Current Banking Environment

and Bank Valuations

California Bankers AssociationLenders Conference

Palm Springs, CaliforniaMarch 19, 2012

CHICAGO TAMPA RALEIGH ATLANTA SAN FRANCISCO

2

CBA Lenders Conference

I. UPDATE ON INDUSTRY CONDITIONS

1. Long-Term Bank Performance 4

2. Bank Performance by Asset Size (in a normal market) 5

3. Nonperforming Assets & Bank Failures by Region 6

4. Bank Failures 7

5. Number of Bank Charters 8

6. Bank Charters – Ultra Long-Term View 9

7. Capital Markets for Community Banks

a. Long-Term Trend in Bank Stock Values 10

b. Recent Common Equity Offerings 11

7. Bank Consolidation Trends

a. Merger Volume - Ultra Long-Term View 12

b. Merger Pricing – Strong and Weak Markets 13

8. Summary of Community Bank Environment

a. Strengths, Weaknesses, Opportunities & Threats 14

b. Big Picture Strategic Issues 15

Table of Contents

3

II. MANAGING THROUGH CRISIS AND VALUATIONS1. Bank A - Performance and Stock Valuation (well done!)

17

2. Bank B – Performance and Stock Valuation (a cautionary tale)

18

3. What Bank Investors Think (performance and stock price correlation) 19

4. Recent Trend in Community Bank Stock Prices

20

III. STRATEGY CONSIDERATIONS1. A Case of Toxic Assets

22

2. The Asset Sale Process

23

3. The Case for Independence: What Investors Expect

24

4. The Prospect of Merging: What Merger Partners Want

25

IV. CONCLUSIONS

CBA Lenders ConferenceTable of Contents

I. Update on Industry Conditions

5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Profitability (% )Net interest margin 4.17 4.21 4.15 4.05 4.06 4.04 3.91 3.89 3.77 3.78 3.96 3.73 3.52 3.47 3.31 3.29 3.16 3.46Noninterest income/earning assets 1.82 2.00 1.93 1.98 2.12 2.21 2.46 2.70 2.65 2.57 2.62 2.69 2.44 2.45 2.41 2.17 1.83 2.30Noninterest expense/earning assets 3.95 4.05 3.93 3.80 3.92 3.80 4.02 3.98 3.88 3.79 3.78 3.71 3.54 3.47 3.33 3.42 3.25 3.34Efficiency ratio 64.5 63.7 63.2 61.4 61.5 58.9 60.8 58.5 58.4 57.8 56.2 56.6 58.0 57.3 56.8 59.5 59.4 55.0ROAA 0.87 1.10 1.05 1.10 1.10 1.18 1.16 1.26 1.14 1.14 1.30 1.38 1.28 1.28 1.28 0.81 0.04 0.10ROAE 12.21 14.09 13.33 13.63 13.31 14.03 13.51 14.71 13.53 13.02 14.08 15.05 13.20 12.43 12.30 7.75 0.36 0.93

Balance Sheet Composition (% )Net loans/deposits 75 77 81 85 88 88 89 92 93 90 89 90 92 93 91 93 85 79Equity/assets 7.45 7.97 7.81 8.16 8.22 8.39 8.52 8.35 8.49 8.98 9.20 9.15 10.28 10.28 10.52 10.30 9.30 10.90Total risk-based capital ratio 12.54 13.42 13.41 13.12 12.91 12.61 12.58 12.46 12.36 12.88 12.99 13.00 13.19 12.94 12.97 12.80 12.80 14.20

Credit Quality (% )Noncurrent loans/total loans 2.95 2.02 1.34 1.21 1.09 0.99 0.95 0.91 1.05 1.30 1.36 1.12 0.80 0.74 0.80 1.42 2.93 4.94NCOs/loans 1.10 0.80 0.51 0.46 0.53 0.57 0.59 0.53 0.59 0.83 0.97 0.78 0.56 0.49 0.39 0.59 1.29 2.38LLR/loans 2.36 2.21 2.00 1.85 1.74 1.68 1.62 1.54 1.54 1.68 1.69 1.57 1.34 1.15 1.07 1.30 2.21 2.97

