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www.stonecastle.com StoneCastle Financial Corp. | 212-354-6500 | 152 W. 57th Street, 35th Floor, New York, NY 10019
CONFIDENTIAL
FOR INSTITUTIONAL USE ONLY
CAPITAL RAISING ALTERNATIVES
FOR COMMUNITY BANKERS
www.stonecastle.com
ABOUT STONECASTLE PARTNERS
Founded in 2003, StoneCastle Partners is a highly
experienced asset manager and one of the largest
managers of community bank related investments
• Over $9 billion of AUM in 600+ banks across all 50 states
• Management team of StoneCastle has closed 450+ bank
capital investments totaling $5.8 billion
• 40 professionals dedicated to investing in community banks
• Proprietary systems built in house for underwriting and
monitoring community bank investments
• Strong relationships with State and Federal bank regulators
and other critical industry groups
• Exclusive endorsement from ABA and endorsements from
many state bank associations
• Majority owned by management with two minority institutional
investors; Charlesbank Capital Partners and Canadian Imperial
Bank of Commerce
PAGE 2
Who We Are
StoneCastle
Partners
StoneCastle
Securities
Asset
Management
Cash
Management
Alternative
Asset
Management
ACTIVE BANK RELATIONSHIPS
ORGANIZATIONAL STRUCTURE
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ABOUT STONECASTLE FINANCIAL CORP.
• An investment company focused on investing in community banks that are the
cornerstones of their communities
• Conducted IPO on November 7, 2013 and traded on the NASDAQ Global Select
Market under the ticker: BANX
• Long-term, passive non-control investor that understand the needs of community banks
and views portfolio companies as partners rather than “targets”
• Seeking capital investment opportunities in healthy, well-run community banks
PAGE 3
Who We Are
www.stonecastle.com
PROPRIETARY ANALYTICAL PLATFORM
• RAMPART was developed by StoneCastle to combine deal origination, credit
underwriting, risk management, investment monitoring and accounting into a seamless
platform to manage the granular nature of banking industry information:
– Identifies banks who may need or can supply funding at attractive rates by tracking and analyzing
key metrics correlated to funding
– Tracks and analyzes every bank in the U.S.
– Combines multiple data sources which feed proprietary models to provide individual bank and
industry-wide analytics
– Allows our professionals to sort through vast amounts of data to screen and monitor banks for
SCCM
Who We Are
RAMPART OVERVIEW
Forward-looking metrics1
Historical metrics2
Proprietary algorithms and models
SCP A – CAMELS 1 – AA+/AA
SCP B – CAMELS 1,2 – AA-/A
SCP C – CAMELS 2,3 – BBB/BB+
SCP D – CAMELS 3,4 – BB/B
SCP E – CAMELS 4,5 – B-/CCC
1 Forward-looking metrics include capital relative to asset quality, exposure to problem asset classes, and profitability. 2 Historical metrics include growth, profitability, capital and liquidity.
PAGE 4
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WHY CAPITAL?
PAGE 5
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BANKS ALWAYS NEED CAPITAL, REGARDLESS OF THE CYCLE
• Banks need to raise capital in weak markets to:
– Acquire weaker performing or failed banks
– Acquire divested branches
– Grow loan portfolio and deposits organically in the wake of competitor weakness
– Absorb potential and future loan losses
• Banks also need capital in strong markets to:
– Organically grow loan portfolio and deposits while maintaining regulatory capital ratios
– Acquire strategically aligned banks to gain cost efficiencies and pricing power
– Expand branch network for control of market share
– Acquire value-added businesses to increase non-interest income
PAGE 6
Why Capital?
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THREE PRIMARY OFFENSIVE USES FOR A CAPITAL RAISE
• Organic Growth
– Funding loan growth and securities purchases
– Expanding presence outwards in an adjacent territory
– Establishing a new operating group: specialized lending unit, trust
company, insurance
• Acquisitive Growth
– Acquiring another institution (whole bank), buying bank branches,
purchasing an operating unit of another institution or portfolio asset
purchase
– Can be banking specific, or a complementary business line, such as
trust, insurance or wealth management
• Refinancing Activities
– Share repurchases
– Refinancing trust preferred securities (if they are loosing Tier I
treatment)
– Building a more efficient equity capital structure with preferred stock
PAGE 7
Why Capital?
