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Joshua S. Siegel, Managing Principal Examiners Forum: Non-control Equity Options for Community Banks.

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Presentation on theme: "Joshua S. Siegel, Managing Principal Examiners Forum: Non-control Equity Options for Community Banks."— Presentation transcript:

1 Joshua S. Siegel, Managing Principal Examiners Forum: Non-control Equity Options for Community Banks

2 1 New York-based investment management company providing private capital to U.S. community banks Manages $3.1 billion Investments in over 220 community banks across 43 States Pioneered use of hybrid capital to invest in community banks owns a minority interest in StoneCastle Partners — Manages $1.5+ billion of private equity — Spinout of Harvard endowment private equity unit

3 2 StoneCastle’s Investment Footprint is National Investment team has invested $5.8 billion in over 400 banks across 47 States

4 3 Reference – Key public and proprietary information Analytics – Automated Key Metrics Monitoring – Any stat defined by Management Portfolio – Portfolio Tracking and Management Accounting – All data fed to Accounting System to ensure data is consistently applied across Management, Risk, and Accounting Ratings – Automated and Manual Grading Trading - Automated Trading Platform Proprietary Investment Technology Platform – RAMPART

5 4 Market Overview Community Banking Model Investment Process Demographic and Economic Overview Regulatory Capital Options Federal Government Initiatives and the Private Market — Non-control Equity Options Outlook Topics of Discussion

6 5 Market Overview

7 6 Consolidation has resulted in improved credit quality Weaker banks typically acquired by stronger banks or have failed Number of Commercial Banks Continues to Decline Source: FDIC

8 7 While the number of banks continues to decrease, the number of branches continues to increase Internet Banking May Not Be The Future Source: FDIC

9 8 Highly fragmented industry - 8,131 community banks have less than $10 billion of assets — 98.6% of total U.S. banks — $3.0 trillion of combined assets — $318 billion of combined equity capital Number of Institutions by Asset Size at 3/31/09 Source: FDIC

10 9 Money Center Banks — Capital markets activities — Available-for-sale securities…FAS 157 — Alternative mortgage products Regional Banks — First come Innovators, followed by Imitators, and then come the Idiots, whose avarice undoes the very innovations they are trying to use to get rich. -- Paraphrase of Warren Buffett Community Banks — Deviation from core banking strategy — Expansion into higher risk loans without enough capital — Expansion out of footprint, rapid growth, bad markets Different Banks Have Different Root Problems

11 10 Source: FDIC Number of FDIC-Insured "Problem" Institutions 305 FDIC-Insured “problem" institutions as of Q1 2009 with 21 failures vs. 1,400 and 217, respectively, in 1988 1,430 banks were placed on watch at the beginning of 1992 185 banks have failed since 1992

12 11 How is this cycle different from the S&L crisis? — Deregulation — Insufficient capital — Risk management tools — Gap risk — Bloodletting already occurred in 1980s — Shadow banking market — Derivatives and other structured finance tools A Different Cycle This Time

13 12 Putting Things in Perspective Banks are generally less risky than other corporations Banks have performed similar to A/BBB corporate credits since ‘34 Banks are on average 40+ years old…can not be high risk and last that long without failing Below Investment Grade Corporations Banks S&L Crisis FDIC Formed (1)Source: FDIC, Moody’s Corporate Default and Recovery Rates, 1920-2008, and Historical Default Rates of FDIC-Insured Commercial Banks, 1934–1996, Joshua Siegel et al, June 7, 2001.

14 13 Bank Defaults vs. GDP Growth Bank Defaults vs. Recessions Bank defaults generally uncorrelated to GDP growth…bank earnings are highly correlated Prior recessions have had little impact on bank defaults Default experience in 1980s generally a consequence of bank de-regulation and insufficient capital

15 14 Community Banking Model

16 15 Community banks play an important role in their local markets —Cornerstone of their communities —Provide essential services to under-served, rural and suburban markets —Experienced, local management teams with large ownership stakes —Intimate knowledge of their customers and local economies – more informed credit underwriting —Play a substantial role in the U.S. as lenders to small businesses —Back local charities —Earned the trust of local depositors and customers over the years (average age of community banks is 40+ years) —Customer loyalty – intangible asset unrivaled by out-of-market competitors Connection to the Community

17 16 Proven Strategy Banks that did not stray from core banking activities have outperformed Key characteristics of poor performance include: — High asset growth (+25% average annual growth) — Banks with assets in excess of $10 billion — De novos — Publicly traded institutions — Below average capital levels — Poor liquidity — Loan over-concentrations, particularly construction

