2010

STATE OF THE INDUSTRY

REPORT ON THE CONDITION OF CALIFORNIA COMMERCIAL BANKING

California Bankers Association Carpenter & Company 1303 J Street, Suite 600 Five Park Plaza, Suite 950 Sacramento, California 95814 Irvine, California 92614 916-441-7377 949-261-8888 Richard P. Smith, Chairperson Edward J. Carpenter, Chairman Rodney K. Brown, President John D. Flemming, President

200404 2010

TABLE OF CONTENTS

INTRODUCTION ...... 1

THE ECONOMY

United States ...... 3 California Trends ...... 15

THE BANKING INDUSTRY

National Trends ...... 23 California Trends ...... 31

THE CHANGING ENVIRONMENT

Banking Failures ...... 39 Commercial Real Estate ...... 49

INDUSTRY VALUATIONS

Mergers and Acquisition Activity ...... 55 National Stock Prices ...... 57 California Stock Prices ...... 58 Stock Performance by Asset Size ...... 59

INDUSTRY RANKINGS ...... 69

STOCK PERFORMANCE, CALENDAR YEAR 2009 ...... 77

2010

INTRODUCTION

INTRODUCTION

The recession in the U.S. is over. When can we celebrate and enjoy the recovery? The deterioration in the quality of banking assets is abating. When will the industry return to its former rates of profitability? Clarity remains elusive regarding the future conditions for the economy and banking industry. Although the economy and banking industry are improving, fragile is constantly used as the descriptor for current activity.

Why are there lingering fears about the economy? More than 8 million Americans lost their jobs during the recession. In California the ranks of newly unemployed increased by 1.3 million. Can consumers mount a spending rebound without a major expansion in jobs?

The federal government and many state governments face record budget shortfalls. Will the fragile economic upturn survive efforts to reduce deficit spending? To foster growth and liquidity within the economy, the Federal Reserve allowed the fed fund rates to carry a zero rate of interest for more than a year. Why did bank lending declining during this period? When will the Federal Reserve alter its policy stance of exceptionally low market rates? How will the economy respond?

Financial reform legislation continues to wind its way through the halls of Congress. As of this writing, there is no specificity over which provision will survive the joint committee markup and the final Congressional voting. How will reform affect community banks? These are questions to be pondered when considering the strategic direction for one’s community bank.

Challenges Presented

The current economic milieu continues to create challenges for commercial banks, especially for California community banks. Unemployed customers and declining sales adversely affect the financial viability of the small business community, the bread and butter business for community banks. The demise of the syndication market for real estate funding contributes to the free-fall in property prices. Those external conditions helped to create the worst asset quality for the banking industry on record.

Week after week in 2009 and so far this year, the FDIC would announce that financial institutions failed. There have been 229 failures from the beginning of 2008 until April 30, 2010. The banks that have survived are part of an industry that is greatly reduced in number and constrained in their capacity to meet the credit needs of their local community.

Whew, not a pretty picture, but you know that already.

Breaking through the dark clouds of the economic and banking atmosphere are glimmerings of improvement. Asset quality stabilized in the second half of 2009. The downdraft on earnings from ever increasing loss provision abated. Operating conditions, net of loss provision, improved, especially for California banks.

CALIFORNIA BANKERS ASSOCIATION -1- CARPENTER &COMPANY I NTRODUCTION

Net interest margins of banks are increasing, as the decline in funding costs generally exceeded the drop in interest income. The California banking industry reports lower operating costs, in part due to the elimination of failed banks. Although asset quality measures remain poor from a historic perspective, California banks are doing better than the national average.

Nationally, banks reported fewer assets in 2009, while California banking assets increased slightly. Loans declined due to the charge-off of existing loans and tighter underwriting curtailing originations. Banks generated more core deposits and reduced dependency on borrowings. Despite the challenging times, the banking industry increased its capital and posted record ratios based on risk-based measures.

It is clear that there will be fewer banks in the future. The exclusivity of the banking community makes your existing bank charter a valuable commodity. As such, your challenge is to continue to create value for your core constituencies of shareholders, employees and customers. Such a strategy should be met with improved franchise value, renewed profitability, and more favorable stock pricing.

Quarterly Updates

Economic and banking trends change frequently and at an ever-increasing rapidity. Thus, an annual report on banking conditions has limited freshness. In an attempt to provide timely information and analysis, while maintaining fiscal responsibility and environmental consciousness, quarterly updates to this report are available by e-mail.

Carpenter & Company distributes free of charge quarterly updates to the STATE OF THE BANKING INDUSTRY as well as its monthly stock report. Many of you have already received the monthly stock report, as well as the quarterly updates. If you are on this mailing list, that’s great. If you wish to be added to the e-mail list, please send an e-mail to [email protected] and place “Monthly Stock Report” and/or “Quarterly Report” in the subject line and your name, company affiliation, phone number, and e-mail address in the e-mail message. We hope that these updates will be of interest to you.

Acknowledgements

This tenth annual report on the STATE OF THE BANKING INDUSTRY has been developed from data and information obtained from a variety of public and private sources. The information contained in this reported is believed to be accurate and reliable. However, no special warrant can be provided. Special thanks are due to the UCLA Anderson Forecasting Project for their economic forecast of the United States and California.

The California Bankers Association and Carpenter & Company wish you much success in the year ahead.

CALIFORNIA BANKERS ASSOCIATION CARPENTER & COMPANY

CALIFORNIA BANKERS ASSOCIATION -2- CARPENTER & COMPANY

2010

THE ECONOMY

THE ECONOMY: United States

The United States economy is in recovery from the steepest recession of the post-war period. The recovery based upon data available through mid-May 2010, however, has been atypical compared with other cyclical rebounds. A sustainable and robust upturn is not in the current vernacular as a descriptor of recent trends.

Yes, the economy is growing. Yes, there have been some increases in jobs. Yes, sales, output and even building are up from basement levels. Yet, the question lingers, is the recovery sustainable? The recovery definitely is not robust. Even the official determiner of business cycles, the National Bureau of Economic Research, opined in April 2010 that it was too early to declare an end to the recession because recent data may be revised and that there still exists a risk of another decline.

Clouding the question of the sustainability of the recovery is that fiscal and monetary policy actions have been important triggers for the recent growth. Future growth of the U.S. economy may falter due to the end of federal stimulus, most notably the removal of tax incentives that supported the purchase of homes and autos. The Trends Inside the US Economy Real output of the U.S. economy, as measured by the gross domestic product, began to increase in the third quarter of A recovery, albeit slow ...... 3 2009 and has recorded three quarterly gains through the first quarter of 2010. Through April 2010, retail sales Fiscal challenges to eliminate recorded YOY gains for six consecutive months and budget deficits ...... 4 reported monthly gains in 12 out of the past 13 months. Monetary policy gradually YOY Change in US Retail Sales Industrial output reducing liquidity ...... 6

10% posted YOY gains

5% for each of the first Cyclical perspective on

0% four months of Spending ...... 8 -5% 2010. Businesses -10% began to rebuild Outlook for employment ...... 11 -15% 07 08 09 10 inventories in the first quarter of 2010 Expectations on growth ...... 12 for the first time since the second quarter of 2006. Business spending on Industrial Production Index Inflation moderate ...... 12 equipment and Year-over-year Change software picked up 5% Foreign exchange trends ...... 13 to add significantly 0% to the recent -5% Interest rate developments ..... 13 expansion of the -10% U.S. economy. Yield curve to flatten ...... 14 -15% 02 03 04 05 06 07 08 09 10

CALIFORNIA BANKERS ASSOCIATION -3- CARPENTER &COMPANY T HE ECONOMY: United States

As the United States economy started to recover spending toward state and local governments and domestic spending picked up, especially for since their budgets were sorely tested by the consumer goods, the rise in import shipments economic decline. The federal government exceeded the increase in exports in the first enacted legislation to support financial markets quarter of 2010. This development reversed the through the Troubled Asset Relief Program declining trend in the U.S. net export deficit. (“TARP”) and to fund the conservatorships of Fragility of the recovery is evident in the national Fannie Mae and Freddie Mac. These factors rate of unemployment. This rate declined from contributed to an increase in spending to a nearly 10.0% at year-end 2009 to average 9.7% through 25% share of GDP in FY 2009. the first quarter of 2010. In April, the rate Federal Government on-Budget increased to 9.9%. Surplus/Deficit as a Percent of GDP OMB Estimates 4%

Fiscal stimulus programs supported the third 2% quarter 2009 rebound in auto sales. Home sales 0% appeared to benefit from the federal tax -2% incentives for home buyers which closed for the -4% second time in June 2010. The Federal Reserve -6% and the federal government as well as other -8% -10% central banks and governments took 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 unprecedented actions in September 2008 to prevent a major financial and economic collapse. Based upon current law, the federal deficit in In early 2009, a federal government stimulus fiscal 2010 will edge down to $1.3 trillion, which program was enacted, which served as the equates to 9.2% of GDP, the second largest catalyst for recent economic growth. The impact deficit share on record. The FY 2010 budget of the stimulus program will wane in the second assumes that outlays will increase $5 billion, while half of 2010 and through 2011, as efforts are revenues will climb $70 billion. initiated to reduce the record levels of the federal deficit. Revenues are projected to increase 3% in 2010, allowing total revenues to climb to a 14.9% share Fiscal Policy of GDP, up from 14.8% in 2009. Nearly 60% of the projected rise in federal revenues will come The deficit in the federal budget increased by $1 from the profits generated by the Federal trillion in fiscal 2009 to a level of $1.4 trillion. Reserve System. In addition, rising personal This deficit equaled a post-World War II record income tax receipts will account for about 25% 9.9% share of GDP. The increased deficit of the projected revenue growth in 2010. resulted from reductions in revenues created by Increased corporate profits will contribute to the weakness in economic activity and from tax about 13% of the revenue gain. cuts associated with the fiscal stimulus legislation enacted in February 2009. Federal government The growth in outlays in FY 2010 will be held spending increased to provide counter-cyclical down by the $218 billion repayment of TARP support and to fund programs designed to funding. Spending in many budget categories will stabilize financial markets. The American increase, notably unemployment benefits, Social Recovery and Reinvestment Act of February Security and related benefits, and provisions 2009 provided spending, tax breaks, and tax related to the stimulus package. Outlays in FY incentives designed to stimulate consumer and 2010 are projected to equal 24.1% of GDP, business spending. The program also directed down from the 24.7% share in FY 2009.

CALIFORNIA BANKERS ASSOCIATION -4- CARPENTER & COMPANY T HE ECONOMY: United States

Federal Budget as % of GDP Congressional Budget Office (“CBO”) holds that the current recovery will be dampened by the 26% continuing fragility of some financial markets and 24% institutions, the declining support from fiscal 22% policy as the stimulus from the February 2009 act 20% is removed, the slow growth in wages and 18% employment, and the sizable inventory of unsold 16% homes. The CBO expects the rate of 14% unemployment will average 10% in the first half 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 of 2010 and will decline in the second half. A

Receipts Outlays return to a 5% jobless rate, however, is not anticipated until 2015. Based upon current law estimates, revenues are projected to increase sharply in FY 2011 and The slack in the economy will dampen upward trend higher through FY 2020. Conversely, pressures on prices and reduce inflation below outlays will register a sizable decline as a share of the low rates of 2009. According to the CBO, the GDP in FY 2012 and again in FY 2013 before core price index for personal consumption drifting slightly higher through 2020. The budget expenditures, which eliminates trends in food deficit is projected to decline to a 6.5% share of and energy prices, is projected to increase 1% on GDP in FY 2011, to a near-term low of 2.6% in a fourth-quarter-to-fourth-quarter basis in 2010 FY 2015 before drifting up to a 3% share in FY and 0.9% in 2011. The total personal 2019 and FY 2020. consumption expenditure price index is forecast to increase 1.4% in 2010 and 1.1% in 2011. The federal budget estimates are predicated upon an economic outlook that incorporates a These economic and budget assumptions, recovery through 2011 that is significantly milder however, are predicated upon a steadily than a typical business cycle upturn. The recovering economy, expanding employment, prolonged stability in financial markets, and the

Congressional Budget Office Economic Projections For Calendar Years 2009 to 2020

Actual Forecast Annual Average 2009 2010 2011 2012-2014 2015-2020 Nominal GDP 14,253 14,706 15,116 17,816 A 22,770 B Nominal GDP (% change) -1.3 3.2 2.8 5.6 4.2 Real GDP (% change) -0.4 2.1 2.4 4.4 2.4 GDP Price Index (% change) 0.9 1.0 0.9 1.2 1.7 PCE Price Index 1.4 1.4 1.1 1.2 1.8 Core PCE Price Index 1.5 1.0 0.9 1.1 1.7 Consumer Price Index (% chg) 1.7 1.6 1.1 1.3 1.9 Unemployment Rate (%) 9.3 10.1 9.5 6.5 5.0 3-Month Treasury Bill (%) 0.1 0.2 0.7 2.9 4.6 10 Year Treasury Note (%) 3.2 3.6 3.9 4.5 5.5 A Level in 2014 B Level in 2020

CALIFORNIA BANKERS ASSOCIATION -5- CARPENTER & COMPANY T HE ECONOMY: United States political will to cut future spending and reduce of the past six quarters through the first quarter the deficit. Short of those conditions, deficits will of 2010. Weakness in the state and local become a protracted problem for the U.S. government sector is anticipated over the current government and economy. year and beyond.

State and Local Governments Monetary Policy

According to the Center on Budget and Policy Monetary policy focused on the following trends: Priorities and the National Conference of State restoring order to financial markets, providing Legislatures, nearly every state in the U.S. faces stimulus to offset the impact of the recession, distressingly high levels of budget deficits. Some and supporting the subsequent growth that has states, however, are significantly more distressed only been moderate. The statement at the April than other states. A serious deficit at the state 27-28, 2010 meeting of the Federal Open Market level leads to budgetary distress on local Committee aptly summarizes the prevailing governments, as well. thrust of policy:

Gaps widened in the FY 2010 budgets for 41 Information received since the Federal Open Market states as tax collections in April 2010 were lower Committee met in March suggests that economic activity than anticipated. California topped the list with has continued to strengthen and that the labor market is the highest FY 2010 budget gap, estimated at $52 beginning to improve. Growth in household spending has billion, $19 billion higher than originally picked up recently but remains constrained by high estimated. This gap represented 56.5% of the unemployment, modest income growth, lower housing state’s FY 2010 budget. The Center on Budget wealth, and tight credit. Business spending on equipment and Policy Priorities estimated that the shortfalls and software has risen significantly; however, investment in in state budgets for FY 2010 totaled $196 billion nonresidential structures is declining and employers remain or 29% of all budgets. Only North Dakota and reluctant to add to payrolls. Housing starts have edged up Montana did not face shortfalls in their budgets. but remain at a depressed level. While bank lending The remaining 48 states addressed or continued continues to contract, financial market conditions remain to face budget shortfalls in FY 2010. supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Fiscal problems will continue for most state Committee anticipated a gradual return to higher levels of governments in FY 2011 and beyond. Estimates resource utilization in a context of price stability. of the FY 2011 gaps for 42 states ranged between $103 and $180 billion. Efforts to trim the budget With substantial resource slack continuing to restrain cost shortfalls included cutting services, furloughing pressures and longer-term inflation expectations remaining employees, and raising taxes. The federal stable, inflation is likely to be subdued for some time. The stimulus program of February 2009 provided Committee will maintain the target range for the federal about $135 to $140 billion in assistance for states, funds rate at 0-0.25% and continues to anticipate that scheduled to be distributed over a 2-1/2 year economic conditions, including low rates of resource period. The funding will filter into increased utilization, subdued inflation trends, and stable inflation Medicaid payments and a state fiscal stabilization expectations, are likely to warrant exceptionally low levels fund. of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook Despite the federal assistance, the volume of and financial developments and will employ its policy tools spending by state and local governments, as as necessary to promote economic recovery and price measured in the GDP accounts, declined in five stability.