Strategic
Strategic
Opportunistic
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RETHINKING DEFENSIVE CAPITAL
• Defensive capital for predictable scenarios
– Building a fortress balance sheet
– Weakness in local market demographics/economics
– Expansion into higher risk lending
• Defensive capital for unpredictable scenarios
– Doomsday scenarios
– Global macro events: Euro and the ECB; Greece, Spain and Portugal; Russia; Oil prices and the
Middle East
– Political events: elections and appointments
– The regulatory wild card
• The Unknown Unknowns: the things you don’t know that you don’t know
PAGE 8
Why Capital?
“If you choose to sail upon the seas of banking, build your bank as you
would your boat with the strength to sail safely through any storm.”
– Jacob Safra
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GROWTH AND SCALE CHANGES CAPITAL SOURCES
• Just as a manufacturing business changes their funding sources as they grow, so do
banks
– Local offerings will only allow for a certain amount of growth; there is a point where more
investors are needed to achieve goals
– The recent crisis showed that local investors are limited in the amount they can and the amount
they will invest in local banks
– Utilizing an institutional investor reduces the reliance on local investors and the board of directors
– New investors also diversify the shareholder base and provide types of equity capital that local
investors may not be interested in, allowing enhancements to the capital structure
PAGE 9
Why Capital?
$$$
Local High Net Worth
Business owners,
doctors, lawyers, etc.
Board of Directors
“Pass the hat” scenarios,
typically adding to
existing holdings
ESOP
Providing retirement
benefits to employees
through stock
Initial Capitalization
Management team, local
entrepreneurs and
“friends and family”
Private Placements
Marginal capital raises
directed at institutional
investors
IPO / Follow-ons
Regional investment
bankers offering shares
to the “public”
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SEVERAL ITEMS TO REVIEW BEFORE DECIDING TO RAISE CAPITAL
• We have been asked, “as a banker, what can I do to increase the likelihood of securing
new investors?”
• A few items that often need enhancement during a banks pitch or in their policies are:
– Risk Management: a holistic approach beyond simply the credit itself
– Regulatory Relations: how do you intend to adopting to the known-knowns and known-
unknowns?
– Succession Planning: a defined process focused on selection and integration
– Technology: how do you intend on capitalizing on “new” technologies?
PAGE 10
Why Capital?
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HANDLING ROADBLOCKS IN THE PROCESS
Dealing with Potential Investors
• Be honest:
– Your regulatory data is public…every one
can smell a lie
• Know your balance sheet and key data
off the cuff:
– Top 5 performing and non-performing loans
– Largest shareholders
• Have a vision:
– Why should you get capital over another
bank?
– What will you do different? Show realistic
innovation!
• Understand your investors needs:
– Does your vision fit their goals?
Dealing with Regulatory Roadblocks
• Recurring issue is failed communication
between:
– Banks and their regulators
– Investors and regulators
• The solution is better and deliberate
communication by:
– Creating visualizations to show the risk, plan
and strategy
– Finding out why something is important to a
regulator; your interests are almost always
aligned
– Quantifying that the goals of the bank,
investors and regulators are equal
• Build a relationship with your regulator:
– Be honest!
– Besides being governmental bodies they are
people too
PAGE 11
Why Capital?
