Weighing the Pros & Cons of the SBLF Program

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1 Banks February 18, 2011 Weighing the Pros & Cons of the SBLF Program David J. Bishop, CFA (443) P. Carter Bundy, CFA (804) Stephen Geyen, CFA (612) Collyn Bement Gilbert (973) Brian J. Zabora, CFA (443) Commentary from some banks during 4Q10 indicated an increased interest in the Small Business Lending Fund (SBLF). The program is available for banks with $10 billion in assets or less and non-binding applications are due March 31, We believe there are several positives, which outweigh the negatives for TARP banks refinancing into the SBLF program. We do note there are several conditions of the program that could result in banks not participating. The major positive of the plan is the potential to reduce the interest rate from the 5% under TARP depending on the growth of small business lending. Under the program the rate is variable for the first 9 quarters and can be as low as 1%. Also, the rate reset to 9% would occur in late 2015, compared to 2014 for most TARP banks. The later reset date provide a longer window to generate capital organically, which could reduce the additional capital necessary to exit the TARP/SBLF program. A negative/unknown of the plan is if the funds will receive Tier1 treatment under Basel III. The new capital standards grandfathers public capital injections into banks through January 1, We do not know if refinancing TARP funds into the SBLF will result in the funds losing this grandfather status. If this status is lost the SBLF funds may not be considered Tier 1 capital starting in Also the maximum SBLF funding is 3% of risk-weighted assets for banks with assets between $1 billion and $10 billion. While this is the same maximum under the TARP program, many banks have experience a decline in risk-weighted assets over the last two year resulting in a maximum funding amount under the SBLF program that is lower than current TARP outstanding, which may result in some banks not participating. We calculate the potential EPS impact of refinancing TARP into the SBLF fund from two perspectives. 1) Foregoing a common capital raise in 2011 or 2012 to repay TARP and the interest rate paid remains at 5%. Based on our 2012 estimates CoBiz Financial (COBZ-$6.54 Buy) and Eagle Bancorp (EGBN-$14.51 Buy) would experience the greatest benefit under this scenario. 2) The EPS accretion for every 1% reduction in interest rates from the 5% rate under TARP. We estimate the typical benefit to our 2012 EPS estimate is 3%-4%. Prices are as of 2/17/11 market close. We will host a conference call to discuss the results of the report 11 AM ET today. *CORRECTION to note previously issued 2/18/11. Stifel Nicolaus does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 9-10 of this report.

2 Commentary from some banks during 4Q10 indicated an increased interest in the Small Business Lending Fund (SBLF). This represents a change from 3Q10 as we heard very little consideration of the program. Recall the SBLF was established as part of the Small Business Jobs Act of 2010 with the goal to stimulate small business lending. The main benefits for institutions is the ability to refinance TARP and lower the rate of interest depending on the company s level of small business lending. The following are the plan basics, our view of the pros and cons/unknowns, comapny commentary, and the potential earnings impact. The Basics $30 billion fund available to banks with assets less than $10 billion. Considered Tier 1 capital. Investment is a senior perpetual noncumulative preferred stock with a liquidation preference of $1,000 per share. SBLF maximum limits are 5% of risk weighted assets for banks with $1 billion on assets or less and 3% of risk weighted assets for banks between $1 and $10 billion in assets. Minimum SBLF funding is 1% of risk weighted assets. The initial interest rate is variable between 1% and 5% for the first nine quarters after funding, and is dependent on growth in small business lending. The rate is fixed between 1%-7% from quarters 10 through year 4 ½. After 4 ½ years the rate is fixed at 9%. Although the full interest benefit is realized only after small business loan growth exceeds the amount of SBLF funding. Small business lending as define by this program includes C&I loans, owner-occupied commercial real estate, and agriculture/farmland loans. Also, loans that qualify need to be $10 million or less to borrowers with revenues of $50 million or less. Acquired or purchases loans are not included in the growth rates. Participating TARP banks can refinance into the SBLF program. Banks receiving funds must downstream at least 90% of the proceeds to the subsidiaries that originate small business loans. Applications for the program are due March 31, 2010 and there is no obligation to participate. The application includes an institution s small business lending plan. In reviewing the application Treasury can issue a; 1. Preliminary approval. 