roe's stock was "fairly illiquid," and that ONB looked at the company's tangible book
value to determine the full valuation for the stock.

 Jones said the markets to which ONB is gaining access also help justify the premium,
with the combined company leading in market share in the Bloomington market. The
acquisition will help fill in gaps in the company's Indianapolis market as well. He also
noted the bank has the capital and the capacity to do another deal if the right opportunity
presents itself, confirming that changing regulations and higher capital requirements
were forcing more boards of directors to consider a sale. “We do think it’s going to be
an active period.”

5
 Brookline Bank Buys First Ipswich Bancorp
 On Oct. 27, 2010, Brookline Bancorp (BRKL) announced an all-cash $260 million
deal to acquire First Ipswich Bancorp (FIWC) of Ipswich, MA. This transaction pro-
vided an over 200 percent return to investors since FIWC was trading at just 45 per-
cent of tangible book value, and the transaction was priced at 145 percent of tangible
book value. The stock increased from $2.25 on Oct. 26, 2010 to close at $7.82 the
next day, as the deal value per share was $8.10 at announcement, with only $19 mil-
lion of the $260 million deal value as cash consideration. Once again, this example
paints a familiar story; a company experiencing asset quality deterioration and capital
constraints deciding to partner with a larger institution with far greater resources.
With the target company’s shareholders receiving a significant windfall in the process.

Merger Trends: 1990 to 2010 and Beyond

The chart below shows the trends in bank and thrift transactions during the last 20 years. The last
major boom in M&A was the 1992 to 1994 period. After the recession in 1990 to 1991, which was
particularly harmful to real estate lenders, there was a spike in consolidation activity as the econ-
omy began to show signs of improvement. Moreover, deals exploded to a peak of 575 transactions
in 1994.

Since 1994, there was steady M&A activity that slowed considerably in 2000 as bank and thrift
stock valuations took a back seat to the dot-com bubble and the resulting recession of 2001 to 2003.
Activity started to pick up until the financial crisis hit in 2007, and even today continues to plague
bank balance sheets. The current recession is again centered on real estate and has crippled many
companies in the sector.

Bank & Thrift Deals: 1990 - 2010

600

500
Deal Count

400

300

200

100

0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Sources: SNL Financial LC & FJ Capital Research Data as of October 31, 2010

6
As demonstrated below, the trend in the bank sector is clearly consolidation, with the number of
banks and thrifts dropping by about half, from almost 16,000 in 1989 to less than 8,000 today.
It is often said in the industry that a bank is either a buyer or a seller. Furthermore, based on the
“new normal” operating environment, there could be a similar decline during the next 5 years.
In short, we believe conditions exist for a substantial rebound in M&A that could equal or ex-
ceed 1994 peak levels.

Number of U.S. Banks & Thrifts

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

-
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Sources: SNL Financial LC & FJ Capital Research Data as of October 31, 2010

What Other Industry Experts Are Saying

 “The current environment provides a once-in-a-career opportunity for some banks to
move the market share needle.” — John Duffy, Chairman & CEO of KBW, Inc.1

 “A sea change could be occurring at this point in the cycle, with buyers offering
prices that cannot be ignored by the boards of target institutions.” — Brian Sterling,
Principal and Co-Head of Investment Banking, Sandler O’Neill &Partners.2

 “There has to be consolidation, with most of the consolidation taking place at smaller
banks, as mid-size banks bulk up by purchasing smaller companies.” — John Feiger,
CEO of MB Financial ($10.6 billion in Assets—Chicago , IL)2
1
Sources: Bank Director Magazine — 2nd Quarter 2010
2
SNL Bank and Thrift M&A weekly.
Note: KBW and Sandler are the leading investment banks in Bank and Thrift M&A activity.

7
The below chart examines M&A pricing and offers some key takeaways.

 During recessionary periods, transaction pricing averaged 125 percent to 150 percent of tan-
gible book value.