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A LOOK INSIDE THE MIND OF AN INVESTOR
PAGE 12
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INVESTMENT PROCESS OVERVIEW
Management Market Balance
Sheet/Business Plan
PAGE 13
Inside The Mind Of An Investor
• Determines the overall
risk profile of the
institution
• Creates the vision and
ensures execution which
drives franchise value
• Determines the “next
balance sheet”
• The local market drives
the performance of the
risk mix set by
management
• With community banks,
exposures is often below
the state level; on a
county, town or MSA
level
• Balance sheet confirms or
disproves what was
learned about
management and the
market
• The balance sheet is only
a snapshot in
time…trends carry more
weight
• With the average loan
duration of roughly 5
years, the risk exposure
turns over quickly and will
be determined by
management choosing
loans from the market
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INVESTMENT PROCESS OVERVIEW
Management Market Balance
Sheet/Business Plan
PAGE 14
Inside The Mind Of An Investor
• Strong character
• Long term banking
experience
• Financial ties to the bank
• Strong ties to the local
community
• Compensation aligned to
performance
• Low frequency of credit
policy violations
• Loan work-out
experience
• Acquisitions and
integration experience
• Not necessarily high
growth, but stable growth
• The need for small bank
consolidation
• Under-banked market
with bank having high
market share
• Favorable demographic
and socioeconomic
trends:
• Household income
• Population migration
• Bankruptcy rate
• Housing prices/starts
• Unemployment
• A viable business plan
that:
- Will not likely be
impeded by regulatory
impediments or delays
- Shows innovation and
differentiation from local
competitors
• Consistent earnings
quality
• Positive trends on forward
looking metrics:
- Second Texas ratio
- Operating leverage
- RE concentrations
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WHICH TYPE OF CAPITAL IS RIGHT FOR YOU?
PAGE 15
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DEPOSITORY BANKS HAVE MULTIPLE OPTIONS TO RAISE CAPITAL
Subordinated Debt Perpetual Preferred Common Equity
Issuer Bank Holding Company or
Charter
Bank Holding Company or
Charter
Bank Holding Company or
Charter
Treatment Tier II, CE Tier I at Charter Addtl. Tier I, CE Tier I at Charter Common Equity Tier I
Tangible Equity No Yes Yes
Coupon Fixed or Floating None None
Dividend None Fixed or Floating Discretionary
Dividend/Coupon Non-Deferrable Non-Cumulative Non-Cumulative
Ownership Dilution None None Pro-rata
EPS Dilution Least More than sub debt Most
Term Typically 10-15 years Perpetual Perpetual
Call Options After 5th Year After 5th Year None
Conversion Options Possible Possible None
Pricing More than senior debt More than sub. debt Market based valuation; highest
Cost of Capital Lowest More than sub debt Highest
Voting Rights None None None
Type of Offering Public or 144A at Bank Holding
Company Level; Exempt at
Charter Level
Public or Private Public or Private
Payment Tax Benefits Interest is deductible None None
PAGE 16
Types Of Capital
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POSITIVE CHANGE IN REGULATORY POLICY FOR SMALL BANKS
• December 18, 2014: Public Law 113-250 was enacted
• This has raised the asset threshold on the Small Bank Holding Company Policy Statement from
$500 million to $1 billion in 2015
• This means more holding companies are no longer subject to risk-based capital requirements and
can utilize additional debt at the holding company
PAGE 17
Capital Management
$10 common stock
Hold Co $4 debt
$6 common stock
$10 common stock
Dow
n
Str
ea
me
d
Bank
$0 debt
$10 common stock
Prior Policy New Policy
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NEW POLICY PROVIDES OPPORTUNITY TO ENHANCE SHAREHOLDER VALUE
PAGE 18
Capital Management
No Debt More Debt
Bank Level
Total Assets $100 $100
Common Stock $10 $10
ROAA 0.80% 0.80%
Net Income $0.80 $0.80
Hold Co
Subordinated Debt (6.99%) $0 $4
Common Stock $10 $6
Income from Bank $0.80 $0.80
Debt Expense $0.00 ($0.18)
Net Income $0.80 $0.62
ROAE 8.00% 10.3%
Besides for ability to downstream
additional capital to subsidiary bank as
common equity, policy provides no
material change to the bank level
Debt becomes a larger
component of the capital structure
Despite lower net income due to debt
service, earnings are spread over
significant small equity base,
increasing ROE
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THE COST OF CAPITAL CAN BE DECEPTIVE
• We believe the cost of common equity is often
understated for smaller banks:
- Common equity represents the claim on (1) future
cash flows, (2) dividends, (3) increase in book value
and (4) change in price/book
- By issuing additional common stock, you are
selling the future multiple expansion you
intend to create through scale, operational
efficiencies and/or accretive acquisitions
- In short, when you sell common equity the cost