18 17 Community banks are attractive investments —Long-term, stable historical performance —Highly regulated and transparent business model —Standardized reporting to federal and state regulators —More regulatory scrutiny/leniency —Lower leverage - higher Tier I capital levels than larger banks —Less risk with consistently lower loan losses than larger banks —Low investor participation due to limited access and lack of industry knowledge Attractive Investments

19 18 Bank Activities Community Banks Regional & Money Center Banks Trading Exposurenoneextensive Warehousing/Capital Markets Activitynoneextensive Derivative Exposurenoneextensive Leveraged/Nationally Syndicated Loansnonemedium to high Residential Loan Exposurestandardover exposed Sub-Prime Exposureminimalmedium to high Alternative Mortgage Exposureminimalmedium to high Out-of-Footprint Loan Exposureminimalmedium to high Community Banks vs. Regional and Money Center Banks

20 19 Source: FDIC (1) Loans 90+ days past due or that are non-accrual (2) Loans 30 – 89 days past due Community Banks Continue to Outperform Larger Peers Select 1Q 2009 Data Assets < $1 Billion $1 Billion to $10 Billion Assets > $10 Billion Number of Institutions7,555576115 Total Assets (bn)$1,527$1,513$10,501 ROA0.33%-0.17%0.26% Net Interest Margin3.56%3.36%3.37% Non-current Loans (1) 2.72%3.64%3.98% Past Due Loans (2) 1.84%1.68%2.15% Net Charge-off Rate0.69%1.41%2.27% Leverage Ratio9.87%9.15%7.61% Tier I Ratio13.48%11.94%10.17% Total Risk-Based Ratio14.63%13.31%13.32%

21 20 Net Charge-Off Ratio Tangible Common Equity Ratio Source: SNL Financial Community banks have demonstrated superior credit performance and generally have higher capital ratios Community banks make a higher % of secured loans

22 21 Community Banking Model – Proven Strategy Banks that did not stray from core community banking have outperformed Key characteristics of poor performance include: — High asset growth (+25% average annual growth) — Banks with assets in excess of $10 billion — De novos — Publicly traded institutions — Below average capital levels — Poor liquidity — Loan over-concentrations, particularly construction

23 22 Investment Process

24 23 Bank analysis —Capital, Asset Quality, Management, Earnings, Liquidity & Deposits Bank modeling —Stress test & burn down analysis Economic and demographic review —County and state level, local industry & topography Asset portfolio review —Loan stratification —Specific asset analysis by loan type —Investment portfolio - fair market vs. book value Credit committee process —How do we make a decision? Investment Process

25 24 Capital —Regulatory ratios (leverage, Tier 1, TRBC) —Tangible capital Asset quality —NPLs, NCOs, reserve level —Growth in NPLs and by loan type Management – see next page Earnings —ROA, ROA, NIM —Quality of earnings: adjust for one time and nonrecurring items —Provisions vs. net charge-offs Liquidity —Loans/Deposits, level of brokered and large time deposits —Contingency funding sources and strength of deposit franchise Ratios & Metrics - Trends Are Important

26 25 Management and Board responsible for risk management and strategic direction - “tone at the top” for underwriting and credit How to assess management: —Background – banking experience and overall character —Financial ties to the bank & ties to the community —Compensation aligned to performance —Review of policies, procedures and controls —Frequency of credit policy violations (exceptions report) —Regulatory and accounting issues —Accounting standards (quality of earnings) —Loan work-out expertise (aggressive in collections) —Adequate systems and staff to support growth Management – Foundation of a Bank’s Franchise

27 26 Most ratios and financial metrics look backwards Forward looking factors are key to predicting the future —Adjusted Texas ratio —Operating leverage —RE Concentration —Growth rate of earning assets versus deposits —Change in deposit mix —Change in asset mix —30-89 day past due loans —Adjusted cash flow —(net income + provisions + goodwill amort. + goodwill charges - charge-offs) Predictive Ratios & Metrics

28 27 Quality of deposits —Brokered deposits: long-term versus short-term —Pure deposits: level of deposits excluding all CDs & time deposits —Duration and interest rate sensitivity of deposits Liquidity & funding sources —Net liquidity ratio —Carrying value of securities to market value —Composition of securities (3 rd party MBS, munis) —Volatile liabilities ratio (< 25%): Unfunded commitments and loan pipeline —Relative to capital and available funding sources Goodwill relative to capital Liquidity, Deposits & Capital – Other Factors to Consider