 The peak level of 250 percent of tangible book value was reached in 1998 due to a debt-
enhanced economy that is unlikely to repeat in the foreseeable future.

 Contrary to expectations, transactions are getting done, albeit at recessionary pricing of 125
percent to 150 percent of “adjusted” tangible book. Since 2009, 347 deals have been an-
nounced.

 The failed bank or FDIC-assisted transaction has created a slowdown in whole bank acqui-
sitions, a trend that likely will reverse in the 2011 to 2012 timeframe. Moreover, as banks
better understand the value of their balance sheets, it is likely that the open-bank consolida-
tion trend will continue.

Average P/TBV in Bank & Thrift Deals: 1990 - 2010

300
Housing crash, credit
Early 1990’s Early 2000’s crisis and recession
250 recession (2007 to Present)
banking
crisis
P/TBV (%)

200

150

100

50

0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Sources: SNL Financial LC & FJ Capital Research Data as of October 31, 2010

Board Perspective and Consolidation Drivers

The big question on the minds of bank management and directors is whether peak pricing will
return anytime soon. We believe peak levels may be behind us as the economy has structural
issues that will take an extended period to adjust. First, peak pricing was a result of a “hyper”
economy driven by extreme levels of debt and irrational real estate gains. The hangover will
last some time and will be characterized by slower growth and higher-than-desired unemploy-
ment. Additionally, we believe expectations will be tempered by the relative size of pent-up
supply waiting for stabilization in the economy.

8
This “new normal” will lead both to more willing sellers, but also weaker pricing as the ac-
quirer’s stock will be mired by the effects of the economy. Therefore, we believe sellers will
need to re-adjust their expectations, a process we believe has already begun. Nevertheless, peak
pricing is not required to earn substantial returns in this sector.

Why Banks Want/Need to Merge

Generally speaking, the same drivers that existed in the early 1990s exist today. However,
there are new important drivers that were not present in 1994. For starters, there continue to be
too many banks competing for the same marginal deposit and loan. Major consolidation factors
include:

 Cost Savings – The typical merger can save 20 percent to 30 percent in operating costs,
thereby creating significant earnings accretion for the combined entity.

 Lack of Loan Growth – Due to banking competition and the over saturation of banks, loan
growth could be muted in even the best of times. This is especially true in the current economic
environment, with large businesses hoarding record levels of cash and small business not seeing
the end demand needed to make capital investment. In addition, many individuals and house-
holds are working to repair damaged balance sheets and de-lever. The outlook is for limited
asset growth, so many banks likely will opt to merge.

 Lack of Access to Capital Markets – Most small cap firms have limited access to the capital
markets. Even if they have access, the punitive pricing commonplace in today’s market means
this route may not be an economically viable capital raising option for many smaller banking
institutions. Therefore, capital restraints will force banks to partner up.

 Fairly Illiquid Trading – Most smaller cap banks tend to have fairly illiquid shares. The
boards of such institutions will consider this as they deliberate on ways to increase shareholder
value. Most institutional investors will not invest in companies they deem illiquid, tending to
shy away from market caps under $500 million. This excludes most of the public banks and
thrifts from receiving direct investments by institutional investors.

 Management/Board Fatigue – Sophisticated management and boards understand that a

bank must have a valid business plan in place, one that includes either organic growth or growth
via acquisition. We suspect many leaders find it difficult to execute their original business
plans in the current economic environment. This recession has been particularly tough on
banks focused on real estate lending. Therefore, we believe many banking leaders currently are
weighing their M&A options.