you put in your investor pitchbook is the
cost to you…that 15% or 20% return projection
PAGE 19
Types Of Capital
Instruments Components
Subordinated Debt Coupon
Trust Preferred Coupon
Preferred Equity Dividend, conversion
Common Equity
Compounding ROE,
multiple expansion,
dividends
COMPONENTS OF RETURN
HYPOTHETICAL RATE OF RETURN COMPARISON
$0
$10
$20
$30
$40
$50
$60
$70
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Common Equity
ROE is compounded,
valuation multiple
expands
Preferred Equity
Annual dividend
payments
16.8%
9.0%
Differential:
7.8%
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THE COSTS OF AMORTIZATION & COVENANTS
• Analyze the instrument beyond simply the interest rate to determine cost of capital –
two key features bankers should carefully review are:
– Amortization:
• Issuing debt from the holding company is done to provide more common equity at the bank level through tax-
deductible leverage
• Since the holding company does not generate material income, the subsidiary bank must dividend cash
…capital…to the holding company to service the debt
• Amortization increases the amount of such required dividends – and each bank dividend reduces retained
earnings and hence, common equity tier 1 capital. This in turn reduces the amount of loans (NIM) at the bank
– Covenants:
• We all know the purpose of covenants, but some may unduly restrict the growth potential of an institution
• Bank stock loans typically have heavy financial covenants, while tier 2 qualifying subordinated debt is free of
such financial covenants
• Breaching a covenant without a proper cure can cause the lender of a bank stock loan to accelerate the loan
and force bankruptcy, while subordinated debt generally cannot be accelerated in the event of a default
• Covenants also frequently include restrictions on additional indebtedness – which is why bank stock loans
should be added to the capital stack last, not first
• And lastly but not of least importance, bank stock loans typically require a pledge of the majority of the
underlying bank’s stock…meaning you could lose your bank in event of default
PAGE 20
Types Of Capital
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QUANTIFYING THE COST OF AMORTIZATION
• Amortization requires more dividends from the subsidiary bank, which reduces the
subsidiary’s capital ratios, thus restricting additional lending opportunities
– Bank stock loan: 5 year term, fully amortizing, LIBOR + 4.50%
– Subordinated debt: 10 year term (assuming a call in year 5), interest only, fixed rate of 6.99%
PAGE 21
Types Of Capital
(1) Interest expense on the bank stock
loan is lower over the 5 year term
(2) The total payment on the subordinated debt
is lower through the first four years, leaving
more usable capital at the subsidiary
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QUANTIFYING THE COST OF AMORTIZATION
• Knowing the interest expense difference, we now calculate the opportunity cost caused
by amortization
• The opportunity cost can be estimated as the marginal NIM generated by the leveraged
capital at the subsidiary that you did not need to dividend to the holding company
– First, calculate the principal balance difference
between the subordinated debt and the bank
stock loan at the end of year 1
– Then, multiply that number by 10 to reflect the
amount of loans that can not be made
(10x reflects the leverage effect of deposits)
– Finally, multiply that number by 3.75% to
reflect the additional NIM generated
The lost net income at the subsidiary bank is estimated to
be $304,822 in year 1 due to the amortization
PAGE 22
Types Of Capital
$5,000,000 - $4,091,140 = $908,860
$908,860 x 10 = $9,088,600
$9,088,600 * 3.75% = $304,822
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QUANTIFYING THE COST OF AMORTIZATION
• For the bank stock loan, we add the interest expense to the opportunity cost
• For the subordinated debt, the only expense is the interest payment
• By the end of year 5, the bank stock loan has an average annual cost of $862,873,
which equates to over 17% per annum versus 6.99% for Tier 2 capital
PAGE 23
Types Of Capital
• x = Difference in principal between subordinated debt and bank stock loan
• y = x * 10 which reflects 10 times leverage
• z = y * 3.75%
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PREFERRED STOCK CAN ENHANCE THE CAPITAL STRUCTURE
• We believe most smaller banks can
enhance returns by utilizing more of the
capital structure
• Institutions with full-access to the capital
markets often utilize a mix of debt,
preferred and common equity
– The more senior securities provide the
common shareholders enhanced returns and
do not create ownership dilution
– It is often difficult for community banks to
raise capital outside of local investors and in
structures beyond common equity
– StoneCastle invests principally in these
instruments in sizes and terms that are
applicable for community banks
PAGE 24
Types Of Capital
LARGEST 20 BANK HOLDING CO. USAGE1
# / % $BN
Outstand.