2. Preliminary approval contingent on separately raising match funds. 3. Withdraw the application. For banks refinancing TARP option two in not available. Any institutions on the FDIC s problem list or have been removed from the list in the previous 90 days are not eligible for the program. Generally, this will include any bank with composite CAMEL ratings of 4 or 5. Also, TARP banks must have made all dividend payments and be in material compliance with the program terms. Interest Rate Calculation The baseline for the growth in small business lending is the average of the 4 quarters ended 2Q10. The dividend rate is based on the aggregate increase in small business lending and the SBLF does not distinguish between refinanced loans and new loans. For every 2.5% increase in small business from the baseline results in a 1% reduction in the interest rate paid from the base rate of 5%. The minimum rate is 1%. The rate is variable for the first 9 quarters. If there has been no increase in small business lending for 8 quarters after funding the interest rate increases to 7%. The rate is fixed from quarters 10 to 18 at the same rate as quarter 9. After 18 quarters the rate increases to 9% and is fixed. Page 2

3 Figure 1: Interest Rate Calculation and Timeline Interest Lending Increase Rate Less than 2.5% 5% 2.5% to 5% 4% 5% to 7.5% 3% 7.5% to 10% 2% More than 10% 1% No change after 8 quarters 7% Funding to 9 quarters Timeline 10th to 18th quarter After 18 quarters 1%-5% 1%-7% 9% Variable Rate Fixed Fixed Source: US Treasury There is a further step in the interest rate calculation. If the dollar amount of the company s growth in small business lending is less than the total SBLF funds than the interest rate paid will be a mixed rate. To receive the full interest rate benefit of the rate reduction the growth in small business loans from the baseline must exceed the SBLF funds. We provide an example in Figure 3. In our scenario a bank with $1 billion small business loan portfolio generates 5% growth or $50 million in loan growth. The bank has $75 million in SBLF funding. Under the rules of the program, $50 million in the SBLF funds will have a 3% interest rate and the remaining $25 million will be at a rate of 5%. The result is blended rate in of 3.67%. Figure 2: Sample Interest Rate Calculation ($000s) Baseline Small Business loans $1,000,000 1 Year Growth $50,000 % Growth 5% SBLF Funding $ 75,000 Interest Rate Paid Loan Growth of 5% from base qualifies for a 3% interest rate although since loan growth is less than total $75,000 SBLF funding the calculation is: Amount at 3% $50,000 Amount at 5% $25,000 Blended rate 3.67% Source: US Treasury & Stifel Nicolaus estimates Pros and Cons We believe there are several positives, which outweigh the negatives for TARP banks refinancing into the SBLF program. We do note there are several conditions of the program that could result in banks not pursuing the SBLF plan. The following is our list of pros and cons/unknowns. Pros Obvious benefit is the potential to reduce the interest rate from the 5% TARP rate depending on the level of small business lending. Delays the rate reset date. Under the TARP program the interest rate increases to 9% five years after funding. For many banks this increase will occur in Refinancing into the SBLF would delay this reset to late Page 3

4 Potential to build capital organically over the next several years. This could reduce or eliminate the additional capital necessary to exit the program compared to capital required to repay TARP today. Participation in the SBLF carries no executive compensation restrictions and does not require the issuance of additional warrants. Cons/Unknowns Pressure to generate small business loan growth could result in sacrificing of pricing and/or underwriting standards. Also, interest rate could increase to 7% if an institution does not generate small business loan growth from the baseline in eight quarters after funding. Will the capital receive Tier 1 treatment under the Basel III rules beginning in 2013? The new capital standards grandfathers public capital injections into banks through January 1, We do not know if refinancing TARP funds into the SBLF will result in the funds losing this grandfather status. The following is from the press release announcing the Basel III capital standards. Existing public sector capital injections