29 28 StoneCastle has developed a proprietary bank stress model to project how banks perform in a run-off scenario Integrates bank financial data and local economic data on a county level Five year projections include expectations of income on performing assets 3 C O N F I D E N T I A LC O N F I D E N T I A L StoneCastle’s Bank Stress Model

30 29 C O N F I D E N T I A LC O N F I D E N T I A L StoneCastle considers up to 12 county-level economic metrics to determine the stress level scenario for each bank Stress levels are deposit weighted by county for each bank Entire Bank Universe (8,300+ institutions) is modeled and updated on a quarterly basis Rampart – County by County Level Detail

31 30 StoneCastle’s Bank Rating Algorithm (SCP Rating) Proprietary quantitative algorithm for grading the financial condition of each bank, thrift and bank holding company in the U.S. Largely based on the CAMELS methodology —Incorporates a wide variety of financial metrics pertaining to profitability, capital, asset quality and liquidity Valuable analytical tool used to screen banks by overall credit quality —Ability to draw nationwide and segmented inferences about the state of the banking industry —Drill down on institutions that are exhibiting the worst performance Continually analyze and back-test algorithm to enhance predictability

32 31 StoneCastle Partner’s Rating Definitions A Rating (Excellent) —Exceptionally strong financial profile —Financial metrics demonstrate capital, liquidity, profitability, and asset quality that meet or exceed peers B Rating (Satisfactory) —Adequate financial profile and is highly likely to meet its obligations —Poses very little overall risk of loss in the foreseeable future. C Rating (Average to Below Average) —Exhibiting negative trends, or negative trends are emerging —More susceptible to adverse changes in economic conditions that could affect the ability to meet obligations D Rating (Well Below Average) —Institution demonstrates a persistent negative trend that leads to a higher probability of inability to meet obligations —Risk of loss is not immediate, though possible if trend persists E Rating (Unacceptable Risk) —Poses a high probability of loss

33 32 SCP Industry Ratings: 2008 vs. 2006 2008 2006 8% 14% 9% 21% 48% A B C D E E, 1% D 5% C 29% 49% B A 16%

34 33 Characteristics of Performance – Market SizeAge OwnershipGrowth Rate D & E Rated Banks A, B & C Rated Banks

35 34 Characteristics of Performance – Balance Sheet CapitalLiquidity CRE D & E Rated Banks A, B & C Rated Banks Construction

36 35 Demographic & Economic Overview

37 36 Source: Moody’s & StoneCastle Partners Key Economic Statistics – Select States vs. The United States Select Economic DataAlabamaArkansasGeorgia United States Median Home Price to Median Family Income (1Q09) 2.32x2.15x1.92x2.62x Unemployment Rate (April 2009) 9.00%6.50%9.30%8.90% 5-yr. Change in Unemployment Rate (2004 – 2009) 69.8%12.1%106.7%58.9% 5-yr. Change in Population (2003 – 2008) 3.45%4.20%8.70%3.81% Population Migration: 35-49 yr. old / 25-34 yr. old Ratio (2008) 1.58x1.49x1.56x1.59x Poverty Rate (2007) 14.5%13.8%13.6%12.5% Crime Rate Per 1,000 People (2007) 44.244.944.037.4

38 37 Source: Moody’s & StoneCastle Partners Key Economic Statistics – Select States vs. The United States Select Economic DataIowaKansasLouisiana United States Median Home Price to Median Family Income (1Q09) 1.86x1.95x2.36x2.62x Unemployment Rate (April 2009) 5.10%6.40%6.20%8.90% 5-yr. Change in Unemployment Rate (2004 – 2009) 10.9%14.3%8.77%58.9% 5-yr. Change in Population (2003 – 2008) 2.03%2.60%-1.72%3.81% Population Migration: 35-49 yr. old / 25-34 yr. old Ratio (2008) 1.60x1.51x1.46x1.59x Poverty Rate (2007) 8.90%11.7%16.1%12.5% Crime Rate Per 1,000 People (2007) 29.241.347.237.4

39 38 Source: Moody’s & StoneCastle Partners Key Economic Statistics – Select States vs. The United States Select Economic DataMississippiNebraskaOklahoma United States Median Home Price to Median Family Income (1Q09) 2.32x2.01x2.15x2.62x Unemployment Rate (April 2009) 9.10%4.40%6.20%8.90% 5-yr. Change in Unemployment Rate (2004 – 2009) 59.7%15.8%21.6%58.9% 5-yr. Change in Population (2003 – 2008) 1.87%2.41%3.71%3.81% Population Migration: 35-49 yr. old / 25-34 yr. old Ratio (2008) 1.52x1.50x1.42x1.59x Poverty Rate (2007) 22.6%9.90%13.4%12.5% Crime Rate Per 1,000 People (2007) 34.934.740.437.4