CALIFORNIA BANKERS ASSOCIATION -6- CARPENTER & COMPANY T HE ECONOMY: United States

In light of improved functioning of financial markets, the FOMC meeting. GDP is projected to expand at a Federal Reserve has closed all but one of the special rate that is only slightly above the level of longer- liquidity facilities that it created to support markets run sustainable growth. The unemployment rate during the crisis. The only remaining such program, the is projected to decline slowly through 2012. The Term Asset-Backed Securities Loan Facility, is scheduled table below contrasts the forecast of the FOMC to close on June 30 for loans backed by new-issue as of April 2010 with the January 2010 commercial mortgage-backed securities. It closed on March projections. Although the forecasts of growth 31 the program for loans backed by all other types of rates were nudged slightly higher for 2010, the collateral. FOMC lowered its forecasts for inflation.

All but one member of the FOMC supported this action. Mr. Thomas M. Hoenig, President of the Kansas City Federal Reserve Bank, dissented YOY Change in M2 Monetary Aggregate % based upon the concern that “exceptionally low 12 levels of the federal funds rate for an extended 10 period” could lead to the buildup of future 8 financial imbalances and increase the risks to longer-run macroeconomic and financial stability, 6 while limiting the flexibility of the Committee to 4 shift policy. 2 0 The FOMC released revisions to its economic 2007 2008 2009 2010 projections at its April 27-28, 2010 meeting. The economic forecasts were little changed from the Fed beginning to wring liquidity out of the system. forecast released following the January 2010

Economic Projections of Federal Reserve Governors and Reserve Bank President April 2010

Central Tendency Variable 2010 2011 2012 Longer run Change in real GDP 3.2-3.7% 3.4-4.5% 3.5-4.5% 2.5-2.8% January forecast 2.8-3.5% 3.4-4.5% 3.5-4.5% 2.5-2.8% Unemployment rate 9.1-9.5% 8.1-8.5% 6.6-7.5% 5.0-5.3% January forecast 9.5-9.7% 8.2-8.5% 6.6-7.5% 5.0-5.2% PCE Inflation 1.2-1.5% 1.1-1.9% 1.2-2.0% 1.7-2.0% January forecast 1.4-1.7% 1.1-2.0% 1.3-2.0% 1.7-2.0% Core PCE inflation 0.9-1.2% 1.0-1.5% 1.2-1.6% January forecast 1.1-1.7% 1.0-1.9% 1.2-1.9% NOTE: Projections of the change in real gross domestic product (GDP) and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy.

CALIFORNIA BANKERS ASSOCIATION -7- CARPENTER & COMPANY T HE ECONOMY: United States

Cyclical Perspective A lesson from the recession is that instability can arise when households and other sectors of the As the U.S. emerges from its deepest and longest economy depend upon borrowing to fuel current recession since the Great Depression, it is consumption. The economy would benefit from valuable to analyze the economy from a longer- a shift in share of output achieved through a term perspective as a review of the recent gradual decline consumer spending as a percent downturn and as an assessment of appropriate of GDP and an increase into investment. This growth by sector that could provide future shift would expand the productive capacity of the stability to the economy. nation. In turn, that increased productive capacity could be directed toward the production of Consumer goods for export.

It is clear from the cluster of four charts that the Total Consumer Spending to GDP United States is a consumer nation, wherein at 72% least 70% of national output is directed toward 70% 68% consumer spending. 66%

64% Increasingly and especially since the early 1990s, 62% consumers are spending more on big-ticket 60% items, notably cars, trucks, recreational vehicles, 58% and electronics. The long upturn in homebuilding 50 60 70 80 90 00 and home sales prompted consumers to spend Consumer Spending on Durables to GDP more money on furniture and household fixtures. 10% 9% Over the past 50 years, the concentration of the 8% national output toward spending on consumer 7% 6% durable goods increased by a factor of three, 5% from a 3% share in the early 1950s to 9% before 4% 3% the recession and the tightening of credit led 2% consumers to slash such spending. 50 60 70 80 90 00

Consumer Spending on Services to GDP The U.S. is an advanced, highly developed 48% nation. As such, U.S. consumers pay others to 46% perform services for them. Housing and health 44% 42% care are the two largest components of services 40% spending. Yet, over time U.S. consumers 38% increased their spending on financial services, 36% 34% notably interest on credit, and for meals out. 50 60 70 80 90 00

As an advanced and developed nation, the U.S. Consumer Spending on Non-durables to GDP 26% spends less of its national output on the 24% consumer necessities of food and clothing. Thus, 22% the share of GDP spent on consumer non- 20% 18% durable goods fell from nearly 25% of total 16% output in the late 1940s to less than 16% 14% 12% currently. 50 60 70 80 90 00

CALIFORNIA BANKERS ASSOCIATION -8- CARPENTER & COMPANY T HE ECONOMY: United States

Investment occupancy and rental rates and tight credit conditions. Business spending on structures is Quickly, when were the postwar business cycles? likely to exhibit additional declines and could fall to a record low as a share of GDP before the Total Fixed Investment to GDP current cycle is over. 18% 17% 16% The technology age is illustrated by the business 15% investment in equipment chart. Spending on 14% equipment steadily grew as a share of GDP 13% beginning in the early 1960s. Computer and 12% 11% communication innovations greatly improved 10% productivity, and businesses spending reflected 50 60 70 80 90 00 this boom. The build-up and bust in technology spending around Y2K and the spending decline The following charts highlight the GDP due to the current business cyclical contributed categories of fixed investment, both business and to the jagged pattern in the past decade. residential investment spending.

Investment spending represents long-lead time Business Fixed Investment to GDP purchases, dependent upon financial markets for 13% 12% funding. Investment spending is typically a 11% lagging economic indicator. The span from plan 10% 9% to completion is often protracted. Thus, the 8% trends in such spending evidence the volatile 7% 6% pattern of steep peaks and valleys. Major changes 5% 4% in technology and significant volumes of 50 60 70 80 90 00 construction of residential, office, retail and industrial space caused the U.S. economy to push up its share of investment spending to a record Business Investment in Structures to GDP 17% of GDP in 2005. The steepness of the 5.0% recent recession brought this share back nearly to 4.5% the ratios of the immediate post World War II 4.0% period. 3.5%

3.0% Business fixed investment consists of spending 2.5% on plant and equipment. Both categories of 50 60 70 80 90 00 business investment involve planning and a lag between order and delivery. Longer lead-times Business Investment in Equipment to GDP are associated with investing in commercial 9% structures. This sector exhibits greater cyclicality 8% 7% than the trends in business equipment spending. 6% 5% 4% As reiterated at the April 2010 FOMC meeting, 3% commercial real estate was continuing to fall in 2% 1% most parts of the country as a result of 50 60 70 80 90 00 deteriorating fundamentals, including declining

CALIFORNIA BANKERS ASSOCIATION -9- CARPENTER & COMPANY T HE ECONOMY: United States

the early 1950s and settled to around 6%-7% of It was often cited that residential construction GDP since 2000. predicted fifteen of the last eight recessions. The inconsistent pattern of residential investment State and local government purchases of goods indicates the sensitivity of housing to financial and services peaked in the late 1970s as a share of market and business cycles. Residential GDP at over 15%. Subsequently, spending investment consistently reached lower peaks with trended slightly lower to a 12% share in recent each of its cycles over the past 60 years. The years. Demographics played a major factor in the current cycle has taken residential investment to rise and decline in the share of state and local an historic low relative to GDP. It is likely that government spending. Given the current the decline in residential investment exceeded the budgetary constraints, it is likely that spending on fundamentals, creating the expectation that the the federal and state and local government levels recovery in housing could be brisk. To date, this will continue its declining share to GDP. pattern has not occurred. Trade Residential Investment to GDP 12% A lesson learned from the recent recession is that 10% being an over-extended borrower, whether as a 8% household or a government, makes for a 6% precarious situation. Although the U.S. has been 4% in a deficit position in net exports over much of 2% past 60 years, the U. S. ran record deficits in its 0% net exports position from 2003 through 2006. 50 60 70 80 90 00 The recent narrowing of the net export deficit was recession-induced. Domestic demand Government declined and curbed the growth in imports at a faster pace than the decline in export shipments. Government spending on goods and services has A strategic push to increase U.S. exports could been on a downward trajectory since the end of support a gain in national employment, limit the Korean War. Federal government spending inflationary pressures, and work down the large on goods and services spiked to 25% of GDP in deficit in U.S. international reserves.

Total Government Spending to GDP State & Local Government Spending to GDP 39% 17% 16% 34% The U.S. has become 15% 29% 14% 24% import-dependent. 13% 12% 19% Reasserting its 11% 14% 10% 9% competitive position in 9% 50 60 70 80 90 00 50 60 70 80 90 00 world markets would Federal Government Spending to GDP provide a source of jobs Net Exports to GDP 30% 3% and help lower the 2% 25% 1% 0% 20% balance of payments -1% -2% 15% -3% deficit. -4% 10% -5% -6% 5% -7% 50 60 70 80 90 00 50 60 70 80 90 00

CALIFORNIA BANKERS ASSOCIATION -10- CARPENTER & COMPANY T HE ECONOMY: United States

Employment Trends through April 2010 have regained 6% of these lost jobs. At its low, the 2007 recession had eliminated nearly 8.4 million jobs in the U.S. The jobless rate Growth in U.S. Employment climbed to a high of 10.1% in October 2009 3% 2.3% before declining to 9.7% in the first quarter of 1.8% 1.8% 2% 1.1% 1.1% 1.2% 2010. In April 2010 the rate increased to 9.9%. 1% 0% -0.2% -1% -0.6% -0.6% -1.1% During the six months since November 2009, the -2% U.S. economy recorded five monthly gains in -3% payroll employment. The April 2010 preliminary -4% -5% -4.3% increase of 290,000 payroll jobs was the largest 02 03 04 05 06 07 08 09 10f 11f 12f monthly gain since February 2006. On a quarterly UCLA Forecast basis, the rapid rate of job losses began to abate The UCLA Anderson Forecast (“UCLA”) in the second half of 2009. The solid increase in projects that total employment in 2010 will be jobs during the first quarter of 2010 prompted a lower on an annual basis for the third large number of formerly discouraged jobseekers consecutive year. Even with steady increases in to resume their hunt for employment. employment beginning in the first quarter of 2010 and continuing throughout the 10-quarter Recent economic recoveries have been forecast, the UCLA forecasts of employment increasingly termed jobless recoveries with an over the 30-month period recoups only 56% of extended period of time required to regain the the recession’s job loss. At that pace of prior peak level of jobs. The current recession employment growth, it would require a total of created an over 8 million job hole to fill before 53 months to reach the prior peak in jobs. the prior peak is reached. The employment gains Initially, renewed job growth is met with an Employment Trends increase in the labor force, as discouraged job Postwar Recessions seekers re-enter the labor pool. Despite steady Months of Decline increases in jobs, the jobless rate, according to Months to Regain Past Peak the UCLA forecast, will decline to 8.6% by the end of 2012. The base rate for the preceding Months of Months to chart purposely shows the horizontal axis at 4%, Decline Peak Regain a rate, which is considered the non-inflationary Recession to Trough Prior Peak rate of full employment. The differential above 1945 9 18 4% illustrates the significant slack in labor force 1948 12 21 resources that is anticipated three years hence. 1953 14 24 1957 10 21 U.S. Jobless Rate 1960 11 21 9.7% 1969 12 18 10% 9.3% 9.3% 1973 9 20 9% 8.6% 1980 4 11 8% 7% 1981 20 29 5.8% 6.0% 5.8% 6% 5.5% 1990 21 33 5.1% 4.7% 2001 16 49 5% 4.6% 4.6% 2007 24?? ?? 4% 01 02 03 04 05 06 07 08 09 10f 11f 12f UCLA Forecast

CALIFORNIA BANKERS ASSOCIATION -11- CARPENTER & COMPANY T HE ECONOMY: United States

Growth Developments Real Gross Domestic Product GDP expanded for three consecutive quarters 4.0% 3.6% 3.1% 2.3% 3.2% 2.7% through the first quarter of 2010. Inventory 3.0% 2.5% 2.1% 3.0% management contributed greatly to this upswing. 2.0%

The end of inventory liquidation and the gradual 1.0% 0.4% rebuilding of stocks caused the growth of GDP 0.0% to greatly exceed the growth of final sales during -1.0% the past three quarters. -2.0% -2.4% -3.0% Consumer spending has increased since the third 03 04 05 06 07 08 09 10f 11f 12f -----UCLA Forecast------quarter of 2009, first spurred by motor vehicle sales, followed by renewed growth in consumer spending on non-durable goods. Business UCLA forecasts annual growth rates of 3%, spending on equipment and software picked up 2.3%, and 3.2% over the next three years. Greatly in the fourth quarter of 2009 and the first quarter supporting the upturn will be investment of 2010. Spending on commercial structures spending. UCLA predicts that the downturn in declined during that period, yet on balance commercial construction will end by 2012. business investment spending provided a boost Residential construction will expand briskly to growth. Homebuilding provided support to beginning in 2011, with gains continuing into the economy in the third quarter of 2009, but 2012. Business equipment spending will expand was a net drag on the first quarter of 2010. significantly over the next three years.

Government spending was generally neutral in Inflation and Other Rates the recent growth trends, with declines in the volume of state and local government spending The outlook for inflation is buffeted by a number largely offsetting increased spending on the of crosswinds. With the rate of unemployment federal level. Additionally, the trade sector was only edging down to 8.6% by 2012, there is generally mixed in its support of recent growth. considerable slack in the labor force. This slack Only in the fourth quarter did the growth of will place a lid on labor costs. Housing costs are exports exceed the growth of imports. under downward pressures, largely due to the 30- year high in apartment vacancy rates putting For the remainder of 2010 and into 2012, UCLA downward pressures on rents and lower home forecasts moderate growth, with inventories prices and mortgage interest rates increasing the contributing greatly to the projected growth. affordability of homes. UCLA projects slow growth in consumer spending over the forecast period. Cutbacks in Conversely, high levels of liquidity have been commercial construction will be a drag on infused into the financial system through the growth, while UCLA projects sharp gains in the sharp growth in the money supply and the sizable volume of residential construction. UCLA government deficits. Expectations of a brisk predicts essentially no change through 2012 in upswing in global growth caused a run-up in the net exports, especially on an inflation-adjusted prices of many commodities, notably petroleum basis. Total government spending in 2011 and and metals. In the spring of 2010, however, 2012 will be a net drag on economic activity, with concern over the debt crisis in Europe budget deficit reduction a major concern on the contributed to a reduction in the futures prices federal, state and local government levels. for many commodities, even oil,.