will be grandfathered until 1 January Capital instruments that no longer qualify as non-common equity Tier 1 capital or Tier 2 capital will be phased out over a 10 year horizon beginning 1 January Fixing the base at the nominal amount of such instruments outstanding on 1 January 2013, their recognition will be capped at 90% from 1 January 2013, with the cap reducing by 10 percentage points in each subsequent year. In addition, instruments with an incentive to be redeemed will be phased out at their effective maturity date. Also, many banks that have experienced a decline in their risk-weighted assets over the last two years. This could result in the maximum amount of funds available under the SLBF may be lower than current TARP outstanding. Under the program banks would have to redeem the difference from current funds and then they are able to refinance the remaining amount. (see Figure 3 for details). Banks with low relative qualifying loans as a percent of total loans would need to grow loans above 10% to achieve the 1% rate on the SBLF. The possibility of Treasury requiring some institutions to raise additional capital to participate. Could the rules of the program evolve and become more onerous like the TARP program? This risk is somewhat mitigated by a clause in the documents that indicate if a change in law modifies the terms of the investment or program that is materially adverse an institution can redeem the investment without impediment after consultation with their federal regulator.o This risk is somewhat mitigated by a clause in the documents that indicate if a change in law modifies the terms of the investment or program that is materially adverse an institution can redeem the investment without impediment after consultation with their federal regulator. Will the repayment requirements be the same as TARP? Only details in the plan documentations states the investment may be redeemed at any time at the option of the Issuer, subject to the approval by the appropriate federal banking agency. Maximum Refinance Amount One important issue that may discourage some banks from refinancing TARP proceeds into SBLF is the maximum funding amount of 3% of risk-weighted assets for banks with assets between $1 billion and $10 billion. While this is the same maximum percentage under the TARP program, many banks have experience a decline in risk-weighted assets over the last two year resulting in a maximum funding amount under the SBLF program that is lower than current TARP outstandings. The following is a summary of the maximum SBLF funding based, based on 3Q10 risk-weighted assets. Seacoast (SBCF-$1.64 Hold, First Merchants (FRME-$9.10 Hold) and CoBiz Financial have the greatest difference as their maximum SBLF funding is 20% and 11% below their current TARP outstanding. Some banks near the bottom such as Enterprise Financial and Home BancShares (HOMB-$22.02 Hold) have acquired loans which have increased risk weighted assets. Since acquired loans are not qualifying loans, we would expect some adjust to the maximum available SBLF funds as well. Page 4

5 Figure 3: SBLF Funding Limits Risk-Weighted Maxium TARP Difference Company Ticker Assets 3Q10 SBLF Funding Outstanding $ % Seacoast Banking Corporation of Florida SBCF $1,263,071 $37,892 $50,000 -$12,108-24% First Merchants Corporation FRME $3,084,185 $92,526 $116,000 -$23,474-20% CoBiz Financial Inc. COBZ $1,909,680 $57,290 $64,450 -$7,160-11% S&T Bancorp, Inc. STBA $3,305,338 $99,160 $108,676 -$9,516-9% MainSource Financial Group, Inc. MSFG $1,785,069 $53,552 $57,000 -$3,448-6% Virginia Commerce Bancorp, Inc. VCBI $2,338,716 $70,161 $71,000 -$839-1% Great Southern Bancorp, Inc. GSBC $1,968,051 $59,042 $58,000 $1,042 2% Heartland Financial USA, Inc. HTLF $2,866,875 $86,006 $81,698 $4,308 5% Southwest Bancorp, Inc. OKSB $2,574,746 $77,242 $70,000 $7,242 10% Indiana Community Bancorp INCB $862,232 $25,867 $21,500 $4,367 20% Sterling Bancorp STL $1,724,933 $51,748 $42,000 $9,748 23% Home BancShares, Inc. HOMB $2,536,499 $76,095 $50,000 $26,095 52% Enterprise Financial Services Corp EFSC $1,994,802 $59,844 $35,000 $24,844 71% Eagle Bancorp, Inc. EGBN $1,738,321 $52,150 $23,235 $28, % Center Bancorp, Inc. CNBC $857,443 $25,723 $10,000 $15, % Median 5% Source: SNL Securities & Stifel Nicolaus estimates COMPANY COMMENTARY Midwest Banks Stephen Geyen Five of the six Midwest small-cap banks that could qualify for the SBLF have expressed interest in the program. We believe the program is particularly well suited for Enterprise Financial (EFSC, $13.16, Buy), Heartland Financial (HTLF, $16.65, Buy) and Indiana Community (INCB, $15.57, Buy). MainSource Financial (MSFG, $9.17, Hold) and