% Equity
Capital
Subordinated Debt 10 / 50% $104.7 7.2%
Preferred Equity 17 / 85% $86.2 5.9%
Total 18 / 90% $190.9 13.1%
SELECT PERP. PREFERRED EQUITY ISSUANCE1
Issuer Date $MM Dividend
JPMorgan Chase & Co 1/2014 $2,000 6.750%+
Fifth Third Bancorp 12/2013 $450 6.625%+
F.N.B. Corporation 11/2013 $111 7.250%+
Citigroup Inc. 11/2013 $1,495 6.875%+
City National Corp. 10/2013 $100 6.750%+
First Republic Bank 10/2013 $200 7.000%
Citigroup Inc. 9/2013 $950 7.125%+
Zions Bancorporation 8/2013 $195 7.200%+
Synovus Financial 7/2013 $130 7.875%+
Banc of California, Inc 6/2013 $40 8.000%
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PRIVATE VERUS MARKET DEBT OFFERINGS
• There are two separate offering processes for community banks raising debt:
– Private deals: a single or group of institutional investors, or a local high net worth individual
– Market deals: larger offerings often ran by investment banks selling the debt to a broad audience
PAGE 25
Types Of Capital
Feature Private Deal Market Deal
Offering Size As small as $1 million Usually $15 million or more
Interest Rate 5.75 – 9.5% 5.75 – 8.5%
Deal Expenses Closing fees of 2 – 3% Investment banking fees of 2 – 5%
Other Fees $20-30k legal, due diligence $100-200k legal, travel
Road Show None Usually required
Credit Ratings None May be required @ $50k per year, need to be
$1 billion+ in total assets to receive rating
Marketing Materials None required Pitch books, teasers
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THREE “DIFFERENT BANKS” – SUBORDINATED DEBT
• Simple example: $100 bank has $10 in capital, needs to raise $3 to achieve goals
• Each share is sold at book value ($1 per share) and bank earns $1 of income, pays
6.99% on subordinated debt (tax equivalent of 4.54%)
PAGE 26
Types Of Capital
Pro-forma A
$10
Common
Equity
$3
Common
Shares: 13
Pre Debt NI: $1.00
Debt Exp.: $0.00
NI: $1.00
EPS: $0.077
Pro-forma B
$10
Common
Equity
$1.5 CE
$1.5 SD
Shares: 11.5
Pre Debt NI: $1.00
Debt Exp.: $0.07
NI: $0.93
EPS: $0.081
Pro-forma C
$10
Common
Equity
$3
Sub Debt
Shares: 10
Pre Debt NI: $1.00
Debt Exp.: $0.14
NI: $0.86
EPS: $0.086
Original
$10
Common
Equity
Shares: 10
Pre Debt NI: $1.00
Debt Exp.: $0.00
NI: $1.00
EPS: $0.100
Ownership Dilution
Earnings Dilution
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THREE “DIFFERENT BANKS” – PREFERRED
• Some more details: each share is sold at book value ($1 per share) and bank earns $1
of income, pays 8.5% on preferred
PAGE 27
Types Of Capital
Pro-forma A
$10
Common
Equity
$3
Common
Shares: 13
NI: $1.00
NITC: $1.00
EPS: $0.077
Pro-forma B
$10
Common
Equity
$1.5 CE
$1.5 PE
Shares: 11.5
NI: $1.00
NITC: $0.87
EPS: $0.076
Pro-forma C
$10
Common
Equity
$3
Preferred
Shares: 10
NI: $1.00
NITC: $0.75
EPS: $0.075
Original
$10
Common
Equity
Shares: 10
NI: $1.00
NITC: $1.00
EPS: $0.10
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COMMON, PREFERRED, DEBT… DOES IT REALLY MATTER?