(1) all U.S. banks and thrifts

Profitability

1. Net interest margins have declined and will remain under pressure until interest rates increase

2. Some progress in noninterest income and expense reduction and increased efficiency, although the cost of new regulation may reverse that trend

3. ROAA declined in 2008-09 to unprecedented levels. Will it return?

Capital & Returns

1. Required capital levels have steadily increased, so ROAE has declined. More pressure to get bigger.

Credit Cycle

1. The current “credit crisis” is the worst in a very long time, yet it is not catastrophic on an industry-wide basis

2. The industry became overconfident and let loss reserves fall too low

3. However, the system had enough capital to survive

Update on Industry ConditionsLong-Term Bank Performance

6

Asset Class Number Assets EquityEquity/ Assets

Tang. Eq./ Assets

Loans/ Deposits

ROA ROENet Int. Margin

Efficiency Ratio

Under $250M 386 $139,795 $16,387 11.26 11.21 88.1 0.55 5.02 4.07 77.9

Between $250M-$500M 229 $351,867 $31,739 9.21 8.89 92.5 0.88 9.52 3.94 67.3

Between $500M-$1B 193 $706,493 $65,599 8.75 8.03 95.9 0.91 10.11 3.76 65.7

Between $1-$5B 200 $1,833,280 $161,107 8.85 7.25 97.3 0.92 9.73 3.75 63.1

Between $5-$10B 37 $6,501,102 $595,493 9.06 6.16 94.6 0.94 10.11 3.61 60.4

Over $10B 64 $46,833,472 $3,511,736 8.79 6.01 98.6 1.01 11.73 3.42 59.7

ALL BANKS 1,109 $428,424 $38,648 9.62 8.74 92.8 0.84 8.49 3.84 67.4

Asset ClassNonint. Inc./ AA

Overhead/AA

Reserves/ Loans

NPARatio

Chargeoff Ratio

Price/LTM EPS

Price/ Book

Price/ Tang. Book

Dividend Yield

Weekly Vol./Shares O/S

Under $250M 0.49 3.56 1.21 0.36 0.02 16.7 111.3 111.3 0.00 0.13

Between $250M-$500M 0.71 3.04 1.20 0.74 0.08 13.6 124.8 130.6 1.98 0.12

Between $500M-$1B 0.81 2.93 1.15 0.85 0.10 13.3 126.5 138.6 2.49 0.24

Between $1-$5B 1.01 2.86 1.17 0.91 0.17 13.1 120.2 152.1 3.00 1.05

Between $5-$10B 1.16 2.72 1.24 0.92 0.28 13.3 122.1 196.2 3.53 3.36

Over $10B 1.69 2.85 1.19 1.11 0.30 12.1 130.0 196.6 4.45 3.52

ALL BANKS 0.75 3.07 1.19 0.75 0.09 13.7 118.9 134.1 1.65 0.21

Source: SNL Financial, 12/31/07All averages are based on median values for publicly traded banks As size increases:

margins decrease efficiency increases noninterest revenue increases overhead level decreases leverage increases credit risk increases

Take-aways:

Get larger

Develop noninterest revenues

Update on Industry ConditionsBank Performance by Asset Size (in a normal market)

7

The Southeast has been the hardest hit, followed closely by the West. The other regions have fared much better.

Update on Industry ConditionsNonperforming Assets & Bank Failures by Region

U.S.

Commercial

Banks

Change : Peak to Current 12/31/11 09/30/11 06/30/11 03/31/11 12/31/10 12/31/09 12/31/08 12/31/07

Commercial Banks in

2008

Failures 2008-

12/31/11Failure

Rate

West

Arizona (1.21) 3.78 4.24 3.64 3.59 4.99 4.41 2.24 0.24 38 10 26.3% MediumCalifornia (0.46) 3.04 3.05 3.39 3.49 3.50 3.01 1.53 0.14 261 27 10.3% MediumIdaho (0.75) 5.44 5.80 5.94 6.19 5.93 4.20 2.24 0.40 16 0 0.0% BadMontana (0.19) 2.79 2.76 2.79 2.97 2.89 2.26 1.51 0.71 70 0 0.0% GoodNevada (2.67) 3.57 4.02 5.58 6.05 6.24 3.84 1.27 0.17 28 9 32.1% MediumOregon (0.93) 4.41 5.14 4.47 4.75 5.34 3.78 2.08 0.19 32 6 18.8% MediumWashington (0.85) 3.96 4.37 4.65 4.81 4.66 4.06 1.68 0.30 66 16 24.2% MediumWyoming (0.11) 1.64 1.52 1.50 1.48 1.68 1.75 0.99 0.35 34 1 2.9% Good