40 39 Source: Moody’s & StoneCastle Partners Key Economic Statistics – Select States vs. The United States Select Economic DataOregonTexasVirginiaWyoming United States Median Home Price to Median Family Income (1Q09) 3.60x2.26x2.83x1.86x2.62x Unemployment Rate (April 2009) 12.0%6.70%6.80%4.50%8.90% 5-yr. Change in Unemployment Rate (2004 – 2009) 64.4%8.06%83.8%15.4%58.9% 5-yr. Change in Population (2003 – 2008) 5.98%8.48%4.22%5.94%3.81% Population Migration: 35-49 yr. old / 25-34 yr. old Ratio (2008) 1.43x1.41x1.61x1.39x1.59x Poverty Rate (2007) 12.8%16.5%8.60%10.9%12.5% Crime Rate Per 1,000 People (2007) 38.346.427.431.037.4

41 40 5-yr. Change in Population - Nebraska Sharp County is the 3 rd most populous county in NE with 151 thousand residents 5 – 20 miles from Omaha which is home to 5 Fortune 500 companies: Berkshire Hathaway, ConAgra Foods, Mutual of Omaha, Peter Kiewit Sons, and Union Pacific Railroad Home to Offutt Air Force Base 2 nd largest Wing in the U.S. Air Force 10,000 military and federal employees Sarpy County U.S. Avg Above U.S. Avg Below U.S. Avg Lincoln Omaha

42 41 2008 Household Income - Virginia U.S. Avg Above U.S. Avg Below U.S. Avg Henry County Henry County Largest Employers: Henry County Public Schools, Stanley Furniture and Memorial Hospital County is reliant on manufacturing (particularly furniture), textiles, plastics, wood products and printing 6.3% unemployment rate in 2008 versus the state average of 3.2% Unemployment reached 14.2% in April 2009

43 42 5-Year Change in Household Income - Virginia U.S. Avg Above U.S. Avg Below U.S. Avg Henry County: historically low household income based on demographics of the county Low level of education – 9.4% of people have a bachelor’s or higher degree, only 65% graduated high school Lost ~ 3% of total jobs over the past 5 years (manufacturing) while population declined 4.5% 11.7% of the population lives below poverty with a high unemployment rate Fairfax County: most populous county in VA reflects a more stable economic environment 91% of 25+ year olds graduated high school, 55% have a bachelor's or higher degree 6% job growth with almost 11% population growth 4.9% live below the poverty line and a very low unemployment rate (currently ~ 3.3%) Fairfax County Henry County

44 43 5-Year Change in Home Prices - Arkansas U.S. Avg Above U.S. Avg Below U.S. Avg Poinsett County Little Rock Poinsett County: slower job growth, lower median household income and higher unemployment rate compared to the Arkansas and national averages

45 44 Median Home Price to Median Income - Louisiana Orleans Parish New Orleans’ post-Hurricane Katrina economy has largely shielded the Orleans Parish from the recession being felt in the rest of the economy Due to diminished supply and increasing demand, home prices have dipped only slightly, dropping 2.1% in the fourth quarter of 2008 compared with 12.9% nationwide East Baton Rouge Parish City of Baton Rouge is one of the fastest growing cities in the South, which has prevented a decline in housing prices experienced by many other major cities LA Avg Below LA Avg Above LA Avg Baton Rouge East Baton Rouge Parish Orleans Parish

46 45 Source: Moody’s Economy & NAR Home Price to Median Family Income – by Region Past five years saw a home price bubble in growth areas National average Home Price to Median Family Income since 1981 has been 2.79x The U.S. average home price fell to 2.77x of income in 4Q08 from the peak of 3.90x in 3Q05

47 46 Source: Moody’s Economy & NAR Home Price to Median Family Income – by Select States California may have seen the worst of downward pressure as affordability has reverted towards the mean Most states did not see runaway growth in home prices relative to income

48 47 Source: Moody’s Economy & NAR Home Price to Median Family Income – by Select States Affordability across much of the country continues to improve as home prices return to pre-boom levels

49 48 Source: Moody’s Economy & NAR Home Price to Median Family Income – by Select States The Northeast lags the rest of the U.S. by one to two quarters Current home prices in Oregon approximate June 2005 prices, whereas home prices in the rest of the country have reached 2003 levels

50 49 Unemployment Rate - Texas Houston-Galveston-Brazoria MSA Moderate impact from substantially lower oil and natural gas prices Contraction of the employment base, while less severe than elsewhere in the country, has pushed up unemployment to 5.9% in April 2009, which is still below the 6.7% and 8.9% for the state and nation, respectively U.S. Avg Below U.S. Avg Above U.S. Avg Austin Houston-Galveston- Brazoria MSA Pecos – home to the largest oil field in the U.S.