• The drivers of return differentials are:
- Effects of dilution greatly magnified when selling common stock at material discount to book
- Return differentials are magnified when the bank is sold at higher multiples (2.0x and above)
- If ROE is dramatically below or materially above the dividend rate or tax-adjusted coupon
PAGE 28
Types Of Capital
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COMMON, PREFERRED, DEBT… DOES IT REALLY MATTER?
• Fast forward 5 years
- $100 bank in three scenarios: (i) issues $30 of common stock, (ii) issues $30 of preferred
stock and (iii) issues $30 of subordinated debt
- Bank generates a 9.00% ROE and book value compounds by same amount
- Preferred dividend is 8.50% and subordinated debt is 5.53% (the tax equiv. to 8.50%)
- Common stock is sold at 1.0x TBV, then bank is sold at multiple on horizontal axis
PAGE 29
Types Of Capital
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0.4x 0.6x 0.8x 1.0x 1.2x 1.4x 1.6x 1.8x 2.0x 2.2x 2.4x 2.6x 2.8x 3.0x
An
nu
aliz
ed
Re
turn
Common Preferred Debt
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WHAT ARE SHARE REPURCHASES AND HOW DO THEY WORK?
• A share repurchase is when a company buys back its own shares of common stock
from investors
– This reduces the shares outstanding, but not the shares issued
– Since earnings are unchanged, and the earnings are now owned by a lesser amount of shares,
each share has a greater claim to earnings (increase in EPS)
– While book value remains unchanged, it is now distributed across a lesser number of shares,
therefore each share has a greater book value per share (increase in BV/share)
– This theoretically should increase the market price of each share
– Repurchased shares are either held in treasury stock or are retired; either way these shares are
explicitly not entitled to dividends, nor do they have voting rights
• Companies can buy the shares directly from the market (if public) or tender directly
from the shareholders
PAGE 30
Types Of Capital
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WHAT ARE SHARE REPURCHASES AND HOW DO THEY WORK?
• In the case of private community banks, shareholders often contact the bank directly
looking for assistance with liquidity
– Someone, generally a CFO or controller, keeps tally on investors who want to sell or buy
– This person effectively becomes a “market maker” (some have said this is actually distracting to
their core responsibilities)
– For a bank, having a deep list of sellers allows the easy execution of a share repurchase
– StoneCastle can help integrate a “transfer agent” into the bank at little cost (~$7,500 per annum),
if such function is needed to manage the shareholder records
PAGE 31
Types Of Capital
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WHY SHOULD I CONSIDER A SHARE REPURCHASE PROGRAM NOW?
• Significant return potential:
– Bank valuations are historically low and investors increasingly wish for liquidity
– Odd-lots and orders from those demanding liquidity often trade at a discount to fair value
– Bank can reoffer shares at a later date at a higher valuation, bolstering retained earnings
• Provides a valuable service to your investors:
– Helping your investors monetize their investment goes a long way to generate local goodwill
– Shareholders cannot be expected to hold stock forever: sending the kids to college, buying a larger home, preparing for retirement
– The inevitable events of life: divorce and death…hence estate taxes, transfers and reregistration
• Invest in yourself:
– If the market (public of private) is not valuing your bank properly, take advantage of it
– Also, a valuable solution if growth in your market is difficult to achieve (enhance EPS and BV per share)
• Similar to a distribution of new shares to each shareholder, without tax liability:
– Effectively, the bank is spreading the earnings over fewer shares, which is similar to granting a few more shares to every shareholder
– Long-term shareholders can benefit from the “tax-deferred” transaction
PAGE 32
Types Of Capital
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OPPORTUNITIES WITH STONECASTLE & CLOSING THOUGHTS
PAGE 33
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STONECASTLE’S STOCK REPURCHASE OPPORTUNITY
• What is StoneCastle’s Stock Repurchase Opportunity (“Program”)?