West (0.43) 3.23 3.29 3.37 3.50 3.66 3.18 1.54 0.29 545 69 12.7% Medium

Southwest (0.08) 1.13 1.11 1.17 1.14 1.21 1.04 0.62 0.39 1,170 25 2.1% Good

Southeast (0.11) 3.83 3.93 3.94 3.92 3.91 2.96 1.51 0.58 1,183 128 10.8% Medium

Northeast 0.00 1.42 1.38 1.33 1.30 1.37 1.18 0.72 0.28 96 0 0.0% Good

Mid Atlantic 0.00 1.61 1.60 1.53 1.43 1.45 1.30 0.65 0.41 430 12 2.8% Good

Midwest (0.06) 1.69 1.75 1.75 1.74 1.71 1.61 1.13 0.69 3,210 99 3.1% Good

US TOTAL (0.08) 1.89 1.93 1.95 1.97 1.95 1.75 1.08 0.55 6,634 333 5.0%

* Peak NPA levels highlighted in yellow

(1) NPAs = loans 90+ days delinquent + nonaccrual loans + restructured loans + OREO

Bank Failures 2008-2011

Note:Northeast = CT, MA, ME, NH, RI, VTMid Atlantic = DC, DE, MD, NJ, NY, PAMidwest = AR, IA, IL, IN, KS, KY, MI, MN, MO, ND, NE, OH, SD, WISouthwest = CO, LA, NM, OK, TX, UTSoutheast = AL, FL, GA, MS, NC, SC, TN, VA, WV

Median NPAs / Assets (%) (1) Current Asset

Quality "Rating"

8

In the last banking crisis, high volume of failures (greater than 150 annually) lasted eight years

The current crisis is three years old

Question: this time, will failures last as long and be as numerous? Apparently, economic stimulus and support of the banking industry (for example TARP/SBLF) has made the current cycle less severe and shorter.

0

100

200

300

400

500

600

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Num

ber o

f fai

led

bank

s

Pace of Recent bank failures, compared to last banking crisisSource: SNL Financial, 12/31/2011

Update on Industry ConditionsBank Failures

9

1. Mergers far exceed failures as the cause of industry consolidation

2. As a result of de novo activity from mid 1990s until 2007, there are still too many charters in the U.S.; reduction (by failure and merger) is inevitable and average bank size must increase

21 Yr. Total 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990

United StatesBeginning Charters 12,721 6,841 7,098 7,293 7,407 7,527 7,637 7,778 7,890 8,098 8,317 8,586 8,803 9,155 9,539 9,946 10,475 10,970 11,484 11,965 12,351 12,721Add: New Charters & Conversions 3,072 13 34 109 205 202 177 148 128 104 143 213 254 219 244 184 130 68 73 86 144 194Less: Charters Acquired 8,091 183 158 260 293 309 270 263 225 276 359 456 419 560 601 554 608 548 481 429 447 392

Charters Failed 1,158 127 133 44 26 13 17 26 15 36 3 26 52 11 27 37 51 15 106 138 83 172Ending Charters 6,544 6,544 6,841 7,098 7,293 7,407 7,527 7,637 7,778 7,890 8,098 8,317 8,586 8,803 9,155 9,539 9,946 10,475 10,970 11,484 11,965 12,351

Changes in number of FDIC-insured commercial banksSource: FDIC

Update on Industry ConditionsNumber of Bank Charters

10

1. The banking industry has consolidated;

2. While banking assets have increased;

3. As a result, banks have gotten bigger

• As a result of bank failures of late 80s/early 90s/late 2000s, as well as an active M&A market, the number of banks & thrifts has fallen dramatically

• Long-term and recent trends indicate that investors’ preferences for scale, business mix diversity and sophisticated management systems will continue driving consolidation

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

1934 1944 1954 1964 1974 1984 1994 2004

14,000 14,000

7,000

2010

Number of U.S. Commercial Bank Charters

Update on Industry ConditionsBank Charters – Ultra Long-Term View

11

The long-term valuation cycle:

3-4 years up &3-4 years down or a6-8 year cycle

1. In the 3 year decline that began in 2006, the market anticipated the problems in the economy and the industry that did not become obvious until 2-3 years later in 08-09.