CALIFORNIA BANKERS ASSOCIATION -12- CARPENTER & COMPANY T HE ECONOMY: United States

The UCLA inflation forecast reflects a mild investments. The dollar is perceived as a lower upward trend in the GDP price index, rising risk currency. Futures prices for oil plummeted from 1.2% in 2009 to 1.8% in 2012. Inflation, as 22% from $87.15 a barrel in early May, as the measured by the consumer price index, is declining Euro made dollar-denominated crude projected by UCLA to average slightly above oil more expensive for European investors. 2.0% over the next three years, compared with the -0.3% rate in 2009. Core consumer prices, Against the broader exchange rates, the dollar (CPI less food and energy), are projected to rise resumed its downward path absent the “flight-to- 1.5% in 2010, 1.7% in 2011, and 2.1% in 2012. quality” spike that occurred during the credit These forecasts for core consumer inflation crisis of late 2008. The lower dollar has favorable closely relate to the Federal Reserve’s target implications for the competitiveness of U.S. inflation rate of 2.0%. The steep decline in oil made exports in world markets. prices in 2009 coupled with the 2010 oil price rebound are the causes of the wide swings in the US $ Trade Weighted Exchange Index producers’ price index. Jan. 97=100 135 130 125 UCLA Forecast of Inflation Rates 120 115 6% 110 4% 105 2% 100 0% 95 -2% -4% 90 -6% 00 01 02 03 04 05 06 07 08 09 10 -8% -10% 09 10f 11f 12f Financial markets appeared to be conflicted over GDP Prices CPI Core CPI PPI future economic activity. Early in 2010, investors focused upon the inflation implications of a recovering economy that is saddled with excess The debt crisis in Greece placed significant liquidity and high levels of federal debt. The downward pressure on the Euro in April and worsening crisis over the credit-worthiness of May 2010. The dollar-euro exchange ratio fell in Greece and the other European countries, mid-May 2010 to its lowest level since mid-2006. notably the PIIGS (Portugal, Ireland, Italy, The recent $-€ trends have caused foreign Greece, and Spain), attracted an inflow of funds investment funds to flow into the dollar-based into longer-term U.S. Treasuries.

Dollar - Euro Exchange Rates Yield Spread Between 3 Mo and 10 Yr Treasury Rates $-€ $ to One Euro (last observation 5/19/10) % pts (in percentage points) 1.60 3.9 1.55 3.8 1.50 3.7 1.45 3.6 3.5 1.40 3.4 1.35 3.3 1.30 3.2 1.25 3.1 1.20 3.0 07 08 09 10 Oct Nov Dec Jan Feb Mar Apr May

CALIFORNIA BANKERS ASSOCIATION -13- CARPENTER & COMPANY T HE ECONOMY: United States

By mid-May, this international flight-to-quality up more rapidly than long-term instruments to caused the spread between the 3 month Treasury reduce the upward slope of the yield curve. bill and the 10 year Treasury note to decline to the lower levels that had prevailed in May 2009, Bank of America forecasts gradual increases in before an economic recovery was apparent. short-term rates, using 3 month T-bill rates as a proxy. The rise in short-term rates is anticipated The Fed’s policy stance calling for low federal to exceed the rise in 10 year and 30 year Treasury funds rates has kept a lid on short-term interest instruments. rates. Fears about future inflation caused a run- up in longer-term rates until the Euro crisis hit.

U.S. Treasury Rate Forecast Since the beginning of 2010, rates on 6.0% conventional mortgages averaged approximately 5.0% 5%. The prevailing rate is sufficiently low to 3 Mo T-Bill 4.0% 2 Yr T-Note support a brisk sales pace for homes that 3.0% 5 Yr T-Note 10 Yr T-Note conform to agency guidelines, that is, mortgages 2.0% 30 Yr T-Bond at or below $417,000. 1.0%

0.0% Bank of America Following the credit crisis of late 2008 and 09:4 10:1 10:2 10:3 10:4 11:1 11:2 11:3 11:4 Forecast especially since April 2009, risk spreads between AAA and BAA corporate bonds have declined Prospects sharply. Although some risk concerns have abated, the current rate environment has The U.S. economy is at a turning point. encouraged investors to accept greater risk to Expansion is likely to dominate the economic achieve higher yields on invested funds. horizon through 2012. The robustness of that growth, however, is highly dependent on Spread between AAA and BAA Corporate Bonds % difference sufficient job growth to support organic, not 3.9 debt-induced, consumer spending and to allow 3.4 governments to reduce counter-cyclical spending 2.9 and trim their budget deficits. Another deficit

2.4 reduction that would contribute to sustainable growth of the U.S. economy is a reduction in the 1.9 shortfall between exports and imports. A push 1.4 to reassert the competitiveness of U.S.-made 0.9 products in world commerce would greatly 08/08 12/08 06/09 12/09 5/10 improve the long-term prospects for the U.S. economy and its financial industry.

The prospect of continued economic growth is expected to allow the Federal Reserve to modify its current policy stance of exceptionally low The recovery ahead will be sluggish. short-term rates for an extended period. Watch for additional federal stimulus Forecasters differ as to when that upward rate to be enacted when growth rates move will occur and how rapidly short-term rates falter. will rise when policy changes. Generally, expectations hold that short-term rates will move

CALIFORNIA BANKERS ASSOCIATION -14- CARPENTER & COMPANY THE ECONOMY: California

Just when the writer of this report wrote the italicized paragraph that follows, the esteemed Governor of California characterized the state’s economy as the Greece of the United States, and he was not referencing the weather.

What a difference a year makes! Current economic news on the state of California made for more favorable reading than reports released a year ago. Glimmerings of improvement were evident in the labor market conditions. Trends in the housing markets and general construction activity appeared to be off of the bottom. The state’s general revenues were running ahead of forecast, largely due to better than anticipated personal and corporate income tax receipts.

Is it back to forecast drawing board, or will the California economy re-join the rest of the nation in recovery from the recent recession? Time will only tell.

California Budget Dilemma Inside California Economy In mid-May 2010, Governor Schwarzenegger called for spending cuts to close a shortfall of $19 billion in the Budget challenges ...... 15 budget projected for the 2010-2011 fiscal year. The widening in the state’s budget shortfall resulted from the Job trends ...... 16 effects of the recession, especially the impact of high levels of unemployment on state tax revenues. Personal income Consumer spending ...... 16 tax receipts from the April 15 payments were $3 billion below budget projections. Trade ...... 17

The state’s proposed general fund spending was estimated Homebuilding ...... 17 at $83.4 billion for the upcoming fiscal year. Adjusted for population growth and inflation, this level of spending was Commercial building ...... 19 comparable to the expenditures in the 1998 budget. California outlook ...... 20 The proposed solutions to the budget shortfall included $12.4 billion of spending cuts, $3.4 billion obtained from Jobs to grow ...... 20 federal funding, $1.3 billion of alternative funding, and $2.1 billon of shifts in funding and from other revenues. No Inflation higher ...... 20 change was called for in state taxes or tax rates. Increases were made in student fees charged by the California State Slow recovery ...... 21 University and University of California systems. Medi-Cal recipients would be required to pay more for services. Longer-term prospects ...... 22 Other proposals to close the deficit included the elimination of the state’s welfare-to-work program, known as CalWORKS, and the elimination of state subsidies for child care.

CALIFORNIA BANKERS ASSOCIATION -15- CARPENTER &COMPANY T HE ECONOMY: California

Employment 8.9% from the peak level of jobs. The rate of job loss moderated in the second half of 2009, and The rate of unemployment in California did not modest gains in employment were registered in mirror the declines that were recorded for the the first three months of 2010. U.S. rate of unemployment in early 2010. The rate of unemployment for California continued CA Job Loss from Peak to March 2010 Based upon data from 1/2000 to trend higher through March 2010, reaching a 0% 0% record rate of 12.6%. Since the beginning of the -5% -3% -10% -7% -9% recession in December 2007, the number of -15% -12% -11% -14% -12% -20% -16% -17% unemployed Californians grew by 1.3 million. -25% -30% -25% -35% -34% -40% -45% -41% California Jobs, 2008 - YTD 2010 # Jobs Average quarterly change based upon differing surveys 50,000

0 -50,000 The real estate downturn hit California -100,000 particularly hard. The most vivid indicator of the -150,000 slump was the fall-off in construction -200,000 employment. Total construction employment in 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 the state peaked in February 2006. Since then, Household Survey Payroll Survey construction jobs trended sharply lower. Through March 2010, the total loss in Recently the California economy showed signs of construction jobs equaled 392,200, a drop of improvement. Payroll employment grew in the 41%. state during four of the past six months through Manufacturing employment in California was on March 2010, based upon revised data. a steady decline, even before the early 1990s. Nonetheless, California reported the third Since 2000, the manufacturing workforce was cut highest rate of unemployment in the nation, by 37%. The job loss since the beginning of 2007 trailing only Michigan and Nevada. through March 2010 equaled 230,500, a decline of 15.6% relative to the manufacturing work California Construction Employment force in early 2007. 1,000,000 950,000 Consumer Income and Spending 900,000 850,000 800,000 In line with the steep decline in jobs, California 750,000 700,000 personal income fell 2.2% in 2009. This was first 650,000 annual decline in income since 1938. The drop in 600,000 550,000 California personal income resulted from 500,000 reduced income from all sources, except from 04 05 06 07 08 09 10 the economic safety net of transfer payments. Construction industry lost 41% of its work force Wage and salary income declined 4.2% in 2009, Payroll employment in California peaked in July while other income, including income from 2007. Through March 2010, nearly 1.4 million interest and dividends, fell 5.5%. Growth in jobs were lost. That decline represented a loss of transfer payments, specifically unemployment

CALIFORNIA BANKERS ASSOCIATION -16- CARPENTER & COMPANY T HE ECONOMY: California

insurance payments, equaled 12.2% in 2009. Net (000) units CA New Auto Registrations of the rise in transfer payments, adjusted 160 personal income declined 4.2% last year. 150 140 130 2009 Growth in CA Personal Income 120 Cash for By Income Type 110 Clunkers 14% 12.2% 100 12% 90 10% 80 8% 6% 70 4% 60 2% 2006 2007 2008 2009 2010 0% -2% -0.6% -4% -2.5% -6% -4.2% -8% -5.5% Wages & Other Labor Other Income Transfer Social Auto sales spiked again in the summer of 2009, Salaries Income Payments Insurance due to the tax incentives of the federal economic stimulus program known as Cash for Clunkers. California taxable sales declined substantially in Automaker sales incentives contributed to the 2008 and continued even lower in 2009. On an year-end 2009 run-up in sales. According to the annual basis, the 2009 drop in taxable sales most recently available data, car sales recorded exceeded the 2008 percent decline. Favorably, consecutive YOY gains in excess of 16% in the fall-off in sales appeared to end in the second December 2009 and January 2010. half of 2009. Nevertheless, the level of sales in the second half of 2009 was 20% below the peak Trade in sales that was reached in the second half of 2006. For the year, inflation-adjusted taxable Exports of California-made products declined sales declined 9.0% in 2009 following the 7.9% precipitously in late 2008, as the global recession annual decline in 2008. deepened. Export shipments began to pick up from recessionary lows around mid-year 2009. Growth in Real CA Taxable Sales Despite that turnaround, California exports

9.0% declined 18% for all of 2009. Exports of high- 10% 8% 5.9% technology products were down by nearly 16% 6% 3.9% 4% -3.0% -2.3% 2.2% 0.8% compared with 2008. As the global recovery -9.0% 2% 0% began to take hold, California exports registered -2% -2.7% gains in excess of 19% on a year-over-year basis -4% -6% in early 2010. -8% -7.9% -10% 00 01 02 03 04 05 06 07 08 09 Declines were reported in exports to the state’s primary destination countries. The steepest California car sales mirrored the trends in taxable declines were with the North American trading sales. Using auto registrations as a sales proxy, partners of Canada (-20%) and Mexico (-14%). California car sales trended lower beginning in Exports to China fell 7%. early 2006. Sales plummeted in August 2008, reaching a near-term low (based upon the Residential Construction historical data since 1996) in July 2009. Car sales in 2009 and early 2010 exhibited a zigzag pattern. Permits for new California housing units steadily Sales jumped in March 2009 in anticipation of declined since the February 2006 building peak. the state sales tax hike on April 1, 2010. The rate of decline began to flatten in early 2009.

CALIFORNIA BANKERS ASSOCIATION -17- CARPENTER & COMPANY T HE ECONOMY: California

Yet, permits have been relatively flat over the course of the past year. The record low in total The worst of the California permits was reached twice during 2009 in January housing slump may be over. and then again in May. The record low in single- family permits was the January 2009 level of 19,000 units. The record low for multi-family construction was 8,000 units reported for June The value of residential construction permits hit and December 2009. bottom in February 2009 at a record annualized low of $11 billion, down from the $59 billion California Residential Building Permits peak reached in September 2005. This peak to (000 units) trough decline in the dollar value of construction 250 activity equaled 79%. On a YOY basis, residential 200 valuations were consistently negative beginning 150 in March 2006 before turning positive in January 100 2010. Indicative of the recent uneven pattern in 50 residential construction, the March 2010 - valuation was 16% below January 2010. 2006 2007 2008 2009 2010 SFR M-F Existing home sales have picked up recently, due to federal tax incentives and the perception that Year-over-year changes in single-family permits home price declines may be abating. Buyers of a were consistently negative beginning in October home, for which the sale is initiated before April 2005 and did not turn positive until November 30, 2010 and closed by the end of June 2010, may 2009. As of March 2010, single-family building be eligible for a federal tax credit. California permits were up 12% on a YOY basis. The YOY home prices increased 23% through March 2010 trend in multi-family permits was more from the state’s cyclical trough in prices. The spasmodic. Positive YOY readings were recorded March median price of a home sold in California for four months in 2005, six months in 2006, equaled $301,790 according to the California three months in 2007, two months in 2008, and Association of Realtors. This pricing compared not once in 2009. Multi-family permits spiked in with the February 2009 low in prices of $245,170. the first two months of 2010, yet by March 2010 this series was down on a YOY basis. As of According to the May 20, 2010 report on March 2010, total housing permits were up 0.3% mortgage delinquencies from the Mortgage YOY, yet down 87% from peak levels. Bankers Association, California mortgage problems appeared to be abating. California moved from ranking fourth in the U.S. based $ billions Value of CA Residential Building Permits 60 upon the relative volume of foreclosure actions to seventh place. The percentage of California 50 mortgages that were in the process of foreclosure 40 declined over the past year. Notices of default in

30 the first quarter were 4.2% lower than in the prior quarter and were 40.2% below the year- 20 earlier level. Foreclosure activity in the state, 10 however, appeared to be migrating from lower-

0 priced areas toward the mid-priced and high- 2006 2007 2008 2009 2010 priced housing markets.