– StoneCastle directly invests Tier-1 qualifying non-cumulative perpetual preferred capital into
private and public community banks
– StoneCastle typically makes an initial investment of $500,000 or more with the opportunity for
follow-on investments in increments as small as $100,000 and up to $5+ million
– The proceeds from a preferred stock offering can enable banks to quickly and opportunistically
repurchase common equity in odd-lots or large blocks as opportunities arise
• What are the Key Benefits?
– Capital raised via a preferred offering may enable banks to repurchase1 common stock at a
discount, especially odd-lots, which often trade at a discount to fair value
– Effectively “finance” the repurchase of common stock with preferred stock, not debt
– Maintain Tier-1 capital ratios2 through the issuance of perpetual preferred stock (optimize capital
structure)
– Create goodwill with long-term shareholders by providing liquidity when they need it most (e.g.,
estate taxes, college tuition, etc.)
PAGE 34
Types Of Capital
1 Based upon StoneCastle estimates. Actual results will vary. 2 Tier I capital ratios depend on a number of factors and may vary depending on changes in regulation, the bank’s balance sheet and/or other factors.
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QUICK FACTS ABOUT THE SHARE REPURCHASE PROGRAM
• First program offering small amounts of on demand “at the market” income equity to community banks
– Typically regulators have frowned upon banks utilizing retained earnings to repurchase common stock; Provides new non-dilutive Tier 1 capital to repurchase shares
– Exclusively endorsed by American Bankers Association’s Corporation for American Banking as a source of capital for its members
• Small issuance sizes are not only acceptable, but encouraged
– Initial investment minimum starting at $500,000 with minimal up front expense
• Issuances can be done over multiple closings
– After the initial investment, additional investment can be made as small as $100,0001
• Cost effective
– Capital issuance can be scaled to repurchase opportunities which reduces earnings “drag” caused by large stand-alone offerings of preferred stock
– No roadshow necessary, eliminating the associated expense and the drain on management’s time
PAGE 35
Types Of Capital
1 The receipt of an initial investment does not guarantee any future investment unless contractually agreed to by the bank and StoneCastle. The timeframes presented are estimates based upon management’s prior experience
and may vary due to market conditions, operations of StoneCastle, condition and business model of the investment candidate and/or certain other criteria.
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WE ARE PREPARED TO INVEST IN SUBORDINATED DEBT @ 6.75%
• December 18, 2014: Public Law 113-250 was enacted
• This is expected to raise the asset threshold on the Small Bank Holding Company
Policy Statement from $500 million to $1 billion in 2015
• This means more holding companies are no longer subject to risk-based capital
requirements and can utilize additional debt at the holding company
PAGE 36
Opportunities with StoneCastle
For complete terms please contact your advisor or StoneCastle
Summary Indicative Terms
Security Tier 2 Capital Qualifying Subordinated Debt, 10 year maturity (the “Debt”)
Amount $1 – 15 million
Target Closing On or around June 30, 2015
Coupon Payable quarterly at a fixed rate equal to 6.75 – 7.25%
Closing Fee 3.0% of the amount
Early Redemption Issuer may redeem all or a portion of the Debt at face value after the fifth anniversary
Other Feature No warrants, no conversion
Prior and Rank Subordinated to all senior indebtedness; senior to trust preferred, preferred stock and common
stock. No distributions on, or redemptions or repurchases of, capital stock may be made unless all
payments of principal and interest of the Debt are current.