2. Prices have been flat since the “bottom” of 2009.

264

161

229

99

1,503

815

1,531

735

1,364

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

50

75

100

125

150

175

200

225

250

275

300

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

S&

P 5

00 I

nd

ex V

alu

e

P/T

BV

Val

ues

for

Ban

k I

nd

ex

SNL Micro Cap U.S. Bank (2) S&P 500

Historical Bank Index Price to Tangible Book Values (1)

(1) Monthly, end of month values(2) Publicly traded banks with less than $250 million in total common market capitalization

Capital Markets for Community BanksLong-Term Trend in Bank Stock Values

12

Capital Markets for Community BanksRecent Common Equity Offerings – CA Banks under $2B since 1/1/2010

OfferingCompletion

Date Company Name Ticker City State

TotalAssets($000)

Gross Amount Offered($000)

Offer Price per Share

($)

Tangible BVPS

($)

Offer Price/ TBV(%)

Offering/ Existing Equity

(%)

Tang. Equity/ Assets

(%)

Total Capital Ratio(%)

NPAs/ Assets

(%)

01/20/2012 New Resource Bank NWBN San Francisco CA 160,648 7,700 $4.40 $4.99 88.2 40% 11.97 15.75 0.7910/31/2011 United American Bank UABK San Mateo CA 285,269 1,200 $0.30 $0.44 68.0 12% 3.50 5.61 13.0810/21/2011 Pan Pacific Bank PPFC Fremont CA 91,877 5,034 $2.00 $5.19 38.6 61% 8.95 11.77 0.809/30/2011 Saehan Bancorp SAEB Los Angeles CA 546,738 12,025 $0.25 $0.24 102.9 26% 8.40 17.00 6.148/31/2011 Tri-Valley Bank TRVB San Ramon CA 80,177 4,028 $0.35 $2.53 13.9 91% 5.55 8.73 11.93

08/02/2011 Community 1st Bank CFBN Auburn CA 156,586 7,378 $2.00 $7.08 28.3 49% 9.61 17.95 5.3806/28/2011 California Business Bank CABB Los Angeles CA 103,377 5,061 $3.00 $4.38 68.5 61% 7.96 13.00 7.9706/22/2011 First PacTrust Bancorp, Inc. BANC Chula Vista CA 834,983 24,546 $15.50 $13.94 111.2 18% 16.25 17.27 6.195/13/2011 Open Bank OPBK Los Angeles CA 131,107 11,148 $2.85 $2.51 113.7 64% 13.18 17.26 1.91

03/31/2011 California United Bank CUNB Encino CA 756,284 10,266 $12.75 $10.41 122.5 15% 8.01 12.19 1.421/13/2011 Pacific Commerce Bank PFCI Los Angeles CA 182,184 5,000 $5.00 $5.99 83.5 26% 10.38 13.84 9.08

12/15/2010 Mission Community Bancorp MISS San Luis Obispo CA 212,205 3,743 $5.00 $4.97 100.6 10% 17.55 NA 3.7011/23/2010 Bridge Capital Holdings BBNK San Jose CA 939,975 30,000 $8.55 $8.13 105.1 27% 12.02 18.45 3.4811/19/2010 Santa Cruz County Bank SCZC Santa Cruz CA 293,135 2,501 $10.35 $12.58 82.3 12% 7.15 12.57 1.8911/12/2010 NorCal Community Bancorp NCLC Alameda CA 250,366 7,450 $1.00 $4.92 20.3 48% 6.22 14.62 8.7711/01/2010 First PacTrust Bancorp, Inc. BANC Chula Vista CA 862,713 48,602 $11.00 $18.79 58.5 49% 11.46 14.15 5.2311/01/2010 First PacTrust Bancorp, Inc. BANC Chula Vista CA 862,713 11,398 $11.00 $18.79 58.5 12% 11.46 14.15 5.2310/29/2010 Pacific City Financial Corporation PFCF Los Angeles CA 541,839 18,417 $1.50 $4.07 36.9 36% 9.57 12.10 3.6010/13/2010 Sierra Bancorp BSRR Porterville CA 1,328,306 23,250 $10.00 $11.52 86.8 17% 10.15 17.27 7.229/16/2010 Security California Bancorp SCAF Riverside CA 321,160 20,000 $7.75 $11.23 69.0 49% 12.78 14.97 2.00