CALIFORNIA BANKERS ASSOCIATION -18- CARPENTER & COMPANY T HE ECONOMY: California

Commercial Construction California home prices are firming. Despite dire predictions regarding commercial Fewer unsold homes. real estate in California, the current cycle has yet to create a new record low in building, based upon the value of non-residential construction. The low in non-residential construction spending The number of properties that were foreclosed in was recorded in 1995 at an annualized rate of the first quarter of 2010 was down 16% from the $7.4 billion. So far in this cycle, the low in non- prior quarter and was 1.7% below the prior year. residential construction was an annualized rate of Nonetheless, foreclosures continued to account $9.7 billion. for a significant share of existing home sales. In the first quarter of 2010, foreclosure re-sales accounted for 43% of existing home sales in $ billions Value of CA Non-Residential Building Permits California, up from the prior quarter yet down 30 from the 58% share one year earlier. Foreclosures as a share of home sales ranged from a low of 25 14% in San Francisco to a high of 68% in 20

Merced. 15

10 Regionally, the San Francisco Bay Area reported the highest price gain from its recent price trough 5 at 36.4%. The smallest advance was the 8% gain 0 reported for San Luis Obispo County. 2006 2007 2008 2009 2010

The following table summarizes the trough For the current business cycle, the peak valuation to current pricing for California home prices: of non-residential construction occurred in October 2006. Valuations were Median Home Prices Trough Trough 3/2010 Chg consistently negative on Month Price Median from a YOY comparison Region Trough beginning in August San Francisco Bay Area 2/09 $399,040 $544,120 36.4% 2008. The largest YOY Santa Clara County 2/09 445,000 590,000 32.6% decline was 53% in June Monterey Region 2/09 241,130 229,490 24.2% 2009. The YOY Palm Springs Area 4/09 150,140 186,000 23.9% declines edged down to Ventura County 2/09 359,630 444,890 23.7% single-digit red-ink California 2/09 245,170 301,790 23.1% readings in February San Diego County 3/09 326,830 393,600 20.4% 2010. In March 2010 Riverside/SB 4/09 156,840 184,930 17.3% non-residential Orange County 1/09 423,100 493,120 16.5% valuations were 2% High Desert 5/9 106,210 122,970 15.8% below the prior year’s No. Wine Country 2/09 310,950 352,700 13.4% levels and were 57% Los Angeles County 3/09 295,100 329,190 11.6% below the peak in Sacramento County 4/09 167,340 183,330 9.6% spending of October San Luis Obispo County 4/09 338,160 365,380 8.0% 2006. Source: California Association of Realtors

CALIFORNIA BANKERS ASSOCIATION -19- CARPENTER & COMPANY T HE ECONOMY: California

Cutbacks in the building of commercial properties and state-funded public works will Forecast of the California Economy limit the near-term recovery in private, non- residential construction employment. The major Jobs are projected to grow throughout most of source of construction job growth will be in 2010. Nonetheless, the growth in jobs will not be public works projects funded by the federal sufficient to prevent the third consecutive annual economic stimulus program. decline in employment in 2010. The forecast decline in jobs this year is -0.7%. Holding down The need to trim both federal and California job expansion will be the generally sluggish budgets will greatly limit the growth in growth in California homebuilding and consumer government employment. Government accounts spending. The need to trim the California budget for 18% of California’s non-farm employment. will hold down job growth in the government The education and health services sector had and education sectors. been a source of job creation throughout the recession. Budget cuts in education and health Growth CA Employment care and the uncertainty over the federal health 3.0% 3.0% 2.3% care program suggest that job growth in these 1.9% 1.7% 1.2% 2.0% 1.0% 0.9% industries may be limited in the current year. 1.0% 0.1% 0.0% -0.2% -0.3% -1.0% -0.7% With economic activity in California recovering -2.0% -3.0% only slowly, job growth is likely to be sluggish. -4.0% -5.2% -5.0% Typically, job gains encourage former jobseekers -6.0% to renew their job hunting efforts and re-join the 01 02 03 04 05 06 07 08 09 10f 11f 12f ----UCLA Forecast--- labor force. Thus, despite the anticipated growth in jobs, notably in 2011 and 2012, the decline in UCLA estimates that jobs will increase 2.3% in the state’s rate of unemployment will be limited. 2011 and 3% in 2012. Manufacturing UCLA does not project a return to a single-digit employment is projected to stabilize and register jobless rate in California until 2012. According to moderate gains. The support to manufacturing the UCLA forecast, the current jobless rate of employment stems from the expectation of 12.6% may represent the high for this cycle. continued growth in the production of goods for export, particularly for electronics, computers, machinery and transportation equipment. CA Consumer Prices Annual Change 3.9% The exact timing of the recovery in residential 4.0% 3.6% 3.4% construction and in construction employment is 3.5% 3.2% 3.0% 2.6% 2.4% 2.3% difficult to determine from recent trends. Home 2.5% 1.9% 2.0% prices have increased from their cyclical lows. 2.0% 1.5%

With distressed sales accounting for about one- 1.0% half of the state’s home sales, there appears no 0.5% immediate need for a significant increase in new 0.0% -0.5% -0.3% construction to meet homebuyer demand. In 03 04 05 06 07 08 09 10f 11f 12f addition, it is likely that near-term home sales will ---UCLA Forecast--- falter due to the end of the federal homebuyer Home and fuel prices lead to higher inflation. tax credit program.

CALIFORNIA BANKERS ASSOCIATION -20- CARPENTER & COMPANY T HE ECONOMY: California

Despite the generally sluggish economy and the 2010 will mark the fourth consecutive year of tepid growth forecasted, UCLA expressed declining taxable sales, adjusted for inflation. concerns over the renewal of inflationary Growth in real taxable sales is projected to occur pressures. The sizable growth in the money in 2011 and approach 5% in 2012 in line with the supply and large federal budget deficits added growth of real personal income. significant liquidity to the economy in an effort to jump-start economic growth. The appropriate Growth in Real CA Taxable Sales

5.9% removal of such liquidity, however, is a primary 4.9% 6% 3.9% 3.6% requisite for the containment of future inflation. 4% 2.2% 2% 0.8% 0% -0.4% Commodity prices, notably for petroleum-based -2% -3.0% -2.3% -2.7% products, have increased in recent months. Rising -4% costs of basis products and non-labor production -6% -8% -7.9% -9.0% inputs will place upward pressures on the price of -10% finished goods. Therefore, the decline in 01 02 03 04 05 06 07 08 09 10f 11f 12f California consumer prices that occurred in 2009 California consumer spending will rally by 2011. is not anticipated to be repeated throughout the forecast period. According to UCLA, consumer UCLA projects a relatively robust recovery in price inflation will average in excess of 2% over California home building through 2012. The the next three years. anticipated rebound in 2010 produces a doubling in housing starts from current low levels. The CA Personal Income Growth Adjusted for Inflation volume of housing starts is projected to double again by 2012. Although the 167,000 units 4.5% 5% 4.2% 3.7% 3.7% forecast for housing starts would still be 100,000 4% 2.4% units below the 2006 peak rate, it is possible that 3% 2.0% 1.7% 2% 1.3% UCLA is incorporating a bit more robustness to 1% its housing forecast than may be supported by 0% -0.2% -1% -0.5% the underlying financial and demand conditions. -0.9% -2% -3% -2.4% CA Residential Building Permits 01 02 03 04 05 06 07 08 09 10f 11f 12f thousands of units 213 225 209 197 200 167 164 175 The projected growth in jobs will staunch the 140 150 decline in California personal income. Despite 113 125 the moderate recovery, employment gains are 100 82 66 75 anticipated to be sufficient to achieve gains in 36 50

California personal income in 2010. Even with 25 03 04 05 06 07 08 09 10f 11f 12f the headwinds of rising consumer prices, real ----UCLA Forecast---- personal income is projected to increase 3.7% in Latest UCLA forecast trimmed this growth by 11%. 2011 and 4.5% in 2012.

With jobs and income growing, the California The consulting firm, Beaconomics, projects total consumer is anticipated to be in a position to housing permits at 48,150 units in 2010, rising to support renewed growth in retail sales. This 62,400 units in 2011. It is likely that the actual recovery in consumer spending, however, will level of residential building permits will be lack the typical cyclical vibrancy. UCLA projects bounded by the two forecasts.

CALIFORNIA BANKERS ASSOCIATION -21- CARPENTER & COMPANY T HE ECONOMY: California

Prospects for California world’s economic engine more fuel-efficient and more environmentally friendly. California has According the Wells Fargo Economics Group, been at the forefront in pushing initiatives to California technology industry appears poised for improve the climate and to optimize the use of a cyclical recovery, which will lead to more energy and stands to remain in that position. hiring. Northern California, particularly San Jose and San Francisco, stand to gain from this trend. California has unused manufacturing resources, The demand from Asia and Europe is strong for as evidenced by the steady decline in California-made semiconductors and other high- manufacturing employment over the past twenty technology products. Non-technology-related years. California, with 12% of the U.S. manufacturing will be under pressure to reduce population, has 28% of the engineering schools existing capacity due to lower levels of demand. that are rated in the top 25 and has 20% of the In this sector, employers are likely to expand top 25 rated computer science schools. working hours with existing labor forces and hire temporary help, if needed, before hiring California universities and research laboratories permanent employees. have been recipients of grants focused upon technological solutions to climate issues and The economic recovery remains fragile and energy efficiency. Research is likely to spawn the dependent upon fiscal stimulus. Lost wealth from innovations and business applications to address the declines in home equity and investment these critical issues. The geography of California portfolios, combined with double-digit rates of supports green industries, such as the vast unemployment, will dampen consumer spending deserts, which are ideal for solar power in the state. Efforts by consumers to pay down generation. The state’s many wide canyons have existing debt and increase savings will continue given rise to wind farms for energy generation. to curb the growth in retail sales. Many areas of the state have the potential for increased geothermal production. Residential building will edge up from the record low levels of building activity. The commercial The keys to regaining the growth and expansion real estate market in California is still in decline. that has characterized the state from the first Commercial property values have declined, Eureka! is the capitalization of state’s strengths of dragged lower by rising vacancy rates and innovation, creativity, and follow-through. downward pressures on rents.

CA Net Migration The likelihood of increased state and local taxes, the high cost of conducting business in the state, 400 and the slowdown in the growth of population 350 will moderate the state’s longer-run growth 300 potential compared with the growth of recent 250 200 decades. 150 100 Is green sufficient to generate the jobs, 50 0 technology, and product demand to lift California 01 02 03 04 05 06 07 08 09 10f 11f 12f out of its budgetary and economic morass? Although the answer is “probably no”, the state A measure of this long-term success would be the re- will loom large in the development of the newed inflow of residents to California. technology and products that will make the

CALIFORNIA BANKERS ASSOCIATION -22- CARPENTER & COMPANY

2010

THE BANKING INDUSTRY

THE BANKING INDUSTRY: National Trends

Bankers will probably prefer to forget 2009. The year included many records for the banking industry. Most of those records are not ones to savor. The industry reported the lowest earnings in 22 years. Bank assets declined for the first time since 1948. Bank loans declined by a record amount. Asset quality was abysmal. Non-current loans accounted for a record percent of total loans. Despite providing for loss reserves by a record dollar amount, the allowance for loan losses did not keep pace with the rise in problem loans. As many banks faced a drain on capital due to poor asset quality, the number of banking failures reached an 18-year high. With banks failing and very few new banks, the number of commercial banks reached a record low. The number of troubled institutions, however, continued to climb. Overlying these in trends, debate continues over regulatory reform.

Balance Sheet Trends Inside US Banking

The balance sheets of the United States banking industry Assets and loans declined ...... 23 shrunk in 2009. Total assets declined $462 billion, the first annual decline in bank assets since 1948 and by far the Deposits and capital rise ...... 24 largest annual Growth in US Bank Assets Earnings hampered by poor asset decline on 14% quality ...... 25 record. A 12% decrease in 10% 8% Returns of assets and equity loans was 6% lowest since 1987 ...... 27 the driving 4% 2% force 0% Capital ratios increased ...... 27 behind the -2% -4% asset -6% Non-current loans at historic 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 decline. ratios to loans ...... 28

Net loans and leases declined $400 billion last year, the first Loss reserves increase but decline annual drop in lending since 1991 and a record based upon as a % of troubled assets ...... 17 the dollar amount of the decline. The decline in lending was generally broadly based. The largest decline in loans, both in Number of banks decline ...... 29 dollars and on a percentage basis, was commercial and industrial loans. Portfolios of these loans declined $260 Number of problem institutions billion, which represented nearly two-thirds of the decline in at a 17-year peak ...... 29 total loans. Commercial and industrial loans declined 18.3% last year to the lowest annual total since 2006. Banking problems vary greatly by state ...... 30 The decline in real estate loans was centered in the $118 billion reduction in construction and land development loans. The decline in construction loans was partially offset

CALIFORNIA BANKERS ASSOCIATION -23- CARPENTER &COMPANY T HE BANKING INDUSTRY: National Trends

U.S. Bank Performance - 2006-2009 (Dollars in Thousands, % are Averages)

2006 2007 2008 2009 Number of institutions 7,401 7,283 7,086 6,839 Total assets 10,091,959,195 11,175,989,397 12,308,838,844 11,843,784,287 Net loans & leases 5,912,752,635 6,537,181,655 6,681,743,420 6,281,761,044 Loan loss allowance 69,059,839 89,178,677 156,655,028 213,581,829 Allowance/Total Loans (%) 1.15% 1.35% 2.29% 3.29% Total deposits 6,731,411,258 7,309,831,270 8,082,183,258 8,333,158,066 Total equity capital 1,029,930,319 1,142,858,355 1,154,176,472 1,329,432,959 Net Income 128,201,039 97,583,318 15,290,844 8,558,594 Return on Assets 1.33% 0.93% 0.13% 0.07% Return on Equity 13.02% 9.12% 1.31% 0.68% NPAs/Assets 0.52% 0.87% 1.84% 3.36% NPAs 52,478,188 97,231,108 226,482,635 397,951,152 Reserves to NPAs 131.6% 91.7% 69.2% 53.7% Core capital (leverage) ratio 7.86% 7.63% 7.40% 8.54% Total risk-based capital ratio 12.35% 12.21% 12.72% 14.12% % of unprofitable banks 7.54% 11.22% 23.41% 30.30% # of unprofitable banks 558 817 1,659 2,072 % of profitable banks 92.46% 88.78% 76.59% 69.70% # of profitable banks 6,843 6,466 5,427 4,767 Source: FDIC by increases in other real estate lending. Total Annual Growth in Credit Card Outstandings real estate lending was down $16 billion. Lending 35% on single family residential properties led the rise 30% 25% in total real estate lending. Part of the sizable gain 20% 15% in residential mortgages may be attributable to 10% 5% the lack of a robust securitization market for non 0% -conforming home mortgages. Banks originated -5% -10% such mortgages and kept them in portfolio, -15% rather than selling them into a securitization -20% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Banks experienced reduced volumes of consumer Other real estate owned (“OREO”) by banks lending, as a result of a tightening in consumer increased in 2009 to $35.9 billion, a 57% jump and credit card underwriting standards and/or from the prior year and a nine-fold jump over the through consumer cutbacks in borrowing. Credit recent low in 2005. In 2009, banks reported card debt outstanding historically showed wide higher levels of OREO for all property swings in growth, amplified by business cycles classifications. Land and construction properties and trends in interest rates. accounted for nearly 60% of last year’s rise in OREO, and for over 43% of total outstanding

CALIFORNIA BANKERS ASSOCIATION -24- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends

OREO. Bank owned 1-4 family residential Growth in Bank Cash & Securities properties accounted for 27% of bank OREO in 40% 2009. The increase of bank-owned single-family 35% 30% homes moderated in 2009, expanding 11.6% and 25% a contrast to the doubling of residential OREO 20% in both 2007 and 2008. Owned commercial 15% 10% properties increased sharply last year, up 25% 5% over the 2008 level. Commercial real estate at 0% 18% of total OREO represented the third -5% highest concentration of bank OREO. 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Commercial banks experienced sizable increases Commercial banks generated over $250 billion in during 2009 in loans that were 90 days or more total deposits in 2009, substantially lower than past due or were classified as in non-accrual. As the $770 billion increase in 2008. The deposit rise such, non-current loans and leases, that is, loans in deposits was evenly split between interest- 90 days or more past due or on nonaccrual, bearing and non-interest-bearing deposits. increased $158 billion to a record level of $359.4 billion. This level represented a 78% rise over Total bank equity capital grew $155 billion in 2008. Compared with the near-term low for the 2009 to a record $1.31 trillion. Bank common series, non-current loans and leases increased stock increased $1 billion last year following a 790% in the four years since 2005. $9.4 billion rise in 2008. Capital obtained from preferred stock was down slightly in 2009 following the $1.4 billion rise in 2008. Bank Non-current Loans of US Banks $ Billions surplus capital increased $146 billion in 2009, 400 while undivided profits were $11.7 billion higher. 350 300 250 The growth in deposits combined with the rise in 200 equity capital and the decline in lending allowed 150 commercial banks to reduce borrowed funds, 100 FHLB advances, and subordinated debt. Thus, 50 despite the growth in deposits, total liabilities of 0 commercial banks declined $640 billion in 2009. 84 86 88 90 92 94 96 98 00 02 04 06 08 09 Bank Earnings Commercial banks greatly increased their portfolios of short-term, generally lower risk and The U.S. banking industry recorded full-year more liquid investments in 2008 and 2009. profits in 2009, yet the $8.3 billion in net earnings Significant growth was reported in U.S. were the lowest industry earnings since 1987 and Treasuries, agencies and corporate debt. Bank were lower by nearly $120 billion from the record investment securities at market value climbed to earnings of 2006. This fall from the record a record $4.2 trillion. The flight to asset quality, profits represented a 93% decrease in profits capital preservation, and the adequacy of liquidity over the three-year period. If it weren’t for poor from invested funds were major factors asset quality, however, bank earnings improved contributing to the sharp rise in bank investment last year. But that’s like saying if not for the huge portfolios. hole in the bow, the ship was seaworthy.

