December 11, 2015

R 170 G 123 B 85

2

Presentation Overview

+ Revisions to

Small Bank

Holding Company

Policy Statement

+ Enhanced Capital

Requirements

under Basel III

+ Revisions to

Prompt

Corrective Action

+ Using Leverage to

Increase Returns

+ Debt Capital

Alternatives

+ Tier 2 Capital

Treatment of

Subordinated

Debt

+ Senior Debt vs.

Subordinated

Debt

+ Common vs.

Preferred

+ Regulatory

Capital

Considerations

Utilizing Debt as

a Component of

the Capital Mix

Recent

Developments

Affecting Capital

Planning

Structuring

Strategies for

Capital Offerings

2 4 1

+ Public vs. Private

+ Private Offering

Exemptions

+ Limited Public

Offering –

Regulation A+

Analyzing Equity

Capital

Opportunities

3

3

Recent

Developments

Affecting Capital

Planning

1

4

• REVISIONS TO SMALL BANK HOLDING COMPANY POLICY STATEMENT – December 2014

• ENHANCED REGULATORY CAPITAL REQUIREMENTS UNDER BASEL III – Effective January 2015

Regulatory Developments

• REPRICING OF SBLF SECURITIES IN 2016

• REPRICING OF CPP/CDCI SECURITIES IN 2017, 2018

• LOW INTEREST RATE ENVIRONMENT

• ENHANCED SHAREHOLDER RETURNS WITHOUT ADDITIONAL DILUTION

Debt Capital Drivers

Recent Developments Affecting Capital Planning

5

•REVISIONS TO SMALL BANK HOLDING COMPANY POLICY STATEMENT – December 2014

•ENHANCED REGULATORY CAPITAL REQUIREMENTS UNDER BASEL III – Effective January 2015

Regulatory Developments

Recent Developments Affecting Capital Planning

▬ 12 CFR Parts 3 and 167

▬ 12 CFR Parts 209, 217 and 225, Appendix A

▬ 12 CFR Parts 324 and 325

▬ 12 CFR Part 225, Appendix C

6

Revisions to

Small Bank

Holding Company

Policy Statement

SMALL BHCs ARE NOT SUBJECT TO CONSOLIDATED RISK BASED CAPITAL RULES.

+ Bank holdings companies designated as “small bank holding companies” are not subject to the FRB’s risk-based capital and leverage rules

+ Required to report regulatory capital ratios only at the subsidiary bank level

INCREASE IN ASSET THRESHOLD FOR SMALL BHCs.

+ From $500 million to $1 billion in December 2014

CHANGE PERMITS MORE BHCs TO USE DEBT FINANCING.

+ Small bank holding companies may use debt to finance up to 75% of the purchase price of an acquisition, allowing a bank holding company (in theory) to have a debt-to-equity ratio of up to 3:1

+ Must retire parent company debt within 25 years

+ Must achieve debt-to-equity ratio of .30:1 or less within 12 years of incurrence of debt

BHCs SHOULD MAINTAIN A DEBT-TO-EQUITY RATIO OF 1:1 OR LESS TO:

+ Avoid restrictions on dividends

+ Avoid restrictions on stock redemptions

+ Qualify for expedited processing of regulatory applications

Bank holding companies with

assets < $1 billion are now

“small bank holding

companies.”

Regulatory Developments

7

•2.5% CAPITAL BUFFER

•LIMITS DIVIDENDS, REPURCHASES, DISCRETIONARY EXECUTIVE BONUSES

•PHASE-IN 2016-2019

•ELIGIBLE RETAINED INCOME – LAST 4 QUARTERS OF NET INCOME LESS ANY CAPITAL DISTRIBUTIONS AND CERTAIN DISCRETIONARY PAYMENTS

2.5% CAPITAL BUFFER

Regulatory Development

Phased in

Was Now CCB Effective

• Common Equity Tier 1 Capital

(CETI)/RWA Majority 4.5% + 2.5% = 7%

• Tier 1 Capital/RWA 4 6% + 2.5% = 8.5%

• Total Capital/RWA 8 8% + 2.5% = 10.5%

• Tier 1 Leverage Ratio/AA 4 4%

• January 1, 2015

Enhanced Regulatory

Capital Requirements

Under Base III

CAPITAL CHANGES:

8

• DTA

• MSR

• INVESTMENT IN UNCONSOLIDATED FINANCIAL ENTITIES

• RISK WEIGHTING CHANGE

• HVCREs

• PAST DUES

Regulatory Developments

Enhanced

Regulatory Capital

Requirements

Under Basel III

Regulatory Deductions and Adjustments to

Capital

9

• REPRICING OF SBLF SECURITIES IN 2016

• REPRICING OF CPP/CDCI SECURITIES IN 2017, 2018

• LOW INTEREST RATE ENVIRONMENT

• ENHANCED SHAREHOLDER RETURNS WITHOUT ADDITIONAL DILUTION

Regulatory Developments

Debt Capital Drivers

10

Utilizing Debt as

a Component of

the Capital Mix

2

11

Revised Policy Provides Opportunity to Enhance Shareholder Value

No BHC Debt With BHC Debt

Bank Level

Total Assets $1000 $1000

Common Stock $100 $100

ROAA 0.80% 0.80%

Net Income $8.00 $8.00

BHC Level

Subordinated Debt

(6.99%)

$0 $40

Common Stock $100 $60

Income from Bank $8.00 $8.00

Debt Expense $0.00 ($1.80)

Net Income $8.00 $6.20

ROAE 8.00% 10.3%

Except for ability to

downstream additional capital

to banking subsidiary as

common equity, the revised

policy provides for no material

change at the bank level.

Debt becomes a larger

component of the holding

company’s capital structure.

Despite lower net income due

to debt service, earnings are

spread over a significantly

smaller equity base, thus

increasing ROE.

12

Debt Capital

Alternatives

DEBT CAPITAL VERSUS EQUITY CAPITAL

+ Tax deduction on interest payments, which lowers effective interest rate

+ Non-dilutive to common shareholders

+ Enhanced returns to common shareholders

SENIOR DEBT

+ Unsecured versus secured (i.e., bank stock loans), and typically amortizing

+ Proceeds contributed to the bank are Tier 1 common equity at the bank level

+ Attractive rates in current interest rate environment

SUBORDINATED DEBT

+ For institutions with $1 billion or more in total consolidated assets, can count as Tier 2 capital in the consolidated organization if properly structured

+ Multiple distribution opportunities, including retail offering, private placements to institutional investors and pooling structures similar to TruPS

+ Interest only, without the “strings” attached to senior debt

Capital Raised by U.S. Banks

through Sept. 1, 2015

Common Equity Preferred Equity

Senior Debt Sub Debt

-- Source: SNL Financial

13

Tier 2 Capital

Treatment of

Subordinated

Debt

MATERIAL REQUIREMENTS INCLUDE:

+ Subordinate in right of payment to claims of senior debt holders and general creditors.

+ Minimum original maturity of 5 years.

+ Redeemable by the issuer no less than 5 years after issuance.

+ Unsecured.

+ No acceleration of principal prior to maturity except in the event of bankruptcy, appointment of a receiver or failure of subsidiary bank.

+ No credit sensitive features tied to financial condition of the issuer.

+ Tier 2 capital treatment is reduced by 20 percent of the original principal amount, net of any redemptions, during each of the last five years of the instrument.

PRACTICAL OBSERVATION: Most

subordinated debt issuances by

institutions with less than $1 billion in

total consolidated assets are structured

consistent with Tier 2 capital

treatment.

LITTLE-KNOWN FACT: Basel III

eliminated limitations on the amount

of Tier 2 capital that can be recognized

in total capital (due to the increased

common equity and Tier 1 capital

requirements), as well as the

limitations on the amount of

subordinated debt that can be included

in Tier 2 capital.

14

Evaluating Senior Debt vs Subordinated Debt

•Typically lower for senior debt, although retail subordinated debt offerings are competitive.

•Rate is sensitive to size and public company-status of the issuer. Interest Rate

•Subordinated debt is interest-only, with principal due at maturity; senior debt can be interest only, but is generally amortizing.

•Increased amortization can result in higher dividend requirements, which reduces bank-level capital and, in turn, lending capacity.

Amortization

•Typically, none for subordinated debt.

•Senior debt typically involves extensive covenants regarding regulatory capital, financial condition and no additional debt.

Covenants

•No acceleration of subordinated debt except bankruptcy.

•Senior debt can be accelerated for breach of covenants, failure to pay interest and deterioration in financial condition, among others.