08/05/2010 Bay Commercial Bank BCML Walnut Creek CA 143,228 18,000 $9.00 $10.42 86.4 110% 11.29 13.49 0.0007/26/2010 Mission Oaks Bancorp MOKB Temecula CA 186,868 7,045 $1.00 $1.69 59.3 93% 4.06 NA 12.587/22/2010 Plaza Bank PLZB Irvine CA 177,952 15,000 $2.50 $1.72 145.4 63% 10.89 14.95 0.736/30/2010 Valley Republic Bank VLLX Bakersfield CA 153,261 11,956 $12.00 $8.46 141.8 57% 13.60 34.62 0.00

06/15/2010 Mission Community Bancorp MISS San Luis Obispo CA 194,961 15,000 $5.00 $9.02 55.5 82% 9.38 NA 3.045/19/2010 Ventura County Business Bank VCBB Oxnard CA 84,216 9,359 $1.70 $1.14 149.4 483% 2.30 3.63 8.644/30/2010 Pacific City Financial Corporation PFCF Los Angeles CA 536,947 3,291 $3.25 $4.68 69.5 6% 9.74 11.89 2.86

04/27/2010 Mission Community Bancorp MISS San Luis Obispo CA 193,105 10,000 $5.00 $9.22 54.2 54% 9.65 NA 3.8204/05/2010 Community Bank of the Bay CBYAA Oakland CA 83,743 5,000 $3.50 $2.05 170.8 85% 7.00 10.23 2.0303/30/2010 BofI Holding, Inc. BOFI San Diego CA 1,345,313 13,862 $13.00 $11.33 114.7 14% 7.63 NA 1.2403/23/2010 Bank of Commerce Holdings BOCH Redding CA 813,406 30,600 $4.25 $5.29 80.3 44% 8.04 13.31 2.6203/18/2010 First California Financial Group, Inc. FCAL Westlake Village CA 1,459,821 36,000 $2.50 $5.23 47.8 23% 6.12 12.69 3.09

3/9/2010 Saehan Bancorp SAEB Los Angeles CA 668,060 60,573 $0.35 $0.41 86.0 929% 0.98 2.76 15.653/1/2010 Pacific Valley Bank PVBK Salinas CA 180,881 3,000 $7.00 $5.79 120.8 18% 9.10 12.25 6.83

34 Median: 231,286 10,707 $4.33 $5.26 82.9 46% 9.47 13.49 3.65

Transactions Average: 445,982 14,630 $5.43 $6.74 83.5 82% 9.17 13.74 4.97

Secondary common equity offerings (over $1 MM) with available pricing data completed since 1/1/2010 for CA

banks & thrifts under $2 billion in assets

13

Over the last 75 years:

1. For the first 50 years the “charter elimination rate” of 200 per year kept the number of bank charters steady at about 14,000

2. Over the last 25 years, the elimination rate of 400 per year has cut the number of charters in half

0

100

200

300

400

500

600

1934 1944 1954 1964 1974 1984 1994 2004

Number of U.S. Commercial Bank Charters EliminatedThrough Unassisted Merger Transactions

2010

Bank Consolidation TrendsMerger Volume – Ultra Long-Term View

14

1. Bank sale prices follow bank stock values on a 6-8 year cycle, with a 1-2 year lag

2. The long-term “gold standard” is 2.00x book value (+/- 10%)

1. The recent M&A market has been particularly weak, both in activity level and prices

3. We are nearing a stronger bank sale market

2. This is good for buyers and bad for sellers

Bank Consolidation TrendsMerger Volume – Strong & Weak Markets

15

Summary of Community Bank EnvironmentStrengths, Weaknesses, Opportunities & Threats

Strengths• Size allows adaptable

business plan• Better deposit mix from

“relationship banking”• Net interest margins higher• Customer loyalty• Work environment/lifestyle

Threats• Regulation

(costs, risks)• Negative public image

(shared with all banks)• Big bank and non-bank

competition• “Take-out” size is increasing

Weaknesses• Stock liquidity• Cash dividend capability• Access to new equity capital• Access to debt funding• Legal lending limits• Operating scale• Loan portfolio diversification

(real estate dependent)• Human resource capabilities

(training, career opportunities, benefits, etc.)