CALIFORNIA BANKERS ASSOCIATION -25- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends

The rate of provision for loan and lease losses 2009, largely propelled by higher salary and equaled $231.0 billion in 2009, a rise of $78 benefit costs. In 2008, bank salary expense billion over 2008 and $205 billion higher than the declined $3.3 billion. The $13.1 billion rise in provision taken during the record profit year of salary expense in 2009 placed these expenses $10 2006. Net charge-offs of loans increased over the billion above the prior high in salary costs. The course of 2009, which had the effect of holding rise in salaries occurred despite the 2.8% decline down the increase in the loss allowance despite in the number of bank employees. Could these the generally even rate of provision over the four trends be tied to post-TARP bonus payouts and quarters of 2009. By year-end 2009 the provision severances for the fired bankers? was at a record level. Bank operating income before credit loss provision increased $66.1 billion relative to 2008. $ billions US Bank Provision for Loan Losses The 2009 operating income before provision was 250 $37.7 billion higher than the 2006 level. After 200 provision, however, pre-tax net operating income 150 in 2009 was $6.7 billion below the 2008 level and 100 $168.2 billion below the level in 2006. Income in

50 2009 benefited relative to 2008 from reduced

0 securities losses and lower applicable income 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 taxes. Bottom line profits, however, were lower due to an extraordinary net loss of $3.8 billion in Relatively low interest rates contributed to a 2009 in contrast to the $5.4 billion extraordinary reduction in the interest income of commercial gain in the previous year. banks in 2009. Conversely, the interest rate environment contributed to a decline in interest A major negative to earnings, which prompted expense. In 2009, bank interest income declined the high levels of loan loss provision, was the $48.2 billion, while interest expense fell $88.3 steep rise in the net charge-offs of loans. In 2008, billion. Thus, net interest income increased $40 net charge-offs was a record $88.8 billion. The billion last year. Contrasting 2009 with the record new record, based upon 2009 data, was $173.1 profit year in 2006, interest income was $129 billion, a 95% increase over 2008 and a more billion lower in 2009 than in 2006. Interest than seven-fold increase over the level of charge- expense was $185.7 billion lower than in 2006. offs taken in 2006. The percentage of These trends produced $56.7 billion more net unprofitable banks rose to 30% of the U.S. interest income last year than in 2006. banking industry.

Total non-interest income rebounded in 2009, following the $17 billion decline in non-interest Unprofitable Banks to Total US Banks income in 2008. Banks reported a step-up in 35% deposit account service charge income, trading 30.3% account gains and fees, and additional non- 30% 23.4% interest income. This latter category of non- 25% interest income expanded $26.2 billion in 2009, 20% 15% led by gains in net servicing income, net gains on 11.2% 10% 8.1% 7.5% 7.5% 7.3% 6.6% 6.3% the sale of loans, and other non-interest income. 6.0% 5.9% 5% 99 00 01 02 03 04 05 06 07 08 09 Non-interest expense increased $22 billion in

CALIFORNIA BANKERS ASSOCIATION -26- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends

Ratio Analysis of the banking industry over the period from 1993 to 2006. U.S. banks reported a yield from earning assets in 2009 of 4.69%, down from 5.33% in 2008 and Returns on equity for the U.S. banking industry 6.53% in 2006. Favorably, the cost of funding had a comparable pattern, with a sizable earning assets fell to 1.19%, compared with reduction in 2008 and 2009 following the 2.11% in 2008 and 3.13% in 2006. The yield ratio prolonged period of exceptional returns to declined 64 basis points in 2009. The cost of equity. In 2009, the return on equity equaled funds fell 92 basis points. Thus, the net interest 0.68%, down from 1.31% in 2008 and from margin of U.S. banks expanded 29 basis points 13.02% in 2006. The 2008 and 2009 returns on over 2008 to a 2009 ratio of 3.50%. The 2006 net equity would be considered to be sub-par returns interest margin equaled 3.39%. on assets based upon the ROA performance from 1993 to 2006. In 2009, non-interest income as a percent of earning assets rose 41 basis points. The 2009 ratio equaled 2.36%, compared with 1.95% in Return on Equity U.S. Banks 2008. The 2009 ratio for non-interest income was 18% off by 23 basis points from the 2006 ratio. 16% 14% 12% Return on Assets 10% U.S. Banks 8% 1.6% 6% 1.4% 4% 2% 1.2% 0% 1.0% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0.8% 0.6% 0.4% 0.2% In contrast to the poor earnings ratios, capital 0.0% ratios for the U.S. banking reflected significant 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 improvement based upon a variety of measures. The core capital or leverage ratio averaged 8.55% in 2009, up from 7.40% in 2008 and 64 basis Non-interest expense increased as a percent of points above the second highest leverage ratio earning assets in 2009. The expense ratio had during the period from 1992 to 2009. Risk-based declined 15 basis points in 2008 to 3.32%. In capital ratios ended 2009 at record high rates for 2009, non-interest expense to average assets Tier 1 risk-based capital at 11.38% and for total equaled 3.43%. Nonetheless, the 2009 ratio was risk-based capital at 14.15%. below the expense ratios of 2006 and 2007. Despite these healthy average capital ratios, there U.S. banks reported a return on assets of 0.07% were 209 U.S. financial institutions that reported in 2009, following the 0.13% return in 2008. The leverage capital ratios below 5% at the end of 2009 return on assets was the lowest return since 2009. A number of these financial institutions 1987. As illustrated by the chart above, returns were counted among the failed banks in the first for the past two years were exceptionally low, four months of 2010. especially in contrast to the previous fifteen years. Conversely, this chart presented a validation of the superior and consistent returns

CALIFORNIA BANKERS ASSOCIATION -27- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends

Leverage Ratio classified as non-current, fueled by the 16.2% U.S. Banks ratio of non-current construction and land 9.0% development loans. Non-current single-family 8.5% residential loans equaled 8.0% of the mortgage

8.0% portfolio. Non-current commercial real estate loans equaled 3.9% of all CRE loans, and 5% of 7.5% all apartment loans were non-current. In addition 7.0% to the steep increase in non-current real estate

6.5% loans, commercial and industrial loans reported a 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 doubling in the percent of non-current loans, from 1.7% in 2008 to 3.5% last year. Asset Quality Non-current assets plus other real estate owned Nearly every measure pointed to the poor asset rose to 3.36% of total assets in 2009. This quality of the U.S. banking industry. Non-current reading was up from the 1.84% rate in 2008. In loans reached a record ratio to total loans in 2009, other real estate owned equaled 0.30% of 2009. Non-current loans equaled 5.53% of total total assets, up from 0.18% in 2008. loans. Based upon 25 years of available data, the previous record high ratio for non-current loans Banks made provision to their loss reserves at to loans was 3.70%, which was reported in 1991 record levels during 2009 and achieved a loss and 1992. The current ratio exceeded the old allowance ratio equaled to 3.27% of total loans. record by 183 basis points. In 2009 the ratio of This rate was 98 basis points above the 2008 non-current loans to total loans worsened from level. Despite the high allowance to loan ratio, the 2.95% ratio of 2008 due to the combination the loss allowance fell to 59.2% of non-current of the rise in non-current loans and the decline in loans, down from 77.8% in 2008 and 144.4% in total loans. 2006. Typically, reserves are maintained at a level well in excess of non-current loans in order to cushion earnings against future loan losses. That Non-Current Loans to Total Loans U.S. Banks allowance cushion was deflated by the record

6% amount of loan charge-offs and the continuing

5% rise in non-current loans.

4% Another indicator of asset quality difficulties was 3% the high level of loan charge-offs. Net charge- 2% offs equaled 2.60% of total loans in 2009, up 1% from 1.32% in 2008 and from the 2006 ratio of 0% 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0.41%. Charge-offs affected earnings by reducing the reserve against future loan losses and Record high for this asset quality measure necessitating increased provisions against future losses. The earnings coverage of net charge-offs plummeted from a more than 9 times coverage in The rise in non-current loans occurred across the 2006 to less than 1.5 times coverage in 2009. This major lending categories. Problems with real latter ratio implied that the earnings of banks was estate loan began to intensify in 2008, and these eroding due to high levels of loan charge-offs. problems worsened significantly in 2009. Nationwide, 7.5% of all real estate loans were

CALIFORNIA BANKERS ASSOCIATION -28- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends

At the end of 2009, 415 commercial banks banks were immediately closed. Thus, only 22 reported a Texas ratio in excess of 100. The ongoing commercial banks were opened in 2009. Texas ratio measures non-performing assets as a percent of capital plus loan loss reserves. A ratio The new bank formations were located in in excess of 100 meant that a bank had more thirteen states. There were five new Texas banks problem assets than their safety net of capital and and three banks that opened in Virginia. reserves allocated for future losses. In addition, California, Florida and Michigan each had two there were 663 more banks with a Texas ratio new banks. The other states with new banks between 50 and 100, implying that the potential opening in 2009 were Illinois, Kentucky, exists for asset quality problems to exert Massachusetts, New York, North Carolina, significant future stress on capital positions for Oklahoma, South Carolina, and Washington. these banks. The rate of unassisted banking mergers (i.e., U.S. Banking Population traditional mergers) equaled 157 in 2009, the lowest annual total since 1980. A number of The United States banking industry shrank in financial institutions consolidated banking assets and in number during 2009. In terms of charters, including such large institutions as Third the number of banks, that declining trend Fifth Bank and Wells Fargo Bank. A number of continued through April 2010. At year-end 2009, the Capitol Bancorp subsidiary banks in Arizona there were 6,839 commercial banks, which was and California were consolidated into one the lowest number of banks in the history of the charter. FDIC and nearly 53% fewer banks than the 1984 Number of FDIC Problem Institutions peak in the banking population. $Blns of Assets Institutions BIF and SAIF Insured

1,600 900 1,426 800 Number of US Commercial Banks 1,400 700 1,200 1,063 600 1,000 15,000 775 500 800 702 14,000 572 552 400 600 416 13,000 # of failures shown 300 318 305 400 252 200 12,000 193 200 117 92 94 114136116 11,000 84 79 80 52 50 76 100 10,000 0 0 9,000 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09-09-09-09-10- 1 2 3 4 1 8,000 Number Assets ($ billions) 7,000 6,000 5,000 83 85 87 89 91 93 95 97 99 01 03 05 07 09 As of December 2009, the FDIC reported that there were 702 banks on their problem Record low # of banks since the start of the FDIC institution list, representing more than $400 billion in assets. The number of problem According to the FDIC, only 29 new banking institutions and the volume of problem assets are charters opened in 2009, the fewest number of the highest since 1992. new banks since 1942. Five of the 29 new banks were established by the FDIC to affect the The consolidation of the banking industry orderly shutdown of failed banking operations, continued in 2009, especially the trend toward and four of these five banks were subsequently consolidating the assets of the industry into a closed. Two banks were formed as interim banks smaller number of financial institutions. The big in association with mergers, and these interim bank domination of the industry remained in

CALIFORNIA BANKERS ASSOCIATION -29- CARPENTER & COMPANY T HE BANKING INDUSTRY: National Trends place. The share of total assets held by the reported full-year losses, while six states had nation’s ten largest banks climbed in 2009 to ROAs over 1%. 54.1%, a gain of 4 basis points over 2008. Banks over $10 billion in assets accounted for more The states with the more profit-challenged than 80% of all assets. financial institutions generally reported rapid growth in and high concentrations of

Share of U.S. Bank Assets Held by 10 Largest Banks construction and other real estate lending. Many of the states with losses reported high 54.1% concentrations of commercial real estate as a 60% 50% percent of capital. These same states typically 40% 23.0% reported the highest ratios of non-accrual loans 30% 17.0% to total loans. 20% 10% 0% The statewide rankings provide insight into the 1992 1996 2009 locations where capital may be challenged by high levels of commercial real estate loans and In 1992, the three largest U.S. commercial banks non-accrual loans. Evidence of the earnings accounted for 11.6% of total assets. In 2009, the challenge presented by poor asset quality is share held by the three largest banks exceeded Nevada, where 11% of loans were deemed to be 36.6% of all banking assets. These trends were a non-accrual and industry ROA was –2.6%. clear validation of the trend toward the concentration of the banking industry within a 2009 Negative ROA limited number of institutions. 2009 ROA over 1% 2009 2009 Regional Trends State ROA% State ROA% NV -2.6% LA 1.4% According to the State Profile reports prepared AZ -2.2% WV 1.2% by the FDIC, nine states reported that their FL -1.3% AK 1.2% combined insured depositories, both banks and ID -0.8% NM 1.1% savings associations, experienced full-year losses WA -0.7% OK 1.1% during 2009. Conversely, insured depositories in GA -0.7% five states reported full-year returns on assets CA -0.5% that exceeded 1%. In 2008 only five states OR -0.4% SC -0.1% Highest Non-accrual Lowest Non-accrual Highest CRE Lowest CRE Loans to Total Loans Loans to Total Loans Concentration to Capital Concentration to Capital State Nonaccrual/ State Nonaccrual/ State CRE/Capital State CRE/Capital Loans Loans WA 421.7% DE 41.4% NV 11.0% NE 2.0% AZ 412.4% NE 60.7% GA 7.2% TX 2.1% FL 408.6% SD 63.6% ID 7.1% SD 2.1% OR 383.6% ND 78.5% FL 6.9% ND 2.2% CA 382.4% IA 93.8% MD 5.8% MA 2.3% GA 364.9% KS 95.0% AZ 5.7% IA 2.3% NC 351.3% UT 97.1% WA 5.6% KS 2.4% AL 342.1% RI 144.6% SC 5.4% HI 2.5% SC 336.6% OK 151.7% DE 5.3% AL 2.5% VA 321.9% IL 162.9% UT 5.3% NH 2.5%

CALIFORNIA BANKERS ASSOCIATION -30- CARPENTER & COMPANY THE BANKING INDUSTRY: California Trends

The California banking industry faced another challenging year in 2009. The industry experienced its second full year of losses. The percentage of unprofitable banks widened considerably. Total assets grew marginally. Total and net loans declined. Favorably, despite two consecutive years of losses, the California banking industry reported increased equity capital and compiled record high ratios based upon risk-based capital measures. The California banking industry achieved stepped-up growth in total deposits and reduced its dependence on borrowings.