Great Southern Bancorp (GSBC, $21.60, Hold) are also considering the program but noted some reservations pending further details of the program. First Merchants had significant reservations about the process for establishing the base loans and views the program as having limited benefit. Enterprise Financial has expressed interest in the SBLF program. We would view Enterprise as a natural fit considering the opportunities to grow loans organically following recent investments. Pushing out the repayment to 2015 or beyond could potential put the bank in a stronger position to repay TARP/SBLF through retained earnings versus a capital raise. That being said, the bank has made a number of acquisitions over the past year and management noted at 4Q that any further acquisitions of significant size would likely be accompanied by a capital raise. We are currently forecasting a $25 million common equity raise in 1Q2012. We estimate EFSC would have to grow qualifying loans by $85 million (10% of qualifying loans, 4.5% of 2010 total loans) to achieve the full benefit of the 1% rate on the SBLF. Heartland Financial appears to be a very good fit for the SBLF program. Subsidiary banks in Iowa and Wisconsin had the most significant growth in 2010 and are likely to repeat in At 3Q, Heartland Financial noted that qualifying SBLF loans have grown by 2.8% since the measurement date. We are projecting total loan growth of 3.0% in 2011, a bit below guidance of 4.0%. HTLF appears in no hurry to repay TARP and we suspect management views the SBLF program as another attractive funding option that could minimize shareholder dilution following the repayment of TARP. Last December Heartland issued $24.5 million in sub debt at 5%. Our 2012 EPS estimate currently includes a 3% dividend rate for the TARP/SBLF. We estimate HTLF would have to grow qualifying loans by $100 million (10% of qualifying loans, 4.1% of 2010 total loans) to achieve the full benefit of the 1% rate on the SBLF. Indiana Community was very optimistic about the potential benefits to the bank. We believe management was optimistic about the potential to repay TARP in a few years without a capital raise and before the SBLF program was announced. The conversion of TARP into the SBLF program could put the bank in a pretty strong position of repaying the SBLF through retained earnings before the rate on the preferred shares reset to 9% in We estimate INCB would have to grow qualifying loans by $27 million (10% of qualifying loans, 3.6% of 2010 total loans) to achieve the full benefit of the 1% rate on the SBLF. MainSource Financial is reviewing the program. Based on the SBLF maximum noted above, there is a $3.4 million Page 5

6 difference between TARP currently outstanding. While we don t view this as a significant barrier to MainSource s participation in the program, management has reservations about certain program requirements. Our current forecast assumes a $25 million capital raise in We estimate MSFG would have to grow qualifying loans by $53 million (12.4% of total qualifying loans, 3.6% of 2010 total loans) to achieve the full benefit of the 1% rate on the SBLF. By our estimate, qualifying loans have increased 1% to 2%. Great Southern and First Merchants are reviewing the program. While Great Southern may participate in the program, we see only modest benefit to the rate on the SBLF. We believe First Merchants is unlikely to participate due to modest projected loan growth and the difference between the SBLF maximum and TARP. Figure 4: Potential EPS Imapct ($000) EPS Impact of Refinancing TARP vs. Repayment and Assuming No Common Capital Raise in 2011 or 2012 TARP Common Estimated Current Excluding Capital Raise Difference ($) Difference (%) Ticker Outstanding Raise Amount EFSC $35,000 1Q12 $25,000 $1.43 $1.49 $1.43 $1.54 $0.00 $0.05 0% 3% FRME $69,600 1Q13 $50,000 $0.49 $0.82 $0.49 $0.82 $0.00 $0.00 0% 0% GSBC $58,000 4Q12 $30,000 $1.60 $1.93 $1.60 $1.91 $0.00 -$0.02 0% -1% HTLF $82,000 1Q13 $35,000 $1.27 $1.71 $1.27 $1.71 $0.00 $0.00 0% 0% INCB $21,500 N/A N/A $1.55 $1.67 $1.55 $1.67 $0.00 $0.00 0% 0% MSFG $57,000 3Q13 $25,000 $0.63 $0.89 $0.63 $0.89 $0.00 $0.00 0% 0% Benefit of Every 1% Reduction In Interest Rate Paid on Preferred and no Common Capital Raise in 2011 or 2012 % Benefit TARP EPS Benefit to Ticker Outstanding of 1% Reduction EFSC $35,000 $0.02 2% 1% FRME $116,000 $0.05 9% 5% GSBC $58,000 $0.04 3% 2% HTLF $81,698 $0.05 4% 3% INCB $21,500 $0.06 4% 4% MSFG $57,000 $0.03 4% 3% Source: SNL and Stifel Nicolaus estimate Mid Atlantic Small Cap Banks Carter Bundy Three of our companies under coverage have expressed interest in the SBLF program, all indicating that they intend to