• Lack of related financial services (financial planning, wealth management)

• Management and board depth

Opportunities• Better investor relations

(better stock performance, access to capital)

• Board strengthening and diversification

• Product diversification(using technology)

POSITIVE NEGATIVE

INTERNAL

EXTERNAL

16

Summary of Community Bank EnvironmentBig Picture Strategic Issues

Past Present Future?

Financial leverage Very high Very low Higher

Deposit mix Wholesale Core Mix of core and wholesale

LoansGrowth High Low (or no) High

Mix: C & I None High ModerateC & D real estate High None ModerateComm. real estate-non-owner High None Moderate

Underwriting Collateral Cash flow Cash flow and collateral

Liquidity Low High Moderate

Loans / deposits High Low High

Net interest margins High Low Moderate

Noninterest income Low Low Low

Business strategy Undefined Poorly defined Sharply definedUnrealistic Realistic Realistic

Market niche/ brand identity Weak Weak Strong

De novo banks Lots None Some

MergersAcquisitions (cash out, stock out) Lots None SomeMergers of equals None Few Lots

ValuationsMinority interest (stock prices) High Low HighSale of control High Low Higher

II. Managing Through Crisisand Valuations

18

A B C

D E F

G

Anticipating trouble, stopped growth in 2007 (A) Preserved capital (C) When NPAs did increase (D), sacrificed current earnings (B) to charge off NPAs early and aggressively (E), and build reserves (F). As a result of improved asset quality, reserves are returning to normal,

further boosting profitability

Stock price bottomed early at 50% p/b and recovered earlyto 100% p/b (G)

Managing Through Crisis and ValuationsBank A - Performance and Stock Valuation (well done!)

19

A B C

D E F

G

Not anticipating trouble early, continued growth into 2009 (A) Attempted to preserve capital throughout downturn (C) Were slow to recognize extent of problems (D) Preserved earnings (B) by postponing charge-offs (E) As a result of continuing bad asset quality, reserve building must continue,

further harming profitability

Stock price declined anyway (G), to 50% p/b and, because of continuingproblems and damaged investor confidence, continued to declineto 25% of p/b, where it remains.

Managing Through Crisis and ValuationsBank B – Performance and Stock Valuation (a cautionary tale)

20

Size: has ben and remains positively correlated with stock price Profitability: has finally regained positive correlation with stock price Capital levels: not as correlated with stock p/b Asset quality: increasingly negative correlation

Managing Through Crisis and ValuationsWhat Bank Investors Think (performance and stock price correlation)*

Green cells indicate two highest POSITIVE correlations with current stock price to book values in any given quarterRed cells indicate two highest NEGATIVE correlations with current stock price to book values in any given quarter

Mixed Neutral

Profitability Capital Ratio

Total Assets

Tangible Common

Equity ROAA

Tangible Common Equity/Tg Assets

Adjusted NPAs/Assets

Reserves/Adj Loans

Adjusted Texas Ratio

3Q11 20% 23% 35% 11% -45% -17% -42%2Q11 17% 17% 17% -1% -31% 0% -22%1Q11 20% 20% 18% 0% -38% -17% -27%4Q10 19% 18% -2% -3% -22% 6% -17%3Q10 15% 16% 1% 2% -22% -5% -20%2Q10 14% 17% 1% -1% -23% -1% -13%1Q10 16% 22% -4% -1% -19% 6% -19%4Q09 6% 14% 20% 10% -44% -35% -37%

Positive Correlation Negative Correlation

Size Asset Quality

* Stock valuation and performance data are derived from the Monroe Securities quarterly California Independent Bank Review

21

Managing Through Crisis and ValuationsRecent Trend in Community Bank Stock Prices

III. Strategy Considerations

23

Strategy ConsiderationsA Case of Toxic Assets

Bank's age 10 yearsAssets ($millions) $350Tangible common equity $32T. equity/ assets 9.1% Nonperforming assets $28TARP preferrred $9 NPAs/ assets increases to: 8.00%

ROAA (pre-tax, pre-provision 1.25%NPAs/ assets 2.50%

Nonperforming assets $9

Loan loss reserve/ loans 1.75%Good core deposit mix yes

Good markets yes

6.a. Raise capital? 6.b. Sell Bank ?