 Regulatory Reform – One new factor is the landmark legislation passed a few months back.
The potential for change is yet to be fully processed by managements and board. It is clear the
regulation will greatly increase operating costs and will reduce shareholder returns. In fact,
new capital standards alone will make it much harder for companies to earn an acceptable re-
turn on equity to justify independence. Additionally, uncertainty surrounds the implementation
of the new reform and the potential impact on generating acceptable returns.
9
The Banking Landscape
# of Institutions Assets ($ Billions)
Total Industry Banks & Thrifts 7,428 100% $17,826 100%
Private 6,146 83% $6,392 36%
Public 1,282 17% $11,434 64%

# of Institutions Assets ($ Billions)

Public Banks & Thrifts 1,282 100% $11,434 100%
Public Banks 1,034 81% $11,025 96%
Public Thrifts 248 19% $409 4%

# of Institutions Assets ($ Billions)

Public Thrifts 248 100% $409 100%
Fully Public 174 70% $340 83%
MHCs 74 30% $69 17%
Sources: SNL Financial LC & FJ Capital Research Data as of January 13, 2010

 The above chart illustrates the landscape of private and public U.S. banking institutions.
Let’s review the opportunity set. Below we illustrate that the majority of banks are small
community banks with assets of less than $500 million. Of that, roughly 1,100 are publicly
traded companies with market caps below $250 million, and a combined $85 billion capi-
talization.

U.S. Banking System Composition

Number of Banks by Asset Size

7,000
# of Banks in Asset Group

6,143
6,000
5,000
4,000
3,000
2,000
1,000 642
411 73 157
0
$0 to $500 Mil $500 Mil to $1 Bil $1 Bil to $3 Bil $3 Bil to $5 Bil $5Bil +

Asset Size Range Defining Bank Group

Sources: SNL Financial LC & FJ Capital Research Data as of January 13, 2010

10
 Summary of Potential Market Opportunity
SNL Micro-Cap Bank & Thrift Index
1,073 Companies with:
--A Median Market Cap of $ 20.6 Million
--An Average Market Cap of $ 39.3 Million
--For a Total Index Market Cap of $ 42.2 Billion
SNL Small-Cap Bank & Thrift Index
86 Companies with:
--A Median Market Cap of $ 429.6 Million
--An Average Market Cap of $ 499.9 Million
--For a Total Index Market Cap of $ 43.0 Billion
Combined SNL Micro-Cap & Small-Cap Bank & Thrift Indices
1,159 Companies with:
--A Median Market Cap of $ 23.5 Million
--An Average Market Cap of $ 73.5 Million
--For a Total Index Market Cap of $ 85.2 Billion
Sources: SNL Financial LC & FJ Capital Research Data as of September 17th, 2010

 As noted below, nearly 700 companies are trading at less than book value, reflecting inves-
tor appetite for liquidity coupled with the current economic environment and company-specific
issues.
 As stated previously, new capital requirements and banks’ lack of access to the public mar-
kets, will contribute significantly to the increase in consolidation. As the chart below shows,
nearly 500 companies, or 39 percent of all 1,251 public banks and thrifts, are experiencing sub-
standard capital levels and/or elevated asset quality issues.
Public Banks: Current Valuation and Credit Summary

Public Banks 1,251 100.0%

P/TBV is not available 238 19.0%
P/TBV > 100% as of close on 11/2/2010 316 25.3%
P/TBV < 100% as of close on 11/2/2010 697 55.7%

P/TBV < 100% 697 100.0%

No TCE data available 12 1.7%
No NPA data available 61 8.8%
TCE > 6% 998 143.2%
TCE < 6% 241 34.6%
NPAs > 4% 411 59.0%
NPAs < 4% 779 111.8%
TCE < 6% AND NPAs/Assets > or = 4% 158 22.7%
TCE < 6% OR NPAs/Assets > or = 4% 494 70.9%

Sources: SNL Financial LC & FJ Capital Research Tables based on 6/30/2010 GAAP data

11
Update on FDIC-Assisted Transactions
The financial crisis in late 2007 sparked a resurgence in bank failures. As shown below, the
real estate bust led to an unprecedented number of failures in the early 1990s. The present day
cycle has seen some very large institutions fail, yet the absolute number of failures remains well
below the peak created in the last real estate crash.

