The World’s Financial Crisis What Happened and When will it be Over?

1. The World’s Financial Crisis What Happened and When will it be Over? Robert W. Frentzel Executive Vice President and Managing Director The PrivateBank

2. Discussion Points • State of US Economy • State of the Capital Markets • What does it mean for you? • Question & Answer

3. State of the U.S. Economy

4. State of the U.S. Economy FROM IRRATIONAL EXUBERANCE TO IRRATIONAL ANXIETY

5. The Future? “HOPE IS NOT A STATEGY” New York Federal Reserve President Timothy Geither

6. Overview of current Financial environment • Credit crisis has triggered dramatic deleveraging cycle • Aggressive government and Central bank intervention has averted systemic meltdown but painful adjustment period remains • Some improvement in money markets, but capital markets remain highly strained • New issuance volume is anemic and credit spreads still at record highs • Easing cycle is over • Shift toward fiscal stimulus likely to push up long-term rates

7. The growing cost of the crisis • Credit writedowns exceeding $1 trillion • Government rescue package exceeding $1 trillion and contingent liabilities of $8 trillion • 170,000+ lost jobs in financial services, U.S. economy lost 2.5 million jobs • Homeowner equity declined by $5 trillion (25%) • World stock market capitalization declined from $62 trillion to $28 trillion • U.S. stock market capitalization declined from $19 trillion to $10 trillion

8. Recovery Not expected till late in 2009 Quarterly Change, Annualized “Potential” Est. Source: U.S. Department of Commerce Blue Chip Economic Indicators, December 2008; Bureau of Economic Analysis

9. Credit crisis creates unprecedented interest rate volatility… 1m LIBOR, Fed Funds, and Prime

10. Targeted Funds Rate: Active Monetary Intervention Target 0 - 0.25% Source: Federal Reserve Board

11. Unemployment at 16 year high and likely to increase Source: Bureau of Labor Statistics December 2008

12. “Trillion dollar deficits for years to come…”

13. Bear market wipes out five years of gains… U.S. market capitalization has declined from $19 trillion to $10 trillion over the past year.

14. Not many can afford To retire *estimates Sources: Investment Company Institute; Employee Benefit Research Institute (2008 estimate); WSJ

15. Correction Will Take Time

16. Home Ownership Rate peaked in 2005

17. A Correction Seemed Likely In Certain Markets Source: LoanPerformance

18. Fed intervention pushes mortgage rates to all time lows…

19. Housing Market Beginning to Clear at Low Levels Third Quarter Home Resales in California Source: MDA DataQuick and KBW calculations.

20. Deleveraging Begins with the Consumer * Personal savings as a percentage of disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods. ** Monthly data updated through October 2008. Source: U.S. Department of Commerce: Bureau of Economic Analysis and KBW research.

21. Long-term rates at historic lows…

22. State of the Bank Markets

23. KBW Regional Bank Performance Source: SNL Financial. Data as of 1/8/09.The KBW Regional Banking Index (KRX) is an equal weighted index of 50 geographically diverse companies representing regional banking institutions listed on U.S. stock markets.

24. KBW Regional Bank Performance (continued) Source: SNL Financial. Data as of 1/8/09.The KBW Regional Banking Index (KRX) is an equal weighted index of 50 geographically diverse companies representing regional banking institutions listed on U.S. stock markets. Note: This graph is a continuation of the graph on the previous page.

25. Phase I – The Sub-Prime Crisis April 2007 – New Century, largest U.S. sub-prime lender, files for bankruptcy July 2007 – Bear Stearns closes 2 hedge funds after banks refuse bail out, Bernanke warns crisis could cost up to $100 billion August 9, 2007 – Interbank lending market seizes up September 18, 2007 – Fed cuts funds rate by 50 bp to 4.75% beginning easing cycle Jan 11, 2008 – Bank of America acquires Countrywide Financial for $4 billion Phase II – The Liquidity Crisis March 16, 2008 – Bear Stearns acquired by J.P. Morgan for $2 per share July 13, 2008 – Federal regulators seize IndyMac September 7, 2008 – Government takes over Fannie Mae & Freddie Mac Capitalism in crisis