NO: INVESTORS want NPAs < 5% NO: BANK PARTNERS want NPAs < 5%

7. Sell classified assets

Classified assets sold $14Sale price $7Loss on sale (no tax effect) ($7)Nonperforming assets $14Assets ($millions) $336NPAs/ assets 4.17%Tangible common equity $25T. equity/ assets 7.4%

8.a. Raise capital? 8.b. Sell Bank ?

YES: INVESTORS ok with NPAs =4.17% YES: BANK PARTNERS ok with NPAs =4.17%

1. The Situation2. The Bank is considering future strategy

3. The Situation Changes

4. Unfavorable regulatory exam

5. Enforcement order--pressure to raise capital or sell bank

24

Strategy ConsiderationsThe Asset Sale Process

1. Gather detailed files on each individual classified asset2. Develop individual resolution plans with estimated timing and pricing of resolution for each credit3. Identify which assets are potentially sellable4. Develop reports on each sellable asset to make available during due diligence w potential buyers

5. Identify list of most appropriate asset buyers (depending on size, type, and location of assets)6. Assess how to handle informing regulators of asset disposition plan7. Contact asset buyers to gauge interest and have introductory discussion8. Sign nondisclosure agreement with all eligible, appropriate, interested asset buyers9. Set up dataroom (preferably virtual) to share credit files with potential buyers10. Accept preliminary indications of interest from asset buyers11. Assess flexibility of individual buyers as to which combinations of credits they man have interest in (ideally receiving

valuations on each individual credit)12. Negotiate with interested buyers on terms of indications

13. Choose best (or best combination of) asset buyers and agree to move forward14. Negotiate LPSA (loan purchase and sale agreement) with asset buyer(s)15. Close asset sale

After the loan sale process is complete, it is imperative that the bank revisit the original asset resolution plan, update it for the assets sold, and continue to internally work out remaining problem credits until ultimate asset quality targets are achieved

Throughout the process, the Bank must continually be updating (monthly at a minimum) all classified asset reports with current financial information, appraisals, current payment history, etc.

Due to the complexity and time consuming nature of the asset sale process, it is highly recommended that the Bank have a teamspecifically dedicated to managing the process in order to achieve optimal results.

25

Strategy ConsiderationsThe Case for Independence: What Investors Expect

Above average financial performance (mainly long-term EPS growth)

A strong core deposit base to fuel loan growth Investors use the strength of the deposit base as a proxy for the value of the

franchise in the community.

A strong management team The Bank has achieved growth in the loan portfolio without sacrificing underlying

credit quality. Investors view this as a sign of strong management.

A strong market with underlying economic fundamentals and growth potential Investors want to invest in the markets that will perform the best as the economic

cycle transitions from contraction to expansion.

A clearly defined strategy for growth and profitability Investors do not simply want to recapitalize institutions or be the “take-out” for

TARP funds. Whatever the chosen strategy, investors want it to be clearly-defined before they invest.

Investors will use publicly available data to determine the strength of the deposit base, the quality of the management team, and the economic prospects for growth of the bank’s market.

However, only pro-active relationships with potential investors can adequately communicate future strategy.

26

Strategy ConsiderationsThe Prospect of Merging: What Merger Partners Want

Above average financial performance (mainly asset growth and acceptable return on those assets)

A strong core base of customer relationships Partners want to leverage those relationships with new products to drive revenue

growth

A strong management team The Bank has achieved growth (loans, deposits, revenues) while controlling costs and

risk (e.g., without sacrificing underlying credit quality).

A strong market with underlying economic fundamentals and growth potential Partners want to expand in the markets that have long-term growth potential and

that are relatively strong during economic cycles. They want a new market that is, on average, better (not worse)n than the markets they are already in.

A culture of success that is compatible with theirs.

IV. Conclusions