51 50 5-Year Change in Unemployment Rate - Texas U.S. Avg Below U.S. Avg Above U.S. Avg Austin Dallas-Ft. Worth- Arlington MSA Dallas area home to major employers such as Texas Instruments, Perot Systems, AT&T, Verizon, Lockheed Martin, Bell Helicopter Textron, Raytheon and American Airlines Ft. Worth area has a high level of agriculture which could contribute to the somewhat higher unemployment rate in the MSA

52 51 Bankruptcies - Kansas Unemployment levels are often a leading indicator of bankruptcy filings Between 2007 and the first quarter of 2009, unemployment rate in Kansas City MSA increased from 4.6% to 7.5%, while that in Topeka MSA increased from 4.5% to 6.5% Suggests that number of bankruptcy filings in Shawnee and Wyandotte counties will remain high in 2009 Recent layoffs suggest that bankruptcies related to the manufacturing sector may continue to rise Wyandotte County’s 2009 bankruptcy figures will reflect Chapter 11 filing of General Motors, which has a plant in Kansas City Major aircraft manufacturers including Bombardier Aerospace, Cessna Aircraft and Hawker Beechcraft have laid off thousands of workers in Wichita, citing cancelled aircraft orders U.S. Avg Below U.S. Avg Above U.S. Avg Kansas City MSA Topeka Wichita Topeka MSA Kansas City

53 52 5-Year Change in Bankruptcies – Kansas Bankruptcy filings and mass layoffs have increased since 2006 Annual bankruptcy filings in Kansas peaked at 22,786 in 2005, before declining sharply to 6,247 in 2006 and then increasing to 8,900 in 2008 Number of bankruptcy filings corresponded with number of mass layoffs —The number of mass layoffs, which include more than 50 people, increased from 88 in 2006 to 136 in 2008 —38 of these layoffs came in December, the highest monthly figure in over a decade Norton County: Over the 5 year period, population declined 4.9% and personal income decreased 2%, while trends for the state of Kansas were both positive U.S. Avg Below U.S. Avg Above U.S. Avg Norton County Topeka

54 53 Crime Rate - Georgia Fulton and DeKalb counties are affected by substantial drug trafficking activity, low levels of educational, high unemployment and declining number of jobs Educational attainment: 14% and 16% of county populations have not graduated from high school, compared with 10% nationally Unemployment: Among individuals aged 16 and over, the unemployment rate in Fulton and DeKalb was approximately 7.4% and 7.3%, respectively, compared with 6.6% nationally (2008) Job Growth: Employment growth of -0.8% in De Kalb and Fulton counties was lower than the state and national averages during 2008 U.S. Avg Below U.S. Avg Above U.S. Avg Fulton County Atlanta DeKalb County

55 54 Topography - Flood Plains

56 55 Distribution of SCP Ratings - Wyoming Platte County U.S. Avg Above U.S. Avg Below U.S. Avg Sheridan County Hot Springs County Overall, Wyoming banks had better profitability, liquidity, efficiency and lower credit losses than the industry averages in 1Q09 Level of capital, nonperforming assets and exposures to CL&D and CRE loans approximate industry averages Cheyenne

57 56 Net Interest Margin - Oklahoma U.S. Avg Above U.S. Avg Below U.S. Avg Tulsa Marshall County Johnston County Love County Overall, Oklahoma banks enjoy higher asset yields and lower funding costs relative to the national averages in 1Q09

58 57 Concentration of Home Equity Loans - Mississippi U.S. Avg Below U.S. Avg Above U.S. Avg Harrison County Jackson Tishomingo County Adams County Adams, Harrison and Tishomingo counties reported lower than average net charge-offs in their home equity portfolios despite the above average concentration in 1Q09

59 58 Concentration of Construction Loans - Oregon U.S. Avg Below U.S. Avg Above U.S. Avg Salem Eugene Lane County Lane County experienced 74% growth in median household income over the past two years with above average growth in employment

60 59 Net Charge-Offs - Iowa U.S. Avg Below U.S. Avg Above U.S. Avg Poweshiek County Des Moines Poweshiek County’s rating is skewed by the high level of net charge-offs reported by Patriot Bank and People’s Savings Bank in 1Q09 Other banks in the county reported a very low level of NCOs in the quarter

