Community Bank Options for Raising Capital ABA Telephone Briefing Tuesday, January 25, 2011

1. Community Bank Options for Raising Capital ABA Telephone Briefing Tuesday, January 25, 2011 2:00 – 3:30 p.m. ET

2. Speakers • Robert P. Hutchinson, Head of Depository Institutions, Investment Banking, Sterne, Agee & Leach, Inc., Boston, MA • Dave M. Muchnikoff, Partner, Silver Freedman and Taff, LLP, Washington, DC • Keary Colwell, Chief Financial Officer, Bay Commercial Bank, Walnut Creek, CA

3. Discussion Items Section Executive Summary 1 Current Bank Equity Valuations 2 The Migration of Capital Raising 3 Capital Raising Options 4 Capital Raising Process 5 Investor Profiles & Requirements 6 Appendix: Sample Term Sheets 7 Presenter Profiles 8

4. Executive Summary

5. Executive Summary • Bank valuations have improved, but are still trading primarily off of tangible book value as it relates to balance sheet strength • Offering types and structures have varied widely and evolved since the credit crunch began in 2007 • Bias has shifted to common equity: from the perspective of the regulators and investors • Investor requirements are ever evolving and demanding

6. Current Bank Equity Valuations

7. Recent Market Developments • Confidence has returned to the market place • Unemployment has peaked • Inflation remains low • Consumer spending has increased at a rapid pace • Stocks have reached their highest closing levels in 2.5 years • Investors have sought out discounted bank stocks with strong fundamentals • Earnings are improving • Companies are flush with cash on their balance sheets

8. Structural Headwinds Remain • High unemployment, budget deficits and subdued housing market remain a drag on recovery • Housing prices: Where is the bottom? • Many more bank failures expected • At September 30, 2010, “Problem List” consisted of 860 institutions with total assets of $379.2 billion • Many banks are facing slow balance sheet growth, flat fee revenue and rising regulatory expense burden • Significant industry-wide capital need • Regulatory reform has injected further uncertainty

9. Recent Market Performance Relative Price Performance Since December 1, 2010 Source: SNL Financial SNL Bank Index: All major exchange banks in SNL’s coverage universe SNL Thrift Index: All major exchange thrifts in SNL’s coverage universe

10. Pricing Drivers for Bank Stock Valuations • Asset Quality • Capital Levels • Size and Liquidity • Profitability

11. Bank & Thrift Valuations: Landscape Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

12. Valuation Drivers: Asset Quality Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

13. Valuation Drivers: Capital Levels Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

14. Valuation Drivers: Balance Sheet Strength 100% P / TB 20% TX Ratio Note: Texas Ratio = (NPAs + Loans 90+) / (TCE + LLR) Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

15. Valuation Drivers: Size & Liquidity Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

16. Valuation Drivers: Size & Liquidity Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

17. Valuation Drivers: Profitability Values represent median of each respective group Includes all publicly traded banks and thrifts Data as of 1/14/2011 Source: SNL Financial

18. The Migration of Capital Raising

19. Equity Capital Raising Trends: 2008 – PresentCapital Raised by Banks & Thrifts Source: SNL Financial SNL Bank & Thrift Index: All major exchange banks and thrifts in SNL’s coverage universe

20. Equity Capital Raising Trends: 2008 – PresentCapital Raised by Banks & Thrifts Source: SNL Financial SNL Bank & Thrift Index: All major exchange banks and thrifts in SNL’s coverage universe

21. Equity Capital Raising Trends: 2000 – PresentCapital Raised by Banks & Thrifts Beginning in the 2nd Quarter of 2009, companies began shifting from TARP to common equity Source: SNL Financial

22. Equity Capital Raising Trends: 2000 – 2007Aggregate Capital Raised Source: SNL Financial

23. Equity Capital Raising Trends: 2008 – PresentAggregate Capital Raised Source: SNL Financial

24. Common Equity Raises by Asset Size:Number of Transactions 168 165 76 Asset Size ($) < 0.5 B 0.5 B – 1.0 B 1.0 B – 10.0 B > 10.0 B Values represent median of each respective group Source: SNL Financial