While the economic recovery is not out of the woods by any stretch, the pace of FDIC-assisted
transactions has slowed, and their pricing is much more competitive. Often, multiple bidders
try to grow their franchises with the help of government stop-loss guarantees. Companies with
strong balance sheets have taken advantage of this cycle to prudently grow their franchises.

FDIC-Assisted Deals Since 1990

600

500

400
# of Deals

300

200

100

-
1990

1991

1992

1993
1994

1995

1996
1997

1998
1999

2000
2001

2002
2003

2004

2005

2006
2007

2008

2009
2010

Sources: SNL Financial LC & FJ Capital Research Data as of October 26, 2010

According to the head of the FDIC, Sheila Bair, the most recent count of banks on the FDIC’s
“Problem List” is 829. She also declared that the market is near a peak in failures and that this
cycle will produce far less bank failures than the mid 90s cycle.

Based on our research, we see 454 banks with a Texas ratio (nonperforming assets/tangible
common equity + loan loss reserves) greater than 100 percent, a typical sign of potential failure.
Highline Financial, a provider of financial market data, produces a peer ranking of all banks
and thrifts. Highline has calculated that 259 companies are at extreme risk of failure.

12
 Troubled Banks

 FDIC counts 829 banks and thrifts on its “Problem List”.

 As of Oct. 26, 2010, there were 454 banks and thrifts with Texas ratios
greater than or equal to 100 percent.
 Highline Financial estimates that 259 companies are at extreme risk of
failure.

We believe we are closer to the end of the FDIC opportunity. Furthermore, these opportunities
are centered around a handful of states (the top 13 states have 71 percent of banks with Texas
Ratios above 100 percent).

Thus, as the FDIC clears out the weakest banks, traditional whole bank transactions will return
to center stage. In addition, the 454 companies with Texas Ratios above 100 percent have col-
lective assets representing just 1.7 percent of total industry assets. This small percentage high-
lights that the banking industry should have ample capacity to absorb the troubled institutions,
and then move on to normal M&A activity.

Investing in the Buyers Can Be Profitable

M&A pricing is going off at recessionary levels, a reality poised to continue well into the fore-
seeable future and one that clearly favors buyers who are able to build market share on the
cheap. For this reason, investing in the consolidators makes sense. Some desirable buyer char-
acteristics include: proven management teams, access to capital markets, strong capital levels,
diversified loan portfolios and manageable asset quality.

As the equity market opened up, strategic management teams tapped the capital markets to bol-
ster bank capital levels as a source of dry powder to make acquisitions at a later time. At first,
such banks planned to buy companies via government-assisted transactions. But as FDIC deal
pricing has firmed up, and the list of these targets dwindles, we believe buyers will once again
enter the traditional whole bank market.

Since the beginning of 2009, banks raised $387 billion of capital, consisting of $109 billion of
common stock, $76 billion of senior debt1, $34 billion of preferred stock, $10 billion of trust
preferred securities, $3 billion of subordinated debt, $36 billion of original TARP issuances and
$120 billion of TLGP-backed debt issuances.

In fact, capital levels are robust at a time when companies are facing headwinds in both loan
growth and increasing revenue. This dynamic could drive management teams to utilize their
excess cash by making strategic acquisitions. Let’s review how advantageous this environment
can be for a buyer:

13
First Savings Financial Group Buys Community First Bank

On Sept. 30, 2009, First Savings Financial Group (FSFG) based in Clarksville, Ind., purchased
Corydon, Ind.-based Community First Bank, a subsidiary of Community First Financial located
in the adjacent county to FSFG’s branch footprint. Due to financial difficulties in its other sub-
sidiaries, Community First opted to sell it’s well-performing $240 million asset franchise in
southern Indiana.

Furthermore, Community First Financial was forced to sell the bank at recessionary pricing of
115 percent of tangible book value. As a result of the acquisition, FSFG doubled its size, with
its annual earnings per share jumping from $0.75 per share to nearly $2 after merger related
costs. FSFG, a recently converted thrift, has the necessary characteristics for a successful M&A
buyer — smart management, excess capital and stable asset quality.