61 60 Tier 1 Ratio - Alabama U.S. Avg Above U.S. Avg Below U.S. Avg Montgomery The average Tier I ratio in the state has lagged the national average over the past five years

62 61 Regulatory Capital Options

63 62 Subordinated Debt Trust Preferred Regulatory Capital Typical Bank Capital Structure Deposits (89%) Preferred Stock Common Equity Importance of Regulatory Capital Regulatory Capital (11%)

64 63 Historical Capital Options for Regional & Money Center Banks Subordinated Debt Trust Preferreds Hybrids Convertible Preferred Preferred Stock Perpetual Preferred Stock Common Stock

65 64 Historical Capital Options for Community Banks Subordinated Debt Trust Preferreds Hybrids Convertible Preferred Preferred Stock Perpetual Preferred Stock Common Stock

66 65 Current Capital Options for Community Banks Subordinated Debt ? Trust Preferreds Hybrids Convertible Preferred Preferred Stock Preferred Stock via TARP Perpetual Preferred Stock Common Stock ?

67 66 $ in Millions Pooled Trust Preferred Market Issuance No pooled Trust Preferred issuance in 2008 or 2009 Spreads between 2002 and the 1 st half 2007 were artificially low because of increased liquidity from SPVs Capital Markets driven pooled TPS market unlikely to return – dramatic changes to rating agency methodology 1 st Half 2 nd Half

68 67 Subordinated Debt Subordinated Debt Trust Preferred Trust Preferred Common Equity Common Equity Convertible Preferred Convertible Preferred Term 30 years10 yearsPerpetual Rate ~14.0%~13.0%~10.0%30%+ Capital Treatment Tier 1Tier 2Tier 1 Tax Treatment Ordinary Income QDIDividend Call Protection 5-10 years5 years3 yearsNA Voting Rights No Yes Warrants Yes NA Regulatory Capital – Indicative Deal Terms

69 68 Unlikely to return Market demand Change in rating agency criteria Fundamental changes on Wall St. Investor base is much smaller (SIV/Conduits gone) Abuse of structured finance technology Rating agencies are not trusted and ratings methodology is changed for the worse Most legacy investors are gone or failing Pooled Trust Preferred Market

70 69 Federal Government Initiatives and the Private Market

71 70 Spending $100 and Earning $90 for the last 20 years Addiction to Leverage Change from saying: “I’m going to save up for a ______” to “I’m going to charge it and pay it later.” $4 Trillion “Shadow Banking Market” FASB – America’s Unexpected Terrorist Impatience How did the U.S. Economy Get To This Point?

72 71 TARP, TALF, etc………….what’s next? Are the government programs working? Will these programs be enough? Is the government taking the right steps? What will the side-effects be? Federal Government Actions

73 72 “Chicken or the Egg” – who invests first? Temporary vs. permanent solution Legislative and regulatory hurdles ongoing Federal government influence and controls Stigma attached to participation Changing terms - TARP Section 5.3: — “unilaterally amend any provision of this Agreement…” Ultimate take out for TARP unclear TARP and Private Equity Investors

74 73 Rational for TARP and Additional Capital Hybrid capital reduces the blended cost of capital Private and public capital are initially at equal cost — TARP steps up after the fifth year %RateCost Deposits90%3.25%2.93% TPS2.5%14.00%0.35% tax adjustment-4.90%-0.12% Equity7.5%30.00%2.25% Blended Cost of Capital: 5.40% Bank Post TPS

75 74 Regulatory Capital Raises - 2008 (1) (1)Source: SNL Financial & StoneCastle Partners; as of Dec. 31, 2008 Record amounts of capital raised — TARP issuance (Capital Purchase Program – CPP) — Where is the capital for community banks? 4% Sub Debt 5% TPS 4% Pref Equity 67% CPP Pref Equity 20% Common Equity $11.4 billion Issuance by Banks with Assets < $10 billion ($ in bn) Issuance by Banks with Assets > $10 billion ($ in bn) 1% Sub Debt 5% TPS 26% Pref Equity 53% CPP Pref Equity 15% Common Equity $355.3 billion

76 75 Trying to restore confidence Seeks to create more stable trading levels of publicly issued bank debt Provides capital for: —Disposal of bad assets —Increased lending —Acquisition of weaker institutions TARP Aimed towards assisting the money center and large regional banks Short-term and temporary solution Not enough funds are reaching Main Street Community banks may not have access to TARP capital and funds may not be available Advantages Disadvantages