26. Phase 3 – The Solvency Crisis September 15, 2008 – Lehman Brothers files for bankruptcy, Bank of America acquires Merrill Lynch for $50 billion September 16, 2008 – Fed announces $85 billion rescue package for AIG September 18, 2008 – Reserve primary fund “breaks the buck” triggering exodus from money market funds September 19, 2008 – Bush announces plan to buy troubled assets from financial firms, Treasury guarantees money market funds September 22, 2008 – Goldman Sachs & Morgan Stanley convert into bank holding companies September 25, 2008 – Federal regulators seize WaMu and sell it to J.P. Morgan for $1.9 billion September 30, 2008 – FDIC increases deposit insurance to $250,000 October 3, 2008 - House approves revised $700 billion economic rescue package by vote 263-171 and President Bush signs into law, Wachovia snubs Citigroup and agrees to be purchased by Wells Fargo for $15.1 billion Capitalism in crisis

27. October 13, 2008 - Treasury launches Capital Purchase Program making mandatory investments of $125 billion in 9 banks October 14, 2008 - FDIC extends unlimited deposit insurance to non-interest bearing deposit accounts October 24, 2008 - PNC acquires Nat City for $5.2 billion using TARP funds November 12, 2008 – Treasury abandons plan to buy up bad debt and instead says it will use remainder to help revive consumer lending November 24, 2008 – Citigroup receives an additional $20 billion capital investment and $306 billion loan guarantee from government November 25, 2008 - Fed announces plans to buy $600 billion of agency debt and mortgage-backed bonds and establishes $200 billion program to support consumer and small-business loans December 12, 2008 – Senate rejects House-approved bailout plan for GM & Chrysler December 16, 2008 - Fed cuts fed funds rate 75 bp to “target range” of 0 - .25% December 19, 2008 - Treasury agrees to extend $13.4 billion in emergency loans to GM & Chrysler Capitalism in crisis

28. January 8 , 2009 - U.S. employers cut 524,000 jobs in December, capping the worst year of job losses since 1945 January 12, 2009 - President-elect Obama asks President Bush to request second $350 billion installment of TARP funding January 15, 2009 Bank of America requests additional $20 billion Capitalism in crisis

29. State of the Bank Markets Bank portfolios transitioned to higher risk, real estate heavy assets • Higher fees and search for asset growth fueled C&D lending • Real estate represented over 50% of bank portfolios in 2007 Over 50% of portfolios ~25% of portfolios Note: Period ending balance is used to calculate loan composition Source: SNL DataSource, FDIC, and KBW Research

30. How did we get here? • The “securitization” of banking • Accommodative monetary policy • Mark to market accounting • Relaxed capital requirements • Affordable housing targets • Financial innovation (e.g., option ARM) • Over reliance of past performance as predictor of the future

31. Competition Among Banks Drove Behavior • Net interest margins fell steadily from 1995 – 2008YTD • Competition among lenders caused spreads to narrow substantially • Competition for deposits created increased borrowing costs and dependence on wholesale deposit sources • De novo banks formed at unprecedented pace heightened competitive dynamics • Financial Institutions are not being paid for the risk 5B-$30B in Assets All Banks and Thrifts Source: SNL Financial. Data as of 9/30/08. Note: Metric is the median of the top tier consolidated banks and thrifts with assets greater than $500 million.

32. Bank Loan Portfolios are Undergoing Significant Distress • NPAs have spiked over the last several quarters, increasing from $39B in December of 2006 to over $150B currently (9/30/08) 5B-$30B in Assets All Banks and Thrifts Source: SNL Financial. Data as of 9/30/08. Metric displayed is the median. Note: Analysis includes top tier consolidated banks and thrifts with assets greater than $500 million. NPAs include nonperforming loans and leases, renegotiated loans and leases, and real estate owned.

33. Magnitude of Nonperforming Loans • Non-accrual loans for nationwide banks and thrifts with greater than $500 million in assets, excluding 1-4 Family Loans: 9/30/08 6/30/06 $13.4 billion $65.4 billion Source: SNL Financial. Data as of 9/30/08.