25. Common Equity Raises by Asset Size:Premium / (Discount) to Stock Price Asset Size ($) < 0.5 B 0.5 B – 1.0 B 1.0 B – 10.0 B > 10.0 B Values represent median of each respective group Source: SNL Financial

26. Common Equity Raises by Asset Size Price / Tangible Book Value Offering / Market Cap • Small cap valuations driven by size of capital raise Asset Size ($) < 0.5 B 0.5 B – 1.0 B 1.0 B – 10.0 B > 10.0 B Values represent median of each respective group Source: SNL Financial

27. Impact of Relative Offering Size on Valuation

28. Regulatory Considerations

29. Capital is King • Collins Amendment requires regulators to apply leverage and risk-based capital requirements for holding companies and significant non-bank subsidiaries at no less than current PCA levels • Consolidated holding company capital must be at least at bank levels, certain debt/trust preferred/hybrid capital (but not REIT Preferred securities) no longer qualify as “Tier 1” capital (subject to phase-out period or grandfathered for holding companies with less than $15 billion in total consolidated assets) • Does not apply to small bank holding companies (assets under $500 million) not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities (including securitization and asset management), and do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) • Regulators to establish “countercyclical capital principles” so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction • Perpetual non-cumulative preferred and REIT Preferred still qualify as Tier 1 capital – rarely issued in the past because its terms were less attractive than previously-viable hybrids such as trust preferred securities

30. Basel III • Significantly increases Tier 1 Capital requirements for banks • Tier 1 raised from 4% to 6% • New capital conservation buffer calibrated at 2.5% • Countercyclical buffer: 0-2.5% • Final implementation deferred many years: Tier 1 minimums phased in by January 1, 2015, however, regulators may impose earlier deadlines • New requirements for large US banks will be stricter than Basel III – Sheila Bair, FDIC, 10/20/10 • FRB to adopt capital standard for Large BHCs/Significant Non-banks in consultation with Financial Stability Oversight Council • These may trickle down to all • Higher than normal minimum capital requirements already being imposed through examination/application process – most regulators want 8 – 10% Tier 1 and 10 – 12% (Risk-based)

31. Significance of Small BHC Policy • Permits debt levels at small BHCs that are far higher than those permitted for larger BHCs • Policy permits a small BHC (at $500 million or less in assets) to incur debt and to downstream proceeds to its subsidiary banks as low cost, non-dilutive Tier 1 capital to fund acquisitions or critical ownership restructuring transactions • BHC debt incurred to acquire original bank or additional banks cannot exceed 75% of purchase price • BHC debt must be retired in 25 years • BHC debt to equity ratio must be reduced to .30 to 1.0 within 12 years • Each subsidiary bank must be well capitalized or expected to be soon • BHC may not pay dividends if BHC debt to equity ratio is greater than 1.0 to 1.0 • Small BHC policy does not apply to BHCs if the BHC Is engaged in significant non-banking activities directly or through a subsidiary; conducts significant off-balance sheet activities, including securitizations or asset management, directly or through a subsidiary; or has a significant amount of debt or equity securities (other than trust preferred securities) that are registered with the SEC

32. Capital Raising Options

33. Reasons for Raising Capital • Increased Capital Requirements • Structural Regulatory Changes • Liquidity • Growth Opportunities • Organic • Acquisitions

34. Equity Capital Raising Trends: 2000 – Present Capital Raises of Less than $50 MM Number of Transactions Source: SNL Financial

35. Equity Capital Raising Trends: 2000 – PresentCapital Raises of Less than $50 MM Capital Raised by Banks & Thrifts ($B) Source: SNL Financial

36. Types and Sources of Capital Types Sources • Sources: • Rights Offering • Private Offering • Regulation D or Rule 144A • Underwritten • Public Markets • Private Equity Investors • Institutional Investors • Correspondent Banks • Stockholders • Customers • Directors • Common Stock • Preferred Stock • Debt

37. Capital Structure Influences • How much additional capital is needed? • Regulatory requirements: What type of “qualified capital” do you need and at what level? • Corporate structure • Financial condition • Capital structure • Market demand: Who is investing?