Poor asset quality weighed heavily upon the performance of the California banking industry in 2009. Despite declines in loans, California banks increased their reserves to protect against future loan losses. The increase in loan loss reserves, however, fell well short of the sizable increases in non-performing assets. Thus, the reserve coverage was reduced to approximately to 50% of non-performing assets.

Balance Sheet Trends Inside California Banking

California bank assets increased 0.1% in 2009 to $480.4 Assets up, loans down ...... 31 billion, up from $408.0 billion at year-end 2008. This low growth in assets resulted largely from the effects of banking Bank capital grows ...... 33 failures and the net reduction of 17 in the number of California banks. At year-end 2009, the population of Losses continued for second California banks was 271. consecutive year ...... 33

Bank failures loomed importantly in the asset growth Return ratios reflect the worst trends. The failures of the three California subsidiary banks earnings in 43 years ...... 34 of First Bank of Oak Park meant that nearly $11 billion of assets were transferred to the Ohio-based U.S. Bank, N.A. Asset quality deteriorated ...... 35 The failure of First Bank of Beverly Hills resulted in the liquidation of $1.3 billion in banking assets. The failure of Reserves did not keep pace with Temecula Valley National Bank affected the transfer of $1.3 troubled assets ...... 35 billion of assets to a North Carolina-based bank. Hence, over $13 billion in banking assets were directly transferred Non-current loan ratio is not as out of the California banking industry. In addition, there bad as nationally ...... 36 were eleven in-state banking takeovers involving nearly $23 billion in pre-failure banking assets. Although most of these Banking population dwindled .. 36 deposits were transferred to the California-based acquirers, often the assets were marked down to current market Regional perspective ...... 37 values, with a proportion of the assets kept by the FDIC for future liquidation. Approximately $36 billion of California Prospects ...... 38 banking assets were affected by failures in 2009.

CALIFORNIA BANKERS ASSOCIATION -31- CARPENTER &COMPANY T HE BANKING INDUSTRY: California Trends

California Bank Performance - 2006-2009 (Dollars in Thousands, % are Averages) 2006 2007 2008 2009 Number of institutions 279 288 288 271 Total assets 350,268,234 377,170,111 408,005,093 408,413,852 Net loans & leases 240,811,265 269,567,646 289,615,665 270,151,629 Loan loss allowance 2,745,866 3,187,621 5,036,436 6,809,781 Allowance/Total Loans (%) 1.13% 1.17% 1.71% 2.46% Total deposits 257,575,343 256,628,500 267,325,156 287,574,961 Total equity capital 41,912,849 45,284,460 46,281,887 48,286,491 Net Income 4,238,701 2,666,080 (796,211) (756,078) Return on Assets 1.28% 0.74% -0.21% -0.20% Return on Equity 10.63% 6.17% -1.82% -1.65% NPAs/Assets 0.59% 0.69% 1.92% 3.25% NPAs 2,066,583 2,602,474 7,833,698 13,273,450 Reserves to NPAs 132.9% 122.5% 64.3% 51.3% Core capital (leverage) ratio 6.97% 9.25% 9.08% 9.52% Total risk-based capital ratio 12.53% 12.33% 12.49% 14.44% % of unprofitable banks 19.00% 25.69% 51.74% 62.36% # of unprofitable banks 53 74 149 169 % of profitable banks 81.00% 74.31% 48.26% 37.64% # of profitable banks 226 214 139 102 Source: FDIC Net loans at California banks declined nearly $20 residential loans to limit the decline in total real billion in 2009, a drop of 6.7%. A sizable increase estate loans held by California banks. in single-family mortgages nearly offset the steep Commercial and industrial loans and consumer declines in construction loans and multi-family loans declined sharply last year.

Trends in California Bank Lending Loans ($000)

2008 2009 % Change Construction & land development 32,234,836 19,067,416 -40.9% Commercial real estate 81,478,631 78,187,600 -4.0% Multi-family residential 13,944,895 11,091,831 -20.5% 1-4 family residential 72,523,419 86,139,001 +18.8% Total real estate 204,539,126 199,052,894 -2.7% Commercial & industrial 59,739,700 50,951,242 -14.7% Consumer 16,259,340 14,773,071 -9.1%

Source: FDIC

CALIFORNIA BANKERS ASSOCIATION -32- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends

In addition to reduced lending, California banks and increase loan loss reserves were the primary reported lower levels of trading account assets, reasons for the continued losses. Other income bank premises and fixed assets, and goodwill. components showed improvement over the prior Other real estate owned, however, increased in year. Net interest income and non-interest 2009. California banks greatly increased cash income increased marginally relative to 2008. balances held in interest-earning accounts and in securities. These combined investment categories Increased “additional” non-interest income offset increased 33.8% in 2009. reductions in income from fiduciary activities, service charges on deposit accounts, and trading CA Bank Assets account income. Additional non-interest income $ bln 408.2 408.4 climbed $626 million over the 2008 level. The 410 377.2 390 $772 million in gains from purchase accounting 370 350.4 arising from the acquisition of failed banks for 350 320.3 330 the following six California institutions more 310 290 than offset reductions in other income categories. 270 250 2005 2006 2007 2008 2009 Gain on Bank purchase ($000) The funding for the increased cash and securities East West Bank $471,009 was achieved through an over $20 billion rise in California Bank & Trust 152,715 California bank deposits, combined with the Pacific Western Bank 66,989 decline in loans. The 7.6% growth in deposits City National Bank 38,206 compared with a gain of 4.2% in 2008. In Wilshire State Bank 21,679 addition, California banks increased total equity Sunwest Bank 21,669 capital by more than $2 billion. This growth in Total 772,267 deposits and equity, coupled with essentially no growth in assets, allowed borrowings by Non-interest expenses declined in 2009 relative California banks to decline, largely in the to 2008. The elimination of the failed California categories of other borrowed funds and federal banks contributed to a reduction in non-interest funds purchased. expenses. Since 2006, the number of California bank employees declined by more than 10,000 workers. More than one-half of the work force CA Bank Equity $ bln decline occurred in 2009. Bank failures and the 48.3 46.5 transfer of ownership for some California-based 50 45.3 45 42.1 branches to out-of-state banks contributed to the 37.9 40 4.1% decline in occupancy expense in 2009.

35

30 California banks reported lower securities losses

25 than in 2008. The industry reported an 2005 2006 2007 2008 2009 extraordinary gain in 2009 versus the extraordinary loss recorded in the previous three Earnings years. Offsetting the favorable trends in earnings was significantly higher provision expense. The California banks in 2009 suffered losses for the 2009 provision for loan losses equaled $7.6 second consecutive year. Provisions to replenish billion, up $2.6 billion from the $5.0 billion

CALIFORNIA BANKERS ASSOCIATION -33- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends provision taken in 2008. Net charge-offs of assets the 2006 ratio. Non-interest expense fell to last year equaled $5.1 billion, compared with the 2.87% of earning assets in 2009, a decline of 27 $3 billion of charge-offs taken in 2008. basis points over 2008 and a decline of 33 basis points from the 2006 ratio.

Earnings at California Banks Loss provision increased to 2.20% of earning $ bln assets in 2009, an 80 basis point rise over 2008 8 and 214 basis points above the 0.16% ratio of 7 6 2006. Loan losses and the provisions taken 5 against future losses were the primary reasons for 4 3 the continued losses for the California banking 2 industry. 1 0 -1 Total return on assets averaged -0.20% in 2009, 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 marginally better than the -0.21% return in 2008. Due to increased equity capital, the negative The California banking industry experienced a return on equity narrowed from -1.82% in 2008 full year loss of $756.1 million. That statistic to -1.65% in 2009. The historical record for represented only the earnings of banks still in statewide banking data extended only to 1966. operation at the end of the year. Accounting for Based upon that series, prior to 2008, California the earnings of the banks that failed, the sum of banks reported a full-year loss only in 1987 at a the quarterly earnings in 2009 aggregated to an level of $561 million. The 2008 and 2009 adjusted annual loss of $2.4 billion. respective losses of $796 and $756 million were the worst earnings performance in the 43 year Ratio Analysis historical record.

California banks in 2009 reported improved Return on Average Assets ratios for many earnings categories compared California Banks with 2008. Although the yield on earning assets 2.0% 1.5% declined 95 basis points in 2009, the drop in the 1.0% cost of funding earning assets was 96 basis points 0.5% to allow a 1 basis point increase in the net 0.0% interest margin. The 2009 net interest margin -0.5% -1.0% data of 3.80% presented an inferior result 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 compared with the 4.44% rate of 2006. In 2006, the yield on earning assets equaled 7.07%, 201 CA Banks <$1B basis points above the 5.06% ratio of 2009. The cost of funding earning assets for 2009 was a relatively low 1.26%, yet the decline from 2006 Despite the earnings drain, California banks equaled 137 basis points, accounting for the 64 reported increased equity capital. More equity on basis point erosion in the net interest margin in an asset base that grew only marginally allowed the comparison from 2006 to 2009. the capital ratios of California banks to improve. The leverage ratio increased to 9.52% in 2009 , Non-interest income to earning assets of up from 9.08% in 2008. The 2009 leverage ratio, California banks climbed to 1.19% in 2009, up however, was 15 basis points below the 9.67% from 1.06% in 2008 and up one basis point from ratio in 2006. The ratios for Tier 1 risk-based

CALIFORNIA BANKERS ASSOCIATION -34- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends capital at 12.67% and total risk-based capital at the 2008 level. Reserves equaled 2.5% of total 14.42% climbed 194 and 195 basis points, loans in 2009, up from the 1.7% ratio in 2008. respectively, in 2009 to achieve record highs. The increased reserve against future loan losses, however, failed to keep pace with the rise in the Asset Quality non-performing assets of California banks. Non- performing assets of California banks exceeded Non-performing assets held by California banks $13 billion, compared with $6.5 billion in 2008 increased rapidly beginning in 2007. California and $2 billion in 2006. Reserves fell to 51% of banks reported in 2009 that 4.23% of their loans non-performing assets, implying that earnings were 90 days past due or were placed on non- and correspondingly equity capital may be accrual status. This ratio is the highest since 1992. impaired if the pace of charge-offs and asset The worsening in loan delinquencies was deterioration increases. experienced across most loan categories. Consumer lending was the only exception to the Based upon year-end 2009 data, 133 out of the up trend in non-current loans. 271 California banks reported that reserves equaled less than 50% of non-performing assets Real estate lending, particularly lending on and loans 90 days or more past due. There were construction, evidenced the steepest increase in 39 banks reporting that their reserves did not the ratio of non-current loans to total loans. At even cover one-quarter of their troubled assets. year-end 2009, 4.9% of real estate loans held by The lowest reserve coverage reported by any California banks were classified as not current. bank at year-end 2009 was 12.6%. The number This is an increase from 2.7% in 2008 and 0.9% of banks reporting more than 100% reserve in 2007. The ratio of non-current business coverage and/or no problem assets equaled 59, lending, specifically commercial & industrial or 22% of the state’s banks. These reserves and loans, rose sharply in 2009 to 3.0% of such loans problem asset conditions do not bode well for up from 1.6% in 2008 and 0.7% in 2007. Non- many banks in the state and could deter an current consumer loans increased to 0.7% of immediate return to historic levels of California consumer loans in 2009, edging up profitability.

Percent CA Loans Non-Current The level of other real estate owned (“OREO”) 4.9% 5% 4.2% held by California banks climbed from $252 4% million in 2006 to over $1.5 billion in 2009, a six- 3.0% 3% fold increase over this three-year period. At year- end 2009, 163 California banks reported holding 2% 0.7% OREO, while 18 of these banks had 3% of their 1% assets classified as OREO. The highest ratio of 0% OREO to assets at year-end was 6.9%. Total Loans C&I Loans Real Estate Loans to Loans Individuals 2006 2007 2008 2009 Nearly 60% of the OREO held by California banks at year-end 2009 resulted from the Construction loans major source of loan problems foreclosure of construction and land development loans, a type of property that had slightly from the 0.5% ratio in 2008. undergone considerable decline in market value California banks increased their provisions for over recent years. The next largest category of loan losses during 2009. Provisions expanded foreclosed properties was commercial real estate $1.8 billion, accounting for a 35% increase over at nearly 28% of the OREO. Single-family homes

CALIFORNIA BANKERS ASSOCIATION -35- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends and apartments comprised the remaining 12% of 2009 Non-Current Loans to Total Loans outstanding OREO. 25% 20% California banks increasingly restructured 15% troubled debt in an effort to avoid foreclosures 10% and/or the complete charge-off of the loan. At 5% year-end 2009, there were 115 California banks 0% that reported some volume of troubled debt restructures (TDRs), and 13 of these banks reported that restructured debt accounted for US CA more than 3% of their total assets. The highest such ratio was 9.4%. By loan product, California banks reported a higher percentage than the national average in There were at April 30, 2010 18 remaining non-current construction loans. At 20.9%, the California banks that reported a year-end 2009 California ratio of non-current construction loans Texas ratio in excess of 100, with the highest averaged 472 basis points above the comparable ratio at 289, or problem assets at nearly three national ratio. For the other classifications of times the ratio of capital and reserves. There loans, however, California banks had lower non- were an additional 50 banks with a Texas ratio in current loan ratios. The California bank non- excess of 50, implying that a number of banks current loan ratios for single-family residential may face stress on capital and reserves from mortgages and consumer loans were substantially outstanding problem assets. Conversely, there below the national experience. were 63 California banks reporting a Texas ratio below 10, including 23 banks with a ratio of zero. Banking Numbers

Non-Current Loans to Total Loans The number of California headquartered banks declined by 17 institutions in 2009 to a total of 6% 271, the fewest number of California banks since 5% 2004. The change was the result of the addition 4% of two banking charters, which was offset by two 3% traditional mergers and 17 failures. The new 2% charter count was the lowest since 1994. 1% Traditional mergers were the fewest since 1984,

0% while failures were the most since 1993. The 17 84 89 94 99 04 09 failures were resolved through the FDIC merger US California resolution of 15 institutions, the payout of one failed bank, and the voluntary dissolution of a The California banking industry compared bank in lieu of regulatory takeover. favorably in its ratio of non-current loans to total loans relative to the U.S. ratio. The California As of April 30, 2010, there were no new bank ratio at 4.23% was 130 basis points below the charter applications pending in California. The national average. Typically, California carried a last year when no bank opened in California was ratio above the national average; this favorable 1968. There were six pending applications differential was the widest in the 25-year history involving change of control actions, as of April of the series. 30, 2010. Five of the six control applications involved the infusion of capital. Only one