77 76 An Alternative to TARP —Funds can be offered at rates similar to TARP —Ability to avoid the structural issues of TARP An Additional Source of Funds —TARP funds fall short of the existing capital appetite —Funds in addition to TARP are necessary for —Mergers and acquisitions —Acquisition of failed banks’ deposits and assets —Charge-offs —Optimized Tier 1 capital levels A Potential Exit Strategy —TARP funds must be refinanced with “Qualifying Capital” —Qualifying Capital may be expanded to include TPS Private Equity Solutions Co-exist With TARP

78 77 Few firms organized for non-control investments Fewer are qualified to evaluate bank specific investments Large universe of targets for non-control investment Allows investors to participate with well run banks Limited universe of investment targets —Distressed —De novo —Expensive Regulatory gating / BHC risk Requires a management team willing to leave Non-control Investments Control/Buy Out Investments Private Market Solutions

79 78 Non-control Capital InfusionTraditional Bank Buyouts Form of Investment Convertible Preferred Shares/ Trust Preferred with Warrants Common Shares Control (1) NoYes Quality of Management Deep knowledge of the bank’s local markets and customers Weak to average knowledge of the bank’s local markets Age of Institution30+ YearsTypically De Novo to 10 Years Subject to BHC RulesNoYes Voting Shares (1) Yes Ownership % (Diluted) (1) <33%>33% Liquidation PreferenceSenior to EquityN/A Current Dividend Yield8%+0-5% Board Seats (1) TypicallyYes Harvest Period3-5 yearsUncertain Targeted Investment Size$5 - $50$50+ million Targeted IRR12% - 25%+30%+ Targeted MOI2.0x - 3.0x+4.0x+ (1) Certain investments may be in partnership with one or more parties which as a group may have control, higher share ownership and board representation Private Market Solutions

80 79 What Do Private Investment Firms Think About? Deposit quality and franchise value “True” book value of the company Asset/liability composition Market demographics: —population growth, median household income, local industry, age trends Microeconomic factors: —unemployment, house prices, bankruptcy filings Topographical considerations: —earthquake, flood, hurricane

81 80 StoneCastle rates community banks by financial health into the three general categories listed below (1) Category 2 Banks (~700 Banks) SCP Grade D Material but not imminently critical capital or asset quality issues Quantifiable problems that can be defined and addressed Historically good franchise value with credible management and a strategy to address issues Attractive investment opportunities due to low price-to-book and likelihood of future growth Institution may need to raise regulatory capital or consider strategic alternatives Category 1 Banks (~6500 Banks) SCP Grade A, B & C Banking franchises with solid deposit base, strong capital and reserves Sufficient capital and reserves to cover potential asset degradation Minimal exposure to high risk asset classes Average to above average earnings Experienced management team Category 3 Banks (~1100 Banks) SCP Grade E Distressed loan book with unquantifiable asset quality issues Concentrations to high risk asset classes or expanded beyond historical geographic footprint Challenging economic and demographic issues Declining franchise value with insufficient capital and reserves to non-performing assets Likely to come under regulatory supervision or failure C O N F I D E N T I A L As of 4 th Quarter 2008 Community Banking Market – Categories of Banks

82 81 Banks presently have an increased need for regulatory capital Willing to consider dilutive forms of equity Prefer non-dilutive and tax deductible Tier 1 and Tier 2 capital Banks need capital in weak markets Voluntary needs: —Acquire weaker banks and divested branches —Organic growth of loan portfolio and deposits due to competitors’ weaknesses Involuntary needs (regulatory pressure) —Raise capital to absorb potential loan losses Banks also need capital in strong markets Voluntary needs: —Acquire strategically aligned banks —Expand branch network —Organic grow of loan portfolio and deposits —Acquire value-added businesses S T O N E C A S T L E P A R T N E R S Need for Regulatory Capital Exists in Both Strong & Weak Markets

83 82 StoneCastle has identified a need for Tier 1 capital in the community banking sector Community banks hold approximately $3.0 trillion in assets and $319 billion in equity Trust preferred securities (TPS) and subordinate debt will continue to be a critical source of non-dilutive capital StoneCastle estimates that community banks will require more than $92 billion of capital over the next five years based on first quarter numbers Need for Tier 1 Capital in the Community Banking Sector Capital to be Funded by TPS Additional Loan Charge-offs $ 33Bn Organic Asset Growth $ 19Bn Permanent increase to loan loss reserves $ 12Bn Acquisition of D and E rated banks $ 28Bn Total New TPS Needed: $92Bn