Acceleration

•Subordinated debt cannot be redeemed within 5 years of issuance, except in certain limited circumstances. Redemption

15

Analyzing

Equity Capital

Opportunities

3

Capital Considerations

Common

• BASEL III Capital Ratios

– New CET1 Ratio

– Leverage

– Tier 1 RBC

• Dilutive impact

• Merger consideration

Preferred

• Can be structured to

qualify as Tier 1 capital

• Non-dilutive, generally

• Not available for S corps

• Cost of capital, generally

between common & debt

Practical observation: Although the

most common form of capital raised

by community banks, common stock

is usually the most expensive to the

institution and existing shareholders.

Practice tip: Except in limited cases,

preferred stock is rarely used by

community banks because coupon

payments are non-deductible

(compare to interest on debt).

17

Structuring

Strategies for

Capital Offerings

4

Offering Structure

Public

• Cost/benefit analysis

– Expense/time

– Ongoing obligations

– Access to public markets

• Impact of JOBS Act

• Inability to qualify under

exemptions or Reg A+

Private

• Most utilized structure for

community banks

• Expense/time

• Limitation on nature/types

of investors

Regulation A+ 17 CFR §§ 230.251 to 230.263

19

Private Offering Exemptions

+ Accredited + up to 35

non-accredited

+ No advertising or

general solicitation

+ Pre-existing relationship

+ Bad actor rules

+ 1 year holding period,

generally

+ Disclosure requirements

+ General solicitation

permitted

+ Accredited only

+ Verification process

+ Bad actor rules

+ 1 year holding period,

generally

+ Disclosure requirements

+ All subscribers must

be residents of the

same state as issuer

+ No transfer to

nonresident for 9

months

+ General solicitation

permitted

+ State exemption?

Reg. D

General

Solicitation

Reg. D

No General

Solicitation

Intrastate

Offering

Exemption

Practice Note: Reg. D. preempts state blue sky laws

17 CFR §§230.500 to 230.508 17 CFR §230.147

20

Regulation A+: Limited public offering 17 CFR §§ 230.251 to 230.263

• Privately-held issuers based in U.S. or Canada

• No SEC-reporting companies, investment companies, etc.

• Bad actor disqualification

Issuers

• Equity and debt securities (including warrants)

• Original issue vs. exchange Securities

• No more than $20MM in 12 month period

• No investor limitations Tier 1 Limitations

•No more than $50MM in 12 month period

•Non-accredited investors limited to <10% of greater of net income/net worth

Tier 2 Limitations

•Tier 1 – None

•Tier 2 – SEC-lite disclosure Ongoing Reporting

•Tier 1 – Coordinated review process

•Tier 2 – Exemption for offerings to qualified purchasers Blue Sky

21

Private Offering Exemptions

+ 80% of consolidated gross revenues

+ 80% of consolidated assets

+ 80% of net proceeds used and

+ principal place of office is within

such state

+ 80% of consolidated gross revenues

+ 80% of consolidated assets

+ 80% of net proceeds used or

+ majority of employees

Rule 147 Proposed Changes

vs Organized in state

Principal place of business

December 11, 2015

Bank stock prices continue to preform reasonably well despite overall market volatility and challenging industry fundamentals

Small banks have generally fared better than large banks recently as investors focus on growth opportunities and M&A opportunities

Investors remain interested in the banking sector

Banks with a combination of attractive markets, solid financial performance, growth prospects and reputable management can issue stock at premium valuations

Investors are willing to consider investing in banks < $500 million

The sub debt market is very active for community banks

The market is also open to preferred stock in some cases

Capital Markets Trends for Community Banks

-15%

-10%

-5%

0%

5%

10%

15%

Jan-15 Apr-15 Jul-15 Oct-15

Bank Index Performance Since January 1, 2015

SNL Bank S&P 500 NASDAQ NYSE DJIA

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-15 Apr-15 Jul-15 Oct-15

Bank Index Performance Since January 1, 2015

SNL Bank < $500M SNL Bank $500M-$1B SNL Bank $1B-$5B

SNL Bank $5B-$10B SNL Bank > $10B

Historical Pricing Metrics of U.S. Publicly Traded Community Banks¹

12

4% 1

37

%

14

4%

17

6% 18

6%

17

7%

17

1%

13

3%

87

%

75

% 82

%

73

% 84

%

10

3%

10

4%

11

1%

11.5x

13.0x13.9x

17.8x18.6x

16.4x16.7x

15.1x

14.0x14.4x 14.6x

12.2x 12.0x

13.3x 13.5x 13.6x

0.0x

4.0x

8.0x

12.0x

16.0x

20.0x

0%

50%

100%

150%

200%

250%

Me

dia

n P

rice

/ L

TM C

ore

EP

S

Me

dia

n P

rice

/ T

angi

ble

Bo

ok

Val

ue

Price/ Tang. Book Price/ LTM Core EPS

Where are Bank Stocks Trading Today?