Conclusion
The bank sector is on the precipice of a major wave in small- and mid- cap bank acquisitions.
More importantly, for those investors looking to take advantage of this nascent trend, invest-
ment opportunities in the sector are plentiful. This paper highlighted a handful of recent M&A
transactions and their impressive stock price premiums. We have also examined consolidation
activity and pricing from previous cycles, future prospects, and the key considerations facing
bank management teams and their boards.

Clearly, depressed bank and thrift valuations, the changing regulatory environment, and the
fragile economy is forcing many companies to re-evaluate their business prospects and either
exit the fray by selling out or look for a partner to the create economies of scale necessary to
survive and prosper.

For this reason, we strongly believe that, as the economy shows signs of improvement and the
FDIC clears the troubled institutions, bank M&A activity will rise significantly and rival and
possibly far exceed the previous record consolidation seen in the mid 1990s. Moreover, inves-
tors that can prudently navigate the contentious banking landscape will be the ultimate winners.

1
Senior debt issuances exclude issuances for operating purposes, such as medium-term notes, branded notes and
other structured instruments like ELKS, STEEPLS, InterNotes, EAGLES, etc. These instruments behave like me-
dium-term notes because they are quick-fire capital used by companies on a daily basis).

14
About FJ Capital Management, LLC
This paper was written by FJ Capital CEO and Portfolio Manager, Martin Friedman, and FJ Capital
Vice President of Research & Analysis, Scott Cottrell, who have a combined 35 plus years of capi-
tal markets experience, much of this time spent following and analyzing small- and mid- capitaliza-
tion financial institutions.

Mr. Friedman currently serves on the board of Access National Bank (ANCX), an $800 million
community bank headquartered in Reston, VA.

Prior to founding FJ Capital in 2007, Mr. Friedman served nine years as director of research at
Friedman, Billings, Ramsey Group, a major financial services firm publicly traded on the New York
Stock exchange, where he built the 13th largest U.S. sell side research organization, with 140 pro-
fessionals encompassing eight industry sectors. Previously, Mr. Friedman was a senior research
analyst focused on the financial services industry covering small- and mid- cap banks and thrifts.
Mr. Friedman has been analyzing and investing in this sector for over 20 years.

Prior to joining FJ Capital, Mr. Cottrell served as a research analyst at FBR covering small- and
mid- cap banks and thrifts. Mr. Cottrell has approximately 15 years of banking industry experience
for firms that include Wells Fargo, National City Bank and Servus Financial Corporation. He is a
CPA and earned his MBA from Georgetown University.

FJ Capital is a fundamental investment management firm that was formed with a special focus on
under-followed small- and mid- cap banks and thrifts. On the long side, FJ Capital targets institu-
tions with solid credit quality and excess capital that can be used to make strategic acquisitions,
buyback stock at steep discounts to tangible book values and pay attractive dividends. For shorts,
the firm targets banks with weak credit and low capital levels.

To comment on the paper or further discuss opportunities in the bank space, please contact:

Andrew Jose FJ Capital Management

O: 703.875.8378 2107 Wilson Blvd.,
M: 703.408.0394 Suite 400
ajose@fjcapital.com Arlington, VA 22201

Important Disclosures:

This White Paper is provided for informational purposes only, does not constitute investment advice
and should not be relied upon as such. It is neither an advertisement for investment advisory ser-
vices nor an offer to sell or solicitation of an offer to buy securities.

The information presented in this White Paper has been developed internally and/or obtained from
resources believed to be reliable; however, FJ Capital Management does not guarantee the accuracy,
adequacy or completeness of such information. References to securities or asset classes do not con-
stitute recommendations to purchase or sell any specific securities or asset classes.

All investments involve risk and have the potential for loss of investment capital as well as prof-
its. FJ Capital Management does not guarantee success of any investment strategy.
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