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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

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Nw banking crisis

NW Banking Crisis

Financial Executives International


Financial Executives Networking Group

November 11, 2008

Nw banks before the crisis
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)


Nw banks when the crisis hit
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


Nw banks as the crisis unfolded
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    • FAS 114 valuations become problematic as appraisal values become immediately outdated and spiraling downward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


Nw banks internal focus following the outset of the crisis
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


Nw banks capital adequacy issues
NW Banks – Capital Adequacy Issues Crisis

  • 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


Nw banks liquidity issues
NW Banks – Liquidity Issues Crisis

  • 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


Nw banks the toxic cocktail
NW Banks – “The Toxic Cocktail” Crisis


High Dependence on Noncore Funds or TPS

Narrow Capital Cushion



High C&LD/CRE Concentrations

in Weakening Markets


Nw banks what s next
NW Banks – What’s Next? Crisis

  • 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


Nw banks the re opening of credit markets
NW Banks – The Re-opening of Credit Markets Crisis

  • 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


Nw banking crisis11
NW Banking Crisis Crisis

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