84 83 ______________________ Source: FDIC, SNL, Goldman Sachs Research ______________________ Source: FDIC, SNL, Goldman Sachs Research ($ in Billions) (1) ______________________ (1) Note: Taxes should be factored in only one of the three categories where applicable Capital Needed as a Result of Charge-Offs

85 84 ($ in Billions) (1) (2) ______________________ (1) Source: FDIC, SNL, Goldman Sachs Research (2) 1.2x Average annual GDP (3.0%), “United States: Banks” - Goldman Sachs 12/6/2008 (3) Note: Taxes should be factored in only one of the three categories where applicable (3) Capital Needed as a Result of Growth

86 85 Average bank NPAs have been trending upwards and reserve levels will have to be built accordingly Reserve ratios are expected to increase to a peak ratio of 3.50% and trend downward thereafter but to a new higher permanent level TPS will be an important component in supporting this capital need (2) ______________________ (1) Source: FDIC, SNL, Goldman Sachs Research (2) Note: Taxes should be factored in only one of the three categories where applicable Average Bank NPAs and Reserve Level Trends 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 1993Y1994Y1995Y1996Y 1997Y 1998Y1999Y2001Y2002Y2003Y2004Y2005Y2006Y2007Y 2008E2009E2010E2011E2012E2013E NPAs/Total AssetsReserves/ Total Loans (1) Y Capital Needed due to Increased Loan Loss Reserves

87 86 7100 Category A Banks A, B, and C Banks D E ~ StoneCastle’s proprietary algorithm, incorporating both quantitative and qualitative factors, grades the entire universe of performing banks by financial health (scale from A to E) ($ in Billions) (1) ______________________ (1) Assumes a linear distribution of capital for M&A activity over the next five years Capital Needed as a Result of M&A and Failures

88 87 Outlook

89 88 Recession -- Increasing unemployment Continued contraction in credit availability — Disrupted securitization market – not coming back — Bank balance sheet constraints — Heightened risk aversion Credit spreads remain elevated Increase in CRE and C&I loan defaults Sustained global effort needed to restore confidence — Will need public as well as private solutions — Fundamental changes in borrowing habits by investors, corporations and consumers Outlook 2009

90 89 Deep Recession - Key Indicators at All Time Highs Source: Bloomberg

91 90 There will be winners and losers but the banking industry will survive Industry is trending back to traditional model Continued contraction in credit availability likely —30 years ago, 80% of lending was under regulatory control —Less than 40% of lending was under regulatory control last year Loan pricing is becoming more rational and risk-based Wall Street dislocation has reduced the number of non-bank lending institutions − REITs − Hedge Funds − CDOs/CLOs − BDCs − Specialty Lenders Short Term Outlook for Banking Industry

92 91 Municipal securities – embedded losses? —Wider spreads reflecting increasing concerns about the underlying credit —Lack of full disclosure by many issuers of tax-exempt debt —Decline of municipal bond insurance and the bond insurers —Weakened role of bond ratings and the rating agencies —Uncertainties over expected changes to the municipal bond rating scales —Likelihood of increasing tax rates Outlook on interest rates and inflation —Mixed bag Asset quality —Home equity —CRE —Consumer credit Emerging Credit Concerns & Uncertainties

93 92 Political —Mortgage “cram-down” —New regulations —Restrictions on business —Credit availability —Mark-to-market accounting Profitability —Cost of excess liquidity —FDIC special assessment Access to Capital —Replacement of TARP —Expanded stress test —OREO valuations Emerging Credit Concerns & Uncertainties (continued)

94 93 Repricing of adjustable-rate mortgages Emerging Credit Concerns & Uncertainties (continued)

95 94 Who will provide financing to community banks in the long term? Refinancing risks for: — TARP — Corporate debt — Government debt Issues to consider — Future of bank regulatory environment — Global recession — U.S. Dollar — Oil Outlook for 2010 and Beyond

96 95 Private/public partnerships U.S. municipalities and U.S. pensions as part of the solution Easing of Bank Holding Company (BHC) rules More transparency Things For All of Us to Consider

97 96 Summary

98 97 Market stress is not equal among all banks Government support of the banking industry is disproportionate Certain factors can predict bank failure risk Community banks need dedicated capital providers Private investor interest is growing BHC regulatory rules need to be amended or re-written Outlook is better for traditional banking institutions Summary

99 98 Joshua S. Siegel Managing Principal StoneCastle Partners, LLC ph: 212-354-6500 x303 Question and Answer

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