apply with approval importantly being non-binding. These companies include Eagle Bancorp, Inc (EGBN $14.51 Buy), Virginia Commerce Bancorp, Inc (VCBI $6.01 Hold), and Pinnacle Financial Partners, Inc (PNFP $15.36 Hold). Our current estimates for Eagle Bancorp do not incorporate participation in the SBLF program. We currently have a $35M common raise modeled in 3Q11. The first of the following two charts shows the impact to EPS if no raise were assumed and TARP remained on the balance sheet with a 5% cost. The second assumes the refinance of TARP into SBLF and the incremental benefit to EPS per 1% decrease in the SBLF dividend. We would note that 3Q10 qualifying loan growth would already qualify the company for a 3% dividend rate with our belief that 4Q10 significant loan growth (+9% LQ) will have already moved that lower. Consequently, we are increasingly of the mindset that EGBN will participate in the SBLF to refinance TARP given that the company is an ideal fit for the program given excellent core competencies in C&I and Owner Occupied CRE lending coupled with a very fruitful market of opportunities in the DC MSA. The largest question at this point is how much does the company take down vs. the current TARP outstanding. Recall that we have a $35M common raise vs. $23M of TARP outstanding. Virginia Commerce also has expressed serious interest but noted on the 4Q10 conference call that if approval was contingent upon additional non government capital being raised alongside the SBLF funds, the company would not be interested in that option. We currently have a $40M common raise modeled in 4Q11. The first of the following charts shows the impact to EPS with no common raise and the TARP remaining on balance sheet at 5%. The second shows the impact to EPS assuming SBLF participation and the incremental benefit per 1% decline in the dividend rate. Pinnacle Financial Partners, Inc is also very interested in the program and is seriously considering it. We believe the company would be an ideal candidate to participate given very good competency in C&I and owner occupied CRE Page 6

7 lending. We have assumed the company participates in the program in our estimates using a $110M balance that was mentioned on the 4Q10 conference call which importantly compares to the $95M of TARP currently outstanding. We have assumed the dividend eventually reaches 2% which could move even lower. As we have modeled the company to participate already we do not show the incremental benefit to EPS below. Please see our 4Q10 published note and model for details. Figure 5: Potential EPS Impact ($000) EPS Impact of Refinancing TARP vs. Repayment and Assuming No Common Capital Raise in 2011 or 2012 TARP Common Estimated Current Excluding Capital Raise Difference ($) Difference (%) Ticker Outstanding Raise Amount EGBN $23,235 3Q11 $35,000 $0.86 $1.02 $0.90 $1.08 $0.04 $0.06 5% 6% VCBI $71,000 4Q11 $40,000 $0.53 $0.62 $0.55 $0.65 $0.02 $0.03 4% 5% Benefit of Every 1% Reduction In Interest Rate Paid on Preferred and no Common Capital Raise in 2011 or 2012 % Benefit TARP EPS Benefit to Ticker Outstanding of 1% Reduction EGBN $23,235 $0.01 1% 1% VCBI $71,000 $0.02 4% 4% Source: SNL Securities and Stifel Nicolaus estimate Southeast/Southwest Region- David Bishop Having recently spent two days with the senior executive management team of Buy-rated Southwest Bancorp, Inc. (OKSB; $14.08 Buy) we would note that management is strongly considering applying to the SBLF program but is still awaiting final capital treatment of the funds in determining whether to participate even if the application were approved. In regards to the type of lending the bank does, management notes that much of the company s healthcare focused lending (approximately $750 million of total loans) would qualify under the program as these loans are usually to smaller medical centers and doctor practice groups. We would view participation in the SBLF as a substitute for the TARP funds as management notes that it would still want to hold this capital on balance sheet in light of the unsteady economy as a hedge in case the economy would slip back into recessionary conditions. In addition, Hold-rated Home Bancshares, Inc. (HOMB; Hold) was quite vocal about their expectations to apply for the SBLF program and Chairman Allison noted that the bank was going to apply given the potential reduction in the cost of interest of the debt and the more attractive terms in relationship to executive compensation, dividend levels and share repurchase levels. Given the high amount of excess capital at Home Bancshares, this does bear consideration. One other institution under coverage that could possibly benefit from