Transaction Expenses The out of pocket Transaction Expenses (e.g. legal, due diligence) assuming a customary closing
with minimal changes to standard documentation, are expected to total no more than $20,000
www.stonecastle.com
SBLF REFINANCING: WE CAN REDUCE YOUR COST OF CARRY
• We are prepared to invest today, in a manner which reduces the cost of carry on the
low cost SBLF:
– We will rebate the interest rate to between 3.15% and 3.45% from closing through your “step up
date”, then the rate returns to 6.99% - 7.45%
– Reduces the “negative carry” while locking in long-dated fixed rate debt in a volatile rate
environment
– We believe this minor increase in expense over the next several months is greatly covered by
locking in long-term fixed rate debt today
PAGE 37
Opportunities with StoneCastle
www.stonecastle.com
BENEFITS OF WORKING WITH STONECASTLE
• Fast and quality execution:
– Tier 1 and Tier 2 capital in as little as 3 – 6 weeks
– High certainty of closing
• Cap Table:
– No change to underlying bank common stock ownership
– Can keep local ownership local and family ownership internal to family
• Cost Efficient:
– Lower transaction costs and significantly lower legal fees
– No road shows or special events required allows management teams to stay focused
• Continued Benefits Post-Closing:
– StoneCastle can do follow-on investments and is committed to the success of the bank
– Access to a highly specialized group to provide advice, idea generation and share best practices
• Transaction Financing:
– StoneCastle provides pre-approved LOIs to banks to support negotiations allowing acquirers to potentially dictate terms
– Increase cash consideration components to gain bidding advantage
PAGE 38
Opportunities with StoneCastle
www.stonecastle.com
CONTACT
Joshua Siegel
Managing Principal & CEO
StoneCastle Partners
ph: 212-354-6500
PAGE 39
Contact
www.stonecastle.com
SPEAKER BIOGRAPHICAL INFORMATION
PAGE 40
Biography
Joshua S. Siegel
Managing Partner and CEO
StoneCastle Partners
CEO
StoneCastle Financial Corp.
Joshua (“Josh”) Siegel founded StoneCastle Partners, LLC in 2003 and serves as Managing Partner and is the
Chief Executive Officer. Mr. Siegel has direct responsibility for overall management and strategy of all aspects of
the company. Mr. Siegel also serves as the Chairman and CEO of StoneCastle Financial Corp.
Josh is widely regarded as a leading expert and investor in the community banking industry and is often quoted
in financial media, including The Wall Street Journal, The New York Times, American Banker, and CNNMoney.
In addition, he speaks frequently at industry events, including those hosted by the American Bankers
Association, Conference of State Bank Supervisors, FDIC, Federal Reserve Bank and SNL Financial.
A creative instructor with a passion for teaching, Josh has regularly been invited to educate government
regulators about the specialized community banking sector. He also served as Adjunct Professor at the Columbia
Business School in New York City. His research and financial innovations have brought nearly $40 billion of
capital to over 1,600 banks across America over the past 12 years.
Prior to co-founding StoneCastle, Josh was a co-founder and Vice President of the Global Portfolio Solutions
Group at Salomon Brothers/Citigroup Global Markets, a group organized to finance portfolios of financial assets
for corporations and to invest in the sector as a principal. He later assumed responsibility for developing new
products, including pooled investment strategies for the community banking sector. Josh originally joined
Salomon Brothers/Citigroup in 1996 in the tax and lease division, providing structured financing to government-
sponsored enterprises and Fortune 500 corporations.
Prior to his tenure at Salomon Brothers/Citigroup, Joshua worked at Sumitomo Bank where he served as a
corporate lending officer, as a banker structuring equipment lease and credit derivative transactions, and as a
member of the New York Credit Committee and at Charterhouse, carrying out merchant banking and private
equity transactions.
Mr. Siegel received his BS in Management and Accounting from Tulane University.
Josh has provided strategic advice to the Global Food Banking Network — because no one should go hungry.
He also provides annual economic support to Prep for Prep to make sure academic brilliance is recognized and
nurtured without regard to a student's economic, demographic or sociological impediments.