CALIFORNIA BANKERS ASSOCIATION -36- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends application represented an acquisition of a Number of CA Banks by Years of Operations financial institution by an existing banking institution. Year to date through April 30, 2010, 100 88 76 73 80 69 71 71 there were three failures of California commercial 56 banks and one closure of a thrift association. 60 51 With those changes, there are 268 California 40 headquartered banks and industrial loan 20 companies, as of month-end April 2010. 00 <5 yrs 5<15 yrs 15<30 yrs >30 yrs 2008 2009 CA Banks Gained/Lost

30 26 Banking by Major Counties 23 21 20 17 12 9 9 The state of California has 58 counties. Twenty 10 2 six of these counties reported a 2009 population 1 2 2 0 -1 -1 -2 base in excess of 250,000 residents. These 26 -4 -6 -3 -10 counties ranged in population size from 257,000 -14 -16 residents to over 10.4 million. Nine California -20 -18 -17 -23 -20 counties reported more than 1 million residents. -30 -29 02 03 04 05 06 07 08 09 The county of San Francisco reported the Charters Mergers Fail/Convert/Close greatest population density at over 18,000 Fewest new banks since 1994 residents per square mile. San Francisco, as the headquarters city for the state’s largest From 2000 to 2009, the number of California commercial banks, reported the highest volume banks were reduced by 11%. Despite this decline of deposits per person ($153,656) and per branch in the bank population from 304 to 271, the ($478 million). The second highest county for number of bank branches in the state steadily deposits per person ($35,404) was Marin County. increased. At year-end 2009, there were 7,255 The lowest ratio of deposits per person ($6,392) banking offices in California, a gain of 52% over was the largely agricultural Merced County. the number of branches in 2000. Merced County also reported the lowest deposits per branch at $47 million. The second highest In 2009, more than 62% of the 271 California deposit per branch reading was the $161 million banks reported losses, up from the 52% share in average for Santa Clara County. 2008 and the 19% share in 2006. The percent of banks reporting earnings gains increased by Los Angeles County, as the state’ largest county, nearly 20 basis points in 2009 from a ratio of reported the most headquartered banks, as of 17.7% in 2008 to 37.6% last year. mid-year 2009, at 78 institutions and largest number of branches at 1,787. The highest Due to fewer new banks in 2008 and 2009, the population per bank branch was reported for average age of all California banks increased last Kern County at 8,779 residents, while the year to 20.4 years, up from 19.8 years in 2008. smallest population per branch ratio was reported Last year produced a reduction in the number of for Placer County. Among the counties with banks with less than 5 years and more than 30 more than one headquartered bank, the highest years of operating history. population per bank was 412,875 for San Bernardino. The lowest population per

CALIFORNIA BANKERS ASSOCIATION -37- CARPENTER & COMPANY T HE BANKING INDUSTRY: California Trends headquartered bank was San Luis Obispo County 2009. Other real estate owned and non-accrual at a per bank population of 45,304 residents. assets declined in the fourth quarter. Construction loan portfolios declined due to a Prospects for California Banking reduction in loan originations and the judicious write-off of non-performing debt. If asset As 2009 ended, promising developments were deterioration continues its moderating pattern evident for the California banking industry. and loan charge-offs abate, the need to provide Banks achieved quarterly profitability in the for loss reserves will lessen and limit the drain on fourth quarter, the first positive quarterly reported earnings. earnings since the first quarter of 2008. Banks over $10 billion in assets accounted for the The California banking industry generated majority of the fourth quarter profits, in large increased core deposits in 2009, allowing the measure, boosted by the $471 million in industry to reduce borrowings and provide for favorable accounting treatment from the East increased liquidity to support future lending. The West Bank acquisition of the San Francisco- industry increased capital despite the earnings based United Commercial Bank. losses reported in 2009. The California banking industry is generally well-capitalized, a trend that The deterioration in the asset quality of should support asset expansion in the future. California banks abated during the second half of

California Counties over 250,000 in population

2009 HQ Population per Deposits per Population Deposits Branches Banks Sq Mile Branches HQ Banks Person Branch ($ mlns) 2009 ($) ($ mlns)

Los Angeles 10,409,035 245,078 1,787 78 2,563 5,825 133,449 23,545 137 San Diego 3,208,466 52,224 635 25 764 5,053 128,339 16,277 82 Orange 3,155,393 72,123 719 27 3,997 4,389 116,866 22,857 100 Riverside 2,127,612 20,802 345 10 295 6,167 212,761 9,777 60 San Bernardino 2,064,375 16,564 263 5 103 7,849 412,875 8,024 63 Santa Clara 1,872,049 56,640 352 7 1,450 5,318 267,436 30,256 161 Alameda 1,568,903 29,927 301 11 2,127 5,212 142,628 19,075 99 Sacramento 1,439,985 34,169 240 6 1,491 6,000 239,998 23,729 142 Contra Costa 1,068,759 24,116 239 4 1,485 4,472 267,190 22,564 101 Fresno 948,928 9,249 155 6 159 6,122 158,155 9,747 60 San Francisco 851,485 130,836 274 17 18,233 3,108 50,087 153,656 478 Ventura 841,001 14,210 184 7 456 4,571 120,143 16,897 77 Kern 834,041 5,562 95 3 102 8,779 278,014 6,669 59 San Mateo 750,436 20,529 171 4 1,671 4,389 187,609 27,356 120 San Joaquin 692,202 7,339 119 7 495 5,817 98,886 10,602 62 Stanislaus 527,004 5,681 102 1 353 5,167 527,004 10,780 56 Sonoma 490,231 10,221 130 5 311 3,771 98,046 20,849 79 Tulare 445,251 3,850 67 5 92 6,646 89,050 8,647 57 Monterey 433,887 6,724 90 3 131 4,821 144,629 15,497 75 Santa Barbara 432,981 9,557 107 6 158 4,047 72,164 22,073 89 Solano 426,431 3,266 66 2 514 6,461 213,216 7,659 49 Placer 344,565 6,803 124 3 245 2,779 114,855 19,744 55 San Luis Obispo 271,821 4,878 81 6 82 3,356 45,304 17,946 60 Santa Cruz 270,882 4,225 54 2 608 5,016 135,441 15,597 78 Marin 259,772 9,197 91 4 500 2,855 64,943 35,404 101 Merced 257,373 1,645 35 0 133 7,354 NA 6,392 47

CALIFORNIA BANKERS ASSOCIATION -38- CARPENTER & COMPANY 2010

THE CHANGING ENVIRONMENT

THE CHANGING ENVIRONMENT: Banking Failures

Banking failures remained a regular feature in the financial press. Typically, the root causes of the recent failures were aggressive real estate lending, notably on construction and land development projects, with the loans funded with brokered deposits. When the real estate roller coaster was sent plummeting to earth, resultant loan charge-offs impaired, if not eliminated, bank capital. From January 2008 through April 30, 2010, 269 financial institutions failed. Bidding interest in the failing banks ran the gambit from tepid to intense. The following section discussed the major trends in the recent banking failures.

Failure Developments

In early 2008, the environment radically changed for the Banking Failures banking world. The 229 banking failures that occurred from the beginning of 2008 through April 30, 2010 affected $602 229 failures from 1/08-4/10 ...... 39 billion in banking assets. The failure count involved 198 banks with $190.9 billion in assets and 31 thrifts with $412.4 Concentrated in Southeastern, billion in assets. Pacific Coast, Great Lakes, Sand States ...... 40 To provide a perspective, the FDIC from 1934 through 2007 resolved 2,976 failed institutions involving $679 billion Failures of all ages and sizes ...... 44 in assets and supported assisted transactions involving 579 institutions and over $266 billion in assets. During the Resolution strategies ...... 45 decade of 1981-1990 alone, the there were 2,396 failures and assisted transactions involving nearly $670 billion in assets. Statistical appendix ...... 46

The pace of recent failures accelerated over the past 2-1/3 years, with 25 failures occurring in 2008, 140 in 2009, and 64 # of failures US Recent Banking Failures by Month Failed Assets in $blns in the first four months of 2010. Embedded in these recent 30 50 25 40 trends was the largest banking failure on record, Washington 20 30 15 Mutual Bank with over $300 billion in assets. This cycle also 20 10 had the most costly banking failure, IndyMac with an 5 10 estimated cost to the FDIC of $12.8 billion. 0 0

Over its 66 year history, the FDIC deployed innovative Number Assets ($B) structures to achieve what the agency terms “least costly US Banks Number of Financial Institution Failures CA Banks resolutions”. The large number of failures during the savings 600 30 and loans crisis of the late 1980’s to the early 1990’s 500 25 introduced a special-purpose agency, called the Resolution 400 20 Trust Corporation, which was formed to achieve the orderly 300 15 200 10 sale and resolution of the assets and subsidiary interests of 100 5 failed institutions. 0 0 34 39 44 49 54 59 64 69 74 79 84 89 94 99 04 09 US CA 2010 through 4/30

CALIFORNIA BANKERS ASSOCIATION -39- CARPENTER &COMPANY T HE CHANGING ENVIRONMENT

The current banking crisis required immediate investors to capitalize a small bank. The group action, especially beginning in the second half of infused $300 million in new capital. This bank, 2008. When a major institution faced a liquidity State Bank & Trust, became the winning bidder crisis or run on deposits, the FDIC moved of six failed banks in June 2009 and two more quickly to close the failing institution. As the banks in December 2009. The acquiring bank volume of loan defaults increased and mounting grew from $33 million in December 2008 to $2.5 losses greatly eroded bank capital, the FDIC billion one year later. Earnings for State Bank & structured a bidding process for failing banks to Trust climbed from a $361,000 loss in 2008 to a identify a successor depository when the profit of $19.2 million in 2009. institution failed. Growing investor interest, earning gains, and From the second half of 2008 through early often immediate stock price jumps of the 2009, failed bank acquisitions usually entailed the acquiring banks prompted the FDIC to impose sale of deposits, often insured deposits only and terms to reduce its resolution costs. One such selected assets, primarily cash and marketable term was the Value Appreciation Instrument, securities. As the amount of failed assets grew, essentially a stock warrant that the FDIC could the FDIC introduced the whole bank purchase exercise during the first 25 days following the and assumption structure and included a bidders’ acquisition to capital some of the value created incentive whereby losses from the disposition of by a rise in stock prices following an FDIC- the failed assets would be shared between the assisted transaction. Another change was the FDIC and the assuming institution. elimination in April 2010 of the threshold that would trigger the 95%-5% loss sharing. In By the middle of 2009, the whole bank addition, banking regulators apparently turned transaction with loss share accounted for the down potential bidders when the goodwill majority of the failed bank acquisitions. The associated with purchase accounting represented original terms of the loss-share provision too high a ratio of total capital. included an earn-back of the discount applied to the failed institution assets. Losses in excess of Geography of Failures the discount would then be shared 80% by the FDIC and 20% by the acquiring institution, up to Since early 2008 through April 30, 2010, there a threshold valuation. Past that threshold value, have been 229 banking failures. These failures the FDIC would accept 95% of the losses. included institutions in 38 states and the territory of Puerto Rico. The twelve states that avoided Incorporated in this acquisition structure was an the Friday night closings, also known as FDIC accounting gain that could be realized as earnings takeovers, were: Alaska, Connecticut, Delaware, in the quarter when the acquisition occurred. The Hawaii, Maine, Mississippi, Montana, New loss protection and the one-time accounting gain Hampshire, North Dakota, Rhode Island, heightened bidding interest in failed banks. A Tennessee, and Vermont. number of shelf bank charters were formed, with funding pledged by various sources. One such The failures were concentrated in the Sunbelt, group supported the acquisition of BankUnited, Great Lake States, Sand States, and the Pacific FSB in Coral Gables, Florida, with a management Coast. An overarching cause of the banking team led by John Kanas, former Chairman and failures resulted from rapid growth in CEO of North Fork Bank. construction and real estate lending, especially in areas that experienced a steep run-up and a Joseph Evans, a Georgia banker, led a group of subsequent sharp fall back in the valuation of real

CALIFORNIA BANKERS ASSOCIATION -40- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

estate. Failures also were concentrated in areas Nevada in tenth position) accounted for nearly with high rates of unemployment, and associated three-quarters of the 229 banking failures. increases in loan defaults and business closings. The following are characteristics of the economic Throughout the country and especially in the and banking conditions in the high failure states once hot real estate markets, construction activity based upon comparisons of data at year-end 2008 increased rapidly in anticipation that the past and year-end 2009: growth in population would be maintained. To fuel the rise in construction lending, banks relied • High and rising unemployment rates. Six heavily upon brokered deposits, a high cost of the states (CA, FL, GA, IL, MI, NV) funding strategy that was effective as long as reported double-digit jobless rates in the construction loans continued to pay off. As the fourth quarter of 2009. housing market cratered and home sales slowed • Declining home prices.. All eleven states and ceased, construction loans stopped reported two consecutive years of performing and went into default. Land declines in home prices, and three states purchased at the height of the real estate boom (AZ, FL, NV) reported two consecutive quickly lost value. Foreclosures rose. Boom years of double-digit rates of price communities became ghost communities. declines. • Eroding asset quality of headquartered Georgia remained the epicenter of the banking banks. Only MO reported a lower ratio failures, with 37 of the 229 failures. Illinois and of past due and non-accrual loans to total California were in second and third position in loans, based upon the change in the ratio the ranking of states with the most banking from 2008 to 2009. NV banks reported a failures. The top ten states based upon the double-digit ratio. Loan losses to total number of banking failures (there were eleven in loans increased in all eleven states and the top ten due to the tie between Arizona and were up sharply for six (AZ, CA, FL, GA, NV, WA). Banking Failures: Top 10 States • Declining leverage ratios. Nationwide, the Ranked by Number of Failures statewide average leverage ratios were January 2008 to April 30, 2010 well above the level considered to be well % of capitalized. Only 18 of the 50 states and State # Total three (MI, MO, TX) of the top banking failure states reported year-over-year Georgia 37 16.2% increases in average leverage ratios. Illinois 32 14.0% • Five states (IL, MI, MO, MN, TX) of the California 26 11.4% eleven highest failure states reported full- Florida 25 10.9% year bank profits in 2009. Three states Minnesota 11 4.8% (AZ, FL, NV) had losses that exceeded Washington 10 4.4% 1% of average assets. • Texas 8 3.5% Five (AZ, CA, FL, GA, WA) of the states on the top ten states for failures reported Missouri 8 3.5% commercial real estate concentrations in Michigan 7 3.1% excess of the 300% to capital regulatory Arizona & Nevada tied 6 2.6% guidelines. Total of Top Ten 170 74.2% Total # of Failures 229 100.0%

CALIFORNIA BANKERS ASSOCIATION -41- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Washington Mutual, with over $300 billion in The $12.8 billion DIF cost associated with the assets, elevates the state of Washington to the failure of IndyMac accounted for nearly 56% of top state based upon the value of failed assets the total DIF costs incurred by California-based seized. The Washington Mutual failure exceeded financial institutions and 17.4% of the total DIF the combined asset totals for the other 228 costs incurred to date. Failures in the following banking failures since 2008. However, its sale to Banking Failures: Top 10 States JP Morgan was recorded without a reported loss to the FDIC’s Deposit Insurance Fund (DIF). Ranked by Cost to DIF Therefore, most of the following analysis is based January 2008 to April 30, 2010 upon a review of all failures, net of Washington Cost % of Mutual. State ($mm) Total California 22,952 31.4% California topped the list of states with the highest dollar volume of assets seized, with nearly Florida 9,295 12.7% $100 billion and more than 1/3 of the total assets Georgia 6,842 9.4% seized. Georgia, which reported the most number Puerto Rico 5,284 7.2% of failures, ranked fifth among the top ten states Illinois 4,709 6.4% based on total assets seized. Due to the Colonial Alabama 4,462 6.1% Bank failure, Alabama ranked second in failed Texas 3,813 5.2% assets, despite having only four total failures. Three failures on April 30, 2010 propelled Puerto Washington 2,973 4.1% Rico to the top ten list of failed assets and to the Ohio 2,411 3.3% top of the list based on the highest per-bank cost Nevada 2,112 2.9% to the DIF. Total of Top Ten $64,851 88.7%