SBLF participation would be Hold-rated Seacoast Banking Corporation of Florida (SBCF; Hold). However, while we show the potential EPS effects from the interest rate reduction on TARP debt, we would note that the dividend arrearage on the TARP dividends would preclude the company s participation in the program. Thus, we merely include Seacoast for demonstrative purposes only. Figure 6: Potential EPS Impact ($000) Benefit of Every 1% Reduction In Interest Rate Paid on Preferred % Benefit TARP EPS Benefit to Ticker Outstanding of 1% Reduction SBCF $50,000 $0.01-5% 7% OKSB $70,000 $0.04 5% 4% HOMB $50,000 $0.02 1% 1% Source: SNL Securities and Stifel Nicolaus estimate West Region- Brian Zabora CoBiz Financial expressed interest in exploring the SBLF program during the 4Q10 earning conference call. This is a turnaround from comments during the 3Q10 conference call when management indicated they were more interest in Page 7

8 repaying TARP through a common stock offering. The SBLF program seems to be tailor-made for CoBiz due to their focus on the commercial and industrial and owner-occupied loan segments. Management estimates that 50% of the company s loan portfolio meets the program s definition of small business. Based on the SBLF maximums there is a $7.2 million difference between the maximum allowed SBLF Funding and the current TARP outstanding. Management indicated they did not see this as a significant impediment due to the company s holding company liquidity position. Our EPS estimates assume a $50 million common capital raise during 2011 to repay TARP. If we assume the company refinances the TARP investment, does not raise common equity, and continues to pay a 5% interest rate the EPS benefit to our 2012 estimate is $0.05 or 10%. Also for every 1% reduction in the interest rate we estimate a $0.02 per share benefit or 3% accretion to our 2012 EPS estimate. Figure 7: Potential EPS Impact ($000) EPS Impact of Refinancing TARP vs. Repayment and Asuming No Common Capital Raise in 2011 or 2012 TARP Common Estimated Current Excluding Capital Raise Difference ($) Difference (%) Ticker Outstanding Raise Amount COBZ $64,450 2Q11 $50,000 $0.28 $0.49 $0.25 $0.54 -$0.03 $ % 10% Benefit of Every 1% Reduction In Interest Rate Paid on Preferred and no Common Capital Raise in 2011 or 2012 % Benefit TARP EPS Benefit to Ticker Outstanding of 1% Reduction COBZ $64,450 $0.02 7% 3% Source: SNL Securities and Stifel Nicolaus estimate Collyn Gilbert- Northeast Below is the potential impact for the banks in the Northeast coverage, but based management commentary we believe the interest in refinancing the TARP funs into the SBLF program is low. Figure 8: Potential EPS Impact ($000) Benefit of Every 1% Reduction In Interest Rate Paid on Preferred % Benefit TARP EPS Benefit to EPS Estimates Ticker Outstanding of 1% Reduction CNBC $10,000 $0.01 1% NA STBA $108,676 $0.04 3% NA STL $42,000 $0.02 3% 2% Source: SNL Securities and Stifel Nicolaus estimate Page 8

9 Important Disclosures and Certifications We, David J. Bishop, P. Carter Bundy, Stephen Geyen, Collyn Bement Gilbert and Brian J. Zabora, certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers; and We, David J. Bishop, P. Carter Bundy, Stephen Geyen, Collyn Bement Gilbert and Brian J. Zabora, certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at For applicable current disclosures for all covered companies please visit the Research Page at or write to the Stifel Nicolaus Research Department at the following address. Stifel Nicolaus Research Department Stifel, Nicolaus & Company, Inc. One South Street 16th Floor Baltimore, Md Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors) Stifel Nicolaus' overall investment banking revenues. Our investment rating system is three tiered, defined as follows: BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-u.s. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500 and Canadian securities as compared to the S&P/TSX Composite Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-u.s. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-u.s. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value. Of the securities we rate, 48% are rated Buy, 50% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 31%, 21% and 17% of the companies whose shares are rated Buy, Hold and Sell, respectively. Additional Disclosures Please visit the Research Page at for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel Nicolaus' coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks. The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance. Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Page 9

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