102% 108%

144%

199%

165%

91%109%

119%

0%

102%

0%

50%

100%

150%

200%

250%

<$500M $500M-$1B $1B-$5B $5B-$10B $10+B

Median - Price/Tangible Book

NYSE & NASDAQ OTC MKTs

By Asset Size

106%124%

144%

175%192%

88% 90%103% 108%

100%

0%

50%

100%

150%

200%

250%

0.25%-0.50% 0.50%-0.75% 0.75%-1.00% 1.00%-1.25% >1.25%

Median - Price/Tangible Book

NYSE & NASDAQ OTC MKTs

By ROA

Price to Return

Tg. Bk EPS 30 Days 90 Days LTM

By Broad Market

S&P 500 - - 1.0% (2.1%) 0.7%

DJIA - - 1.6% (0.2%) (0.9%)

NASDAQ - - 2.0% (1.5%) 6.3%

Russell 3000 - - 0.7% (2.9%) 0.3%

NASDAQ Bank - - 5.3% 2.0% 11.2%

SNL U.S. Bank 170.5 13.0 5.5% (3.0%) 4.9%

By Asset Size

Assets > $10B 167.4 12.5 5.5% (3.7%) 4.0%

Assets $5B-$10B 239.8 18.3 6.8% 6.7% 18.5%

Assets $1B-$5B 171.1 17.4 4.6% 5.8% 13.1%

Assets $500M-$1B 117.9 15.2 3.3% 4.2% 10.4%

Assets < $500M 152.9 23.1 (2.0%) 3.8% 15.0%

By Market Cap

Micro Cap 123.6 14.6 2.4% 2.9% 8.4%

Small Cap 167.1 17.1 4.8% 5.6% 12.5%

Mid Cap 208.6 17.1 6.4% 3.1% 12.4%

Large Cap 166.0 12.2 5.4% (4.1%) 3.6%

By Geography

Mid-Atlantic 151.5 11.3 5.0% (3.5%) 6.7%

Midwest 204.4 14.7 5.1% (4.0%) 3.1%

New England 202.7 15.0 5.4% (5.8%) 0.3%

Southeast 143.3 13.0 7.0% (1.3%) 3.8%

Southwest 168.4 16.1 6.4% (0.1%) (3.3%)

Western 206.4 14.0 4.8% (3.1%) 5.7%

By Stock Exchange

NYSE 165.7 12.1 5.4% (3.8%) 3.8%

NYSE MKT 207.8 16.5 4.7% 8.5% 12.4%

NASDAQ 195.1 17.3 5.8% 1.5% 10.6%

Bank Pink 120.5 14.0 1.6% 2.4% 7.7%

OTC > $500M 125.5 13.6 1.7% 2.2% 8.8%

OTC $100M-$500M 108.2 15.1 1.5% 2.9% 6.6%

Basel III – Now Effective

Basel III - New Capital Requirements 2015 2016 2017 2018 2019

Minimum Common Equity Tier-1 ("CET1") 4.50% 4.50% 4.50% 4.50% 4.50%

Capital Conservation Buffer ("CCB") -- 0.63% 1.25% 1.88% 2.50%

Minimum Common Equity Plus CCB 4.50% 5.13% 5.75% 6.38% 7.00%

Minimum Tier 1 Risk-Based Capital 6.00% 6.00% 6.00% 6.00% 6.00%

Capital Conservation Buffer ("CCB") -- 0.63% 1.25% 1.88% 2.50%

Minimum Tier 1 Risk-Based Plus CCB 6.00% 6.63% 7.25% 7.88% 8.50%

Minimum Total Risk-Based Capital 8.00% 8.00% 8.00% 8.00% 8.00%

Capital Conservation Buffer ("CCB") -- 0.63% 1.25% 1.88% 2.50%

Minimum Total Capital Plus CCB 8.00% 8.63% 9.25% 9.88% 10.50%

Leverage Ratio- New Tier 1 Capital/Average Assets 5.00% 5.00% 5.00% 5.00% 5.00%

Capital Conservation Buffer ("CCB") -- -- -- -- --

Minimum Leverage Ratio 5.00% 5.00% 5.00% 5.00% 5.00%

40% 60% 80% 100% 100%

Effective January 1, 2015

AOCI Opt-Out Determination (upon first regulatory filing) March 31, 2015

Grandfathered for Banks <$15B in Assets ;