38. Summary of Types of Capital Pros Cons • Non-dilutive to ownership • Down-streamed as Tier 1 capital • Interest payments tax deductible • Not permanent capital • Not treated as capital Senior Debt • Not permanent capital • Non-dilutive to ownership • Down-streamed as Tier 1 capital • Interest payments tax deductible Sub Debt Sub Debt • Tier 1 capital at holding company • Flexible structure • Non-dilutive to common ownership • Cost • Dividends are after-tax Preferred Preferred Unregistered Offering • Permanent capital • Dilutive to ownership Common Common

39. Senior Debt Considerations Benefits • Issued by holding company with proceeds down-streamed to subsidiary bank • Maturity typically up to 10 years • Down-streamed proceeds count as Tier 1 capital at bank level, no capital treatment at holding company level • Interest payments are tax-deductible • No change to ownership structure • Can you raise enough? • Not permanent capital, must have ability to repay or refinance • Must be able to dividend funds from bank to service debt • Will not solve capital issued at the holding company level • Earnings dilutive unless leveraged to break even or better • Usually obtained as a loan from another financial institution Registered Offering

40. Subordinated Debt Considerations Benefits • May be issued by holding company or bank • Maturity must be minimum of 5 years, typically 10-15 years • If issued by holding company, is generally considered Tier 2 capital at holding company level; proceeds can be contributed to bank as Tier 1 capital • If issued by bank, is considered Tier 2 capital • Interest payments are tax-deductible • No change to ownership structure • Can you raise enough? • Not permanent capital, must have ability to repay or refinance • If Tier 2 capital, sub debt limit equals 50% of Tier 1 capital; capital qualification is reduced 20% annually during last 5 years to maturity • Impact on earnings of interest cost; must be able to service debt at issuer level • Usually privately placed with stockholders, another community financial institution or private investors Registered Offering

41. Preferred Stock Considerations Benefits • Increases tangible equity without increasing common shares • Non-cumulative perpetual preferred counts as Tier 1 capital • Can structure to be convertible into common stock, either mandatorily or at the option of the holder • Fixed or floating rate coupon • Higher current cash cost relative to issuance of common stock • Dividends are paid in after-tax dollars except REIT Preferred is paid from pre-tax earnings • Less dilutive to shareholders than common stock • Not available to Subchapter S corporations; usually privately placed with stockholders, another community financial institution or a private investor Registered Offering

42. Common Stock Considerations Benefits • All proceeds count as Tier 1 capital • Represents permanent capital • Concerns about dilution to existing shareholders • Typically priced at a discount to market • Potential concerns over ability to effectively deploy “excess” capital • Negative impact on performance ratios Registered Offering

43. Alternative Sources of Capital Creation • Branch Sales • Securitizations (Denominator Trade) • Sale/Leaseback Transactions • Cut Dividends • Constrain Balance Sheet Growth • Capital Accretive Stock Transactions

44. The Capital Raising Process

45. Registered vs. Unregistered Offering Pros Cons • Pricing • Broader distribution • Greater liquidity • More reporting • More expensive Registered Offering • Less reporting • Less expensive • Flexibility • Lack of liquidity Unregistered Offering

46. Capital Raising Process Pre-Offering Marketing

47. Investor Profiles and Requirements

48. Who Are the Investors • Institutional Money Managers • Private Equity Investors • Bank Focused Hedge Funds • Insiders (Management, Board Members) • Retail Investors

49. Desired Issuer Characteristics of Bank Stock Investors • Proven management teams • Strong asset quality or ability to manage asset quality issues • Demonstrated ability to execute M&A transactions and to opportunistically take advantage of assisted bank transactions • Pricing discipline • Proven ability to grow organically • Prudent capital allocation • High insider ownership

50. Investor Considerations • Potential lead investors (9.9% or more) in banks are typically looking for the following investment characteristics: • 20%+ internal rate of return • Discount to current trading price / peers • Board of Directors representation • Liquidity event in 3 to 7 years • IPO • Refinancing • Sale of the company