NW Banking Crisis

NW Banking Crisis Financial Executives International and Financial Executives Networking Group November 11, 2008

NW Banks – Before the Crisis • No activity in sub-prime lending • Limited holdings of residential mortgage loans, except balances held for sale • Pipeline to Freddie, Fannie, Countrywide, etc. • Limited exposure to risk of loss within loans held for sale • Carried significant holdings in commercial real estate and construction and development loans • Commonly held investments in securitized mortgage and other debt securities • CMOs, MBSs and CDOs • Regulatory environment focused primarily on concentrations in commercial real estate loans (FIL 12/06) 2

NW Banking Crisis 3

NW Banks – When the Crisis Hit • Mortgage pipeline into the secondary market was suddenly and completely shut off for alternative mortgage products, followed by traditional products • Home buying population went “on strike” and housing inventories ballooned • Contractors and builders continued projects, depleting interest reserves and using available funds committed to projects • Banking regulators demonstrated no increased, targeted concern toward NW Banks • Appraisals continued to represent the historical market trends • Residential foreclosures of sub-prime loans had little, if any, direct effect on NW Banks 5

NW Banks – As the Crisis Unfolded • Contractors and builders showed inability to carry projects as housing and land sales ceased • Bank internal resources got redirected to the identification of impaired loans • Loan loss reserves for construction and development real estate loan portfolios escalate • Foreclosures and troubled debt restructurings rise – OREO properties increase • FAS 114 valuations become problematic as appraisal values become immediately outdated and spiraling downward • Increased loan loss provisions move Banks to net loss positions and stress regulatory capital levels • Regulators redirect attention and examinations to construction and development loan concentrations (FIL 3/08) • Reaction in regulatory exams is forceful and swift • CAMELS ratings drop multiple levels • C&Ds, MOUs, and Written Agreements become much more prevalent 6

NW Banks – Internal Focus Following the Outset of the Crisis • Concentration placed upon the determination of fair value for impaired loan, other real estate owned and investment portfolios (FAS 114, FAS 157, EITF 99-20, etc.) • Attention given to Step 1 and 2 assessments of goodwill impairment (FAS 142) • Expected earnings, market cap and comparable deal analyses become suspect indicators, if information is even available • Impact of greater loan loss reserves, impairment charges and fair value adjustments creates an issue of capital adequacy 10

NW Banks – Capital Adequacy Issues • Tier 1 Capital to Risk Weighted Assets is approaching less than “well capitalized” status for many Banks • Capital adequacy impacts the extent of regulatory oversight and restrictions upon bank operations/activities • Some Banks become “under capitalized”; regulators call for robust capital and liquidity plans • Avenues for the acquisition of new capital are limited if not almost non-existent • Limited access to public markets through new offerings • “Family and Friends” or “Accredited Investor” offerings are difficult to accomplish • Trust Preferred Securities market is gone • Institutional investors will apply significant leverage in any deal • De-leveraging the Bank provides a limited optional solution • Sale of loan portfolio, branch networks, cost restructuring etc. • Cash dividends are suspended or curtailed 14

NW Banks – Liquidity Issues • Regulators place restrictions on the holding of “brokered deposits” for Banks less than “well capitalized” • Non-local, brokered deposits have provided an important function for loan funding and liquidity • Competition for core deposits is intense and expensive • Correspondent Banks significantly reduce or not renew inter-bank lines of credit • “Run on the Bank”, if it occurred, could trigger an FDIC-assisted takeover 16

NW Banks – “The Toxic Cocktail” CREDIT High Dependence on Noncore Funds or TPS Narrow Capital Cushion LIQUIDITY CAPITAL High C&LD/CRE Concentrations in Weakening Markets 18

NW Banks – What’s Next? • Liquidity and Capital planning have become priority issues • Deposit competition will be intense, although net interest margins remain historically thin • Access to traditional capital sources will remain limited for some time • Government “Bail-out” Programs are being evaluated and applied for • Initial tranches of Treasury’s Capital Purchase Program funds (TARP) have been allocated to public institutions • Preferred shares with attached warrants will be treated as Tier 1 capital • Next tranches for non-public Banks will require further analysis/guidance by Treasury – some notifications of award are going out • FDIC’s Temporary Liquidity Guarantee Program is intended to strengthen liquidity • FDIC insurance coverage limit increased to $250K is intended to bolster consumer confidence, hence liquidity 19

NW Banks – The Re-opening of Credit Markets • Treasury’s TARP Program is intended to be used to open the credit markets • The force and impact Treasury will now have on Banks is not yet known • Merger and acquisition activity will be recommended to strong institutions; implementation considerations of FAS 141R may spur activity • Banks will again price loans based on credit risk rather than competitive assessments • Bank credit will open up when balance sheets are cleared of impaired real estate related assets (loans, investments, OREO) • Common thinking suggest 2nd half of 2009 or later • Concern that non-owner occupied commercial real estate loan portfolios could be the next “shoe to drop” and delay recovery • Key interest rate will remain low while Banks employ interest rate floors 20

NW Banking Crisis Questions and Comments 21

NW Banking Crisis