Phased out by 1/1/16 for Banks >$15B in Assets

Ris

k-B

ased

Mea

sure

sLe

vera

ge

Mea

sure

sN

ote

able

Phase-in Of Deductions & Adjustments From CET1

(including amounts exceeding the limt for DTAs, MSRs, and financials)

Capital Instruments That No Longer Qualify as Non-Core Tier 1 or Tier 2 Capital

New Risk-Weighted Asset Calculations - Standardized Approach

Summary: Types of Capital

Permanent capital Strongest form of capital

Dilutive to ownership Most expensive form of capital Time to raise

Tier 1 capital at holding company Flexible structures Non-dilutive to common ownership

Cost Dividends are after-tax

Non – dilutive to ownership Down-streamed to bank as tier 1

capital; tier 2 at holding company Interest payments are tax

deductible

Not permanent capital Phase-out of capital treatment as

maturity approaches

Non – dilutive to ownership Down-streamed to bank as tier 1

capital Interest payments are tax

deductible

Not permanent capital Not treated as capital at the

holding company

Cons

Senior Debt

Pros

Common Stock

Preferred Stock

Sub Debt Flex

ibili

ty

Co

st $

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2011 2012 2013 2014 2015 YTD

Off

eri

ng

Am

ou

nt

(in

th

ou

san

ds)

Capital Offerings By Community1 Banks

Common Equity Preferred Equity Senior Debt Subordinated Debt

Common Equity54%

Preferred Equity8%

Senior Debt11%

Subordinated

Debt27%

Capital Offering Trends

The most obvious trend over the last 5 years is the increasing significance of subordinated debt due to the prolonged low rate environment

Preferred equity has become less prevalent at this stage of the current cycle

The amount of common equity raised has been relatively stable and continues to be the preferred capital raising vehicle

Senior debt has remained relatively consistent, although senior debt is less common in community banks versus regional peers

2015 Offering Type Breakdown

Public Offering

Benefits

Ability to execute in expeditious manner

Attractive option when capital market conditions

are difficult for traditional public equity raises

Greater pricing flexibility

Ability to disclose greater financial detail and

speak directly with selected potential investors

A strong leading institutional investor likely to

provide “seal of approval” to other potential

investors

In the event of termination, no public disclosure

Considerations

Limited pool of retail investors can be contacted

May seek Board positions

Regulatory approval and due diligence costs

Private Placement

Benefits

Greater reach of potential investors

Not forced to “open up the hood” for additional

information disclosures

Improvement in liquidity for current shareholders

and increase in market capitalization

Considerations

Limited release of data may not be enough for

institutional investors

Limited pricing flexibility

Valuation

In the event of termination, public perception will

be negatively affected

Offering Comparison

Registered Offering

Pros Cons

Unregistered Offering

Pricing

Broader distribution

Greater liquidity

Less reporting

Less expensive

Flexibility/faster execution

More reporting

More expensive

More time

Lack of liquidity

Limited distribution

Registered vs. Unregistered Offering

Liquidity Concerns – The Importance of Investor Base

Investor Base: Institutional Retail

Pros

•Financial sponsorship

•Enhanced liquidity

•Strategic partners

•Price drivers

•Active investors

•Diversified shareholder base

•Lack of scrutiny

•Silent partners

•“Community-based”

Cons

• Increased accountability

•More transparency

•Reduced control

•Lack of investors

•Unlikely to move stock

•Passive investors

Institutional investors typically look for the following in an offering:

• Attractive entry valuation

• 15%+ internal rate of return

• Liquidity even in 3 to 7 years – IPO, refinancing, future sale

Traits investors look for:

• Markets

• Proven management teams

• Financial performance

• Strong asset quality or ability to manage asset quality issues

• Proven ability to grow organically

• Demonstrated ability to execute M&A transactions and pricing discipline

• Prudent capital allocation

• High insider ownership

Post-offering expectations

• Successful execution of articulated strategy

• Open dialogue with bank management

• Serve as a sounding board for all transformational ideas

• Aggressive deployment of excess capital

Investor Expectations