Joshua S. Siegel, Managing Principal

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

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

4. Proprietary Investment Technology Platform – RAMPART • 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

5. Topics of Discussion • 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

6. Market Overview

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

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

9. Number of Institutions by Asset Size at 3/31/09 • 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 Source: FDIC

10. Different Banks Have Different Root Problems • 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

11. 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 Source: FDIC

12. A Different Cycle This Time • 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

13. Below Investment Grade Corporations Banks S&L FDIC Formed Crisis 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 • 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. 20.00% 2.00% 2.00% 15.00% 1.80% 1.80% 1.60% 1.60% 10.00% 1.40% 1.40% 5.00% 1.20% 1.20% Commercial Bank Default Rate GDP Growth Rate Default Rate 1.00% 1.00% 0.00% 0.80% 0.80% -5.00% 0.60% 0.60% 0.40% 0.40% -10.00% 0.20% 0.20% -15.00% 0.00% 0.00% 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 Bank Default Rate GDP Growth Rate Bank Default Rate Recession Period 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. Community Banking Model

16. Connection to the Community • 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

17. 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. Attractive Investments • 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

19. Community Banks vs. Regional and Money Center Banks

20. Community Banks Continue to Outperform Larger Peers Source: FDIC (1) Loans 90+ days past due or that are non-accrual (2) Loans 30 – 89 days past due

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

22. 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. Investment Process

24. Investment Process • 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?

25. Ratios & Metrics - Trends Are Important • 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

26. Management – Foundation of a Bank’s Franchise • 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

27. Predictive Ratios & Metrics • 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)

28. Liquidity, Deposits & Capital – Other Factors to Consider • 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 (3rd party MBS, munis) • Volatile liabilities ratio (< 25%): • Unfunded commitments and loan pipeline • Relative to capital and available funding sources • Goodwill relative to capital

29. StoneCastle’s Bank Stress Model • 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 assets3 CONFIDENTIAL

30. Rampart – County by County Level Detail • 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 CONFIDENTIAL

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

34. Characteristics of Performance – Market Size Age Ownership Growth Rate D & E Rated Banks A, B & C Rated Banks

35. Characteristics of Performance – Balance Sheet Capital Liquidity CRE Construction D & E Rated Banks A, B & C Rated Banks

36. Demographic & Economic Overview

37. Key Economic Statistics – Select States vs. The United States Source: Moody’s Economy.com & StoneCastle Partners

38. Key Economic Statistics – Select States vs. The United States Source: Moody’s Economy.com & StoneCastle Partners

39. Key Economic Statistics – Select States vs. The United States Source: Moody’s Economy.com & StoneCastle Partners

40. Key Economic Statistics – Select States vs. The United States Source: Moody’s Economy.com & StoneCastle Partners

41. Above U.S. Avg U.S. Avg Below U.S. Avg 5-yr. Change in Population - Nebraska • Sharp County is the 3rd 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 • 2nd largest Wing in the U.S. Air Force • 10,000 military and federal employees Omaha Sarpy County • Lincoln

42. Above U.S. Avg U.S. Avg Below U.S. Avg 2008 Household Income - Virginia • 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 Henry County

43. Above U.S. Avg U.S. Avg Below U.S. Avg 5-Year Change in Household Income - Virginia • 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. Above U.S. Avg U.S. Avg Below U.S. Avg 5-Year Change in Home Prices - Arkansas 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. Below LA Avg LA Avg Above LA Avg 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 East Baton Rouge Parish • Baton Rouge Orleans Parish

46. 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 Source: Moody’s Economy & NAR

47. 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 Source: Moody’s Economy & NAR

48. 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 Source: Moody’s Economy & NAR

49. 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 Source: Moody’s Economy & NAR

50. Below U.S. Avg U.S. Avg Above U.S. Avg 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 • Austin Pecos – home to the largest oil field in the U.S. Houston-Galveston-Brazoria MSA