NW Banking Crisis

Financial Executives International and

Financial Executives Networking GroupNovember 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 CrisisNet Loans and Total Real Estate Loans

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

$50,000,000

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

June2008

June2008

Dec.2007

Dec.2007

Dec.2006

Dec.2006

Dec.2005

Dec.2005

Dec.2004

Dec.2004

Dec.2003

Dec.2003

Net loans and leases All real estate loans

(000's)

Source: FDIC

3

NW Banking CrisisConstruction & Development, Commercial Real Estate and Other Loans

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

June2008

June2008

Dec.2007

Dec.2007

Dec.2006

Dec.2006

Dec.2005

Dec.2005

Dec.2004

Dec.2004

Dec.2003

Dec.2003

Other Construction and development loans Commercial RE

(000's)

Source: FDIC

4

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 Banking CrisisLoan Loss Allowance

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

June 2008 Dec. 2007 Dec. 2006 Dec. 2005 Dec. 2004 Dec. 2003

Washington Oregon

(000's)

Source: FDIC

7

NW Banking CrisisLoan Loss Allowance As A Percent of Total Loans

1.00

1.10

1.20

1.30

1.40

1.50

1.60

June 2008 Dec. 2007 Dec. 2006 Dec. 2005 Dec. 2004 Dec. 2003

Washington Oregon

%

Source: FDIC

8

NW Banking CrisisNon-Accrual Loans - Assets in Non-Accrual Status and Real Estate Loans

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

June2008

June2008

Dec.2007

Dec.2007

Dec.2006

Dec.2006

Dec.2005

Dec.2005

Dec.2004

Dec.2004

Dec.2003

Dec.2003

Assets in nonaccrual status Real estate loans in domestic offices in nonaccrual

(000's)

9

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 Banking CrisisLoans Charged Off - Total and

Real Estate

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000W

ashi

ngto

n

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

June2008

June2008

Dec.2007

Dec.2007

Dec.2006

Dec.2006

Dec.2005

Dec.2005

Dec.2004

Dec.2004

Dec.2003

Dec.2003

Total charge-offs Real estate loans in domestic offices

(000's)

Source: FDIC

11

NW Banking Crisis

12

Loans Charged off – Construction & Development and Other

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000W

ashi

ngto

n

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

Was

hing

ton

Ore

gon

June2008

June2008

Dec.2007

Dec.2007

Dec.2006

Dec.2006

Dec.2005

Dec.2005

Dec.2004

Dec.2004

Dec.2003

Dec.2003

Other Construction and land development

(000's)

Source: FDIC

NW Banking CrisisOther Real Estate Owned

$-

$50,000

$100,000

$150,000

$200,000

$250,000

June 2008 Dec. 2007 Dec. 2006 Dec. 2005 Dec. 2004 Dec. 2003

Washington Oregon

(000's)

Source: FDIC

13

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 Banking CrisisTier One Leverage Capital

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

June 2008 Dec. 2007 Dec. 2006 Dec. 2005 Dec. 2004 Dec. 2003

Washington OregonSource: FDIC

15

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 Banking CrisisNet Non-Core Funding Dependence

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

June 2008 Dec. 2007 Dec. 2006 Dec. 2005 Dec. 2004 Dec. 2003

Washington OregonSource: FDIC

17

NW Banks – “The Toxic Cocktail”

High C&LD/CRE Concentrations

in Weakening Markets

CREDIT

CAPITALLIQUIDITY

High Dependence on Noncore Funds

or TPS

Narrow Capital Cushion

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