34. Credit write-downs reach $1 trilllion…

35. Historical Bank Offering Activity Levels Over $151 billion if capital from Sovereign Wealth Funds included Only $44.3B Raised in the Previous Decade Millions ($) Number of Deals Source: Dealogic. Note: US and Puerto Rican bank IPO, follow-on, 144A, PIPE and Convertible offerings since 1998. As of January 9, 2009.

36. Balance Sheets are Not Positioned to Cover Losses • Accounting dictates, lax credit underwriting standards and overly optimistic reserve levels have caused under reserved balance sheets for most U.S banks, necessitating significant adjustments All Banks and Thrifts 5B-$30B in Assets 5B-$30B in Assets All Banks and Thrifts Source: SNL Financial. Data as of 9/30/08. Metric displayed is the median. Note: Analysis includes top tier consolidated banks and thrifts with assets greater than $500 million.

37. 280 480 224 360 168 240 112 120 56 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Aggregate Assets ($B) Number of Failures Nationwide Bank & Thrift Failures • Bank and thrift failures remain well below those levels seen in the early 1990s, though they are on the rise, with year-to-date failures already exceeding all of 2007. Bank & Thrift Failures since 1990 # of Failures Aggregate Assets ($B) Source: FDIC. 1/12/09.

38. Searching for a Second Derivative on Credit Delinquency Data * Total subprime delinquencies as represented by ABX. ** Downey Financial NPAs, excludes total debt restructured. *** Washington Mutual: nonaccrual prime home equity loans as a percent of WM's prime home equity held for investment loan portfolio; data represents quarter (e.g., Mar-07 = 1Q07). **** Freddie Mac single-family delinquencies. . Source: ABX Net, company reports, and KBW calculations

39. What is next? • Home equity loans • Credit card loans • Automotive loans • Corporate bonds • Leverage financing • Commercial real estate financing

40. Home Equity Delinquencies and Net Charge-offs at Banks (in $ billions) Based on Data filed with Bank regulators. Home equity loans and lines = revolving lines of credit secured by one- to four-family properties + junior lien loans secured by one- to four-family properties. Delinquent home equity = Home equity loans and lines that are more than 30 days past due or non accruing Source: SNL Financial

41. Credit spreads hover near record highs… 5 yr Industrial Corporate Bond Spreads over LIBOR

42. But credit conditions remain tight…

43. Bank lending has increased…

44. Significant refinance on syndicated deals Value of U.S. corporate debt maturing in 2009, in billions Source: Standard & Poor’s

45. Deal flow down significantly Syndicated-Loan Market / Global Borrowing via Syndicated Loans Source: Reuters Loan Pricing Corp

46. What Does This Mean For You?

47. Important Underwriting Metrics Relationships and track record Liquidity of loan - What is the repayment? Efficiency of capital employed Balance sheet strength Collateral coverage Backlog analysis Market expectations

48. Underwrite your bank Has it applied for TARP? Has it opted out of transaction account guarantee program? What is its portfolio exposure to real estate, charge card, home equity, Auto, etc. Does your banker understand your WIP? What is the credit approval process - do they know you? What is the market saying?

49. Tougher Credit Environment The credit markets have tightened Higher interest rates and fees More and tighter covenants Shorter maturities Lower total and senior debt multiples Increased focus on balance sheet strength Difficult syndication market 100% financing less readily available Automakers and other lenders shying away from leasing due to depressed residual values

50. Relationships are Key Relationships continue to drive loan markets Unfunded credit facilities exert significant pressure on lenders’ overall relationship returns Banks have demonstrated a willingness to commit to credits with returns below their hurdle if prospects for retaining and/or gaining ancillary business are visible Returns on new deals being weighted against buying discounted paper in the secondary market Middle market (EBITDA < $50 million), non-levered (<3.0x Total Debt/EBITDA) transactions continue to get done Well structured, well priced transactions Solid borrower track record Sensible use of funds Support from relationship lenders