Banking Failures: Top 10 States Banking Failures: Top 10 States Ranked by Failed Assets Ranked by Average Cost per Failure January 2008 to April 30, 2010 January 2008 to April 30, 2010 Assets % of Avg Cost % of State ($mm) Total State ($mm) Total California $99,968 33.7% Puerto Rico $1,761 2.4% Alabama $27,643 9.3% Alabama $1,116 1.5% Florida $27,209 9.2% California $883 1.2% Illinois $25,121 8.5% Arkansas $833 1.1% Georgia $20,541 6.9% Ohio $804 1.1% Puerto Rico $20,420 6.9% Texas $19,465 6.6% Indiana $788 1.1% Ohio $12,115 4.1% Texas $477 0.7% Washington1 $9,188 3.1% Florida $372 0.5% Nevada $7,294 2.5% Nevada $352 0.5% Total of Top Ten $268,964 90.8% Washington1 $297 0.4% Total of All Failures1 $296,292 100.0% Total of Top Ten $7,681 10.5% 1 Net of WaMu 1 Net of WaMu

CALIFORNIA BANKERS ASSOCIATION -42- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT ten states accounted for nearly 89% of the total failures were institutions that started since 2000, DIF costs so far for the current cycle. including 12% that started in 2004 or later. This concentration of relatively new banks on the Arkansas and Indiana made the list of top ten failure list prompted the FDIC to lengthen the states based upon the average cost per failure. required period for more detailed review of new Both states reported only one failure, but the banks from three to seven years. costs of these two failures were more than double the average of the costs per institution, New banks were relatively less costly to the DIF, due to the lack of competitive bids. in part because these banks generally were smaller than the average failed banks. Through Institutional History April 30, 2010, the average size of failed banks, net of WAMu, equaled $1.3 billion. The failed The 229 financial institutions that failed between banks that opened between 2004 and 2007 January 2008 and April 30, 2010 represented the averaged $159 million in total assets. full spectrum based upon asset size, years of operations, and primary regulator. There was a The banks opened from 2000 to 2003 averaged 150 year span between the oldest and youngest $392 million in total assets. Failure costs as a failed bank. The oldest failed bank was percent of assets and deposits, however, were established in 1857, while the youngest bank, generally higher for the banks of the current which opened in 2007, failed during its second decade. These newer banks often relied upon full year of operations. The median start year for wholesale and brokered deposit generation to the failed banks was 1984. fund rapid growth in construction leading. The core value of the deposit franchise carried a Financial institutions opened since 2000 lower valuation than the relative costs of the accounted for fewer than 15% of all depository transactions for older institutions. institutions. Yet, nearly 25% of the banking

Cost of Bank Failures By Establishment Date January 2008 to April 30, 2010 Failures ($ millions) Failure Cost to Share of DIF Cost Year of Establishmen # Assets Deposits Cost Assets Deposits DIF Cost per Bank

Pre-1900 20 $332,160 $207,593 $5,029 1.5% 2.4% 6.9% $251 Pre-1900, net WA Mu 19 $25,139 $19,333 $5,029 20.0% 26.0% 6.9% $265 1900-1949 47 $87,877 $66,725 $22,228 25.3% 33.3% 30.4% $473 1950-1979 33 $64,980 $50,107 $14,197 21.8% 28.3% 19.4% $430 1980-1994 42 $81,387 $65,172 $20,386 25.0% 31.3% 27.9% $485 1995-1999 31 $21,236 $18,370 $5,638 26.5% 30.7% 7.7% $182 2000-2003 29 $11,362 $10,036 $4,177 36.8% 41.6% 5.7% $144 2004-2007 27 $4,294 $4,100 $1,446 33.7% 35.3% 2.0% $54

TOTAL, net WA Mu 228 $296,273 $233,842 $73,100 24.7% 31.3% 100.0% $321

2000 and later 24.6% 5.3% 6.0% 7.7%

CALIFORNIA BANKERS ASSOCIATION -43- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

of Bank United in Florida. Western Bank, The size of failed banks ranged from $13 million Frontier Bank and R-G Premier Bank all failed to $307 billion. The largest number of failed on April 30, 2010 and made the top ten list of banks had less than $100 million in assets. most costly failures. Considering that institutions under $100 million accounted for 35% of all depository institutions, Top Banking Failures their 20% share in the number of failures was Based upon Cost to DIF disproportionately low. Conversely, financial January 2008 to April 30, 2010 institutions in the $1 to $10 billion range Institution Asset Size Cost to DIF Share of represented, as of year-end 2009, 7% of all banks ($Millions) ($ Billions) DIF Cost and thrifts. The failures of institutions in the $1 to $10 billion range equaled 19% of all failures, Indy Mac Bank (CA) $30,699 $12.8 17.4% nearly three times their representative share. In Bank United FSB (FL) $13,111 $5.7 7.8% Colonial Bank (AL) $25,455 $4.0 5.5% terms of failure costs, as a share of the total DIF Western Bank (PR) $11,940 $3.3 4.5% cost, the ratios were directly proportional to size. Guaranty Bank (TX) $13,464 $2.8 3.8% The bigger the bank, the larger the cost share. AmTrust Bank (OH) $11,439 $2.3 3.1% United Commercial Bank (CA) $10,895 $1.4 2.0% Costs as a percent of assets and deposits Frontier Bank (WA) $3,500 $1.4 1.9% Downey S&LA (CA) $12,779 $1.3 1.8% suggested that banks in $100 to $200 million R-G Premier Bank (PR) $5,920 $1.2 1.7% range yielded higher relative costs among the Silverton Bank, NA (GA) $4,157 $1.0 1.4% various size classifications. Institutions in the $10 to $100 billion range reported the highest cost to Total of Top Ten $143,360.3 $37.2 50.9% deposit ratios, and the third lowest of the seven United Commercial Bank was the first banking categories in terms of costs per assets. failure of a TARP recipient. United Commercial had received $299 million under the TARP Ten institutions accounted for more than 50% of program. Through April 30, 2010, two other the total cost incurred to date by the DIF. The TARP-recipients have failed: Pacific Coast cost associated with the IndyMac failure was National Bank ($4.2 million in TARP) and Park more than double the next highest expense, that Avenue Bank ($11 million in TARP). Allegations

Cost of Bank Failures By Size of Institution January 2008 to April 30, 2010 Failures ($ millions) Failure Cost to Share of DIF Cost Size # Assets Deposits Cost Assets Deposits DIF Cost per Bank

Under $100 million 46 $2,604 $2,440 $746 28.6% 30.6% 1.0% $16 $100-200 Million 39 $5,726 $5,265 $1,795 31.3% 34.1% 2.5% $46 $200-300 Million 28 $6,756 $6,225 $1,885 27.9% 30.3% 2.6% $67 $300-500 Million 31 $12,316 $10,896 $3,151 25.6% 28.9% 4.3% $102 $500 Million-1 Billion 32 $21,996 $19,124 $6,197 28.2% 32.4% 8.5% $194 $1-10 Billion 44 $117,090 $96,401 $25,692 21.9% 26.7% 35.1% $584 $10-100 Billion 8 $129,783 $93,491 $33,635 25.9% 36.0% 46.0% $4,204

TOTAL, Net WAMu 228 $296,272 $233,842 $73,100 24.7% 31.3% 100% $321

CALIFORNIA BANKERS ASSOCIATION -44- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT of fraud have been claimed based upon alleged Resolution Strategies misinformation presented in the TARP applications for United Commercial Bank and The FDIC pursued a variety of structures to Park Avenue Bank. resolve failed banks. Since the middle of 2009, whole bank acquisitions with asset loss-sharing There were 160 failures of state-chartered became the primary vehicle for the resolution of institutions over the period from January 2008 to failures. This strategy provided lower costs April 30, 2010. State charter bank failures relative to assets and deposits and allowed assets represented nearly 70% of the number of failures to remain in the banking system, without the and 23% of the failed total assets. The state bank transfer of assets to the FDIC. The FDIC failures accounted for 48% of the overall cost to utilized the direct payout of insured deposits and the DIF, with average costs to assets of 25% and the delayed resolution of assets in failures when to deposits of 30.7%. Georgia state banks there were no bidders for a failing institution or accounted for the largest number of the state- when a threat of a deposit run on the bank was charter failures. imminent.

There were 38 failures of national banks over this The initial resolutions were deposit only same period. The national bank failures share acquisitions. The disposition of assets was ratios were 16.5% of the total number of failures, handled by the FDIC, either through loan sales 8.3% of the total assets, and 11.8% of the total or the creation of a private-public sales structure. cost to the DIF. The average failure cost to assets Although used less frequently since the first for OCC banks was 17.1% and was 11.8% to quarter of 2009, there were recent banking deposits. failures where the better solution proved to be the sale of the deposits only. For example, Corus There were 31 thrift failures or 14% of the total Bank was acquired through the assumption of number of failures. Including WAMu, assets deposits only. That bank’s loan portfolio of represented 68.4% of the total assets seized. The condominium construction loans was sold OTS closures accounted for 40% of the total through a private-public funding vehicle to cost to the DIF. With WAMu, the OTS failures Starwood, a real estate development group. carried the lowest cost to assets and deposits at Through this structure, the FDIC was able to 7% and 11%, respectively. Without WAMu, OTS realize a lower cost resolution for Corus Bank institution failures carried the highest cost to than had been originally estimated. assets at 27.98% and to deposits at 38.5%.

Type of Resolution January 2008 to April 30, 2010

Failures ($ millions) Failure Cost to Share of DIF Cost Resolution Type # Assets Deposits Cost Assets Deposits DIF Cost per Bank Deposits only 47 $62,054 $46,841 $21,024 33.9% 44.9% 28.8% $447 Payout 16 $13,348 $11,572 $4,711 35.3% 40.7% 6.4% $294 Whole Bank 166 $527,892 $363,690 $47,365 9.0% 13.0% 64.8% $285 Whole Bank w/o WA Mu 165 $220,870 $175,429 $47,365 21.4% 27.0% 64.8% $287

TOTAL 229 $603,294 $422,103 $73,100 12.1% 17.3% TOTAL w/o WA Mu 228 $296,273 $233,842 $73,100 24.7% 31.3%

CALIFORNIA BANKERS ASSOCIATION -45- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Cost of Bank Failures January 2008 to April 30, 2010 Failures ($ millions) Failure Cost to Share of Chartering Agency # Assets Deposits Cost Assets Deposits DIF Cost STATE CHARTERED INSTITUTIONS

Alabama 3 $26,179 $20,691 $4,222 16.1% 20.4% 5.8% Arizona 3 $762 $660 $181 23.8% 27.5% 0.2% California 15 $27,264 $19,703 $4,766 17.5% 24.2% 6.5% Colorado 1 $1,775 $1,496 $863 48.6% 57.7% 1.2% Florida 14 $6,681 $5,809 $1,970 29.5% 33.9% 2.7% Georgia 31 $13,991 $12,656 $5,066 36.2% 40.0% 6.9% Illinois 26 $8,951 $8,481 $2,646 29.6% 31.2% 3.6% Indiana 1 $2,840 $2,254 $788 27.7% 34.9% 1.1% Kansas 1 $511 $421 $115 22.6% 27.4% 0.2% Louisiana 1 $243 $208 $38 15.7% 18.3% 0.1% Massachusetts 1 $268 $233 $23 8.5% 9.8% 0.0% Michigan 6 $2,657 $2,355 $1,017 38.3% 43.2% 1.4% Minnesota 9 $1,036 $943 $260 25.1% 27.6% 0.4% Missouri 5 $271 $232 $85 31.4% 36.7% 0.1% Nebraska 1 $135 $91 $46 33.6% 50.2% 0.1% Nevada 5 $3,883 $3,552 $1,508 38.8% 42.4% 2.1% New Jersey 2 $211 $201 $33 15.6% 16.4% 0.0% New York 3 $792 $760 $88 11.1% 11.5% 0.1% North Carolina 2 $1,459 $1,171 $380 26.0% 32.4% 0.5% Oklahoma 1 $103 $98 $25 24.3% 25.5% 0.0% Oregon 4 $1,463 $1,371 $302 20.7% 22.0% 0.4% Puerto Rico 3 $20,420 $14,840 $5,284 25.9% 35.6% 7.2% South Dakota 1 $211 $232 $79 37.2% 33.8% 0.1% Texas 5 $5,828 $4,372 $984 16.9% 22.5% 1.3% Utah 5 $3,149 $3,080 $1,238 39.3% 40.2% 1.7% Washington 9 $9,188 $8,097 $2,973 32.4% 36.7% 4.1% Wisconsin 1 $327 $273 $99 30.1% 36.1% 0.1% Wyoming 1 $70 $67 $32 45.4% 47.9% 0.0% ALL STATE CHARTERED 160 $140,669 $114,347 $35,108 25.0% 30.7% 48.0%

CALIFORNIA BANKERS ASSOCIATION -46- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Cost of Bank Failures January 2008 to April 30, 2010 Failures ($ millions) Failure Cost to Share of Chartering Agency # Assets Deposits Cost Assets Deposits DIF Cost FEDERALLY CHARTERED INSTITUTIONS

OCC CHARTERED Arkansas 1 $1,896 $1,816 $833 43.9% 45.9% 1.1% Arizona 3 $373 $322 $84 22.6% 26.1% 0.1% California 6 $15,720 $12,685 $2,234 14.2% 17.6% 3.1% Colorado 2 $161 $115 $27 16.6% 23.3% 0.0% Florida 5 $4,318 $3,545 $795 18.4% 22.4% 1.1% Georgia 5 $6,406 $5,294 $1,708 26.7% 32.3% 2.3% Illinois 5 $16,021 $14,735 $1,965 12.3% 13.3% 2.7% Kansas 2 $827 $675 $153 18.5% 22.7% 0.2% Minnesota 2 $113 $105 $15 13.5% 14.5% 0.0% Missouri 2 $120 $105 $18 14.9% 17.0% 0.0% Nevada 1 $3,411 $3,038 $604 17.7% 19.9% 0.8% Ohio 1 $70 $67 $17 24.3% 25.6% 0.0% South Carolina 1 $602 $516 $130 21.6% 25.2% 0.2% Texas 2 $172 $147 $29 16.6% 19.5% 0.0% ALL OCC 38 50,209 43,164 8,610 17.1% 19.9% 11.8%

OTS CHARTERED Alabama 1 $1,464 $1,164 $241 16.4% 20.7% 0.3% California 5 $56,983 $38,327 $15,952 28.0% 41.6% 21.8% Florida 6 $16,210 $11,577 $6,530 40.3% 56.4% 8.9% Georgia 1 $145 $132 $68 47.2% 51.9% 0.1% Iowa 1 $504 $394 $101 20.0% 25.5% 0.1% Idaho 1 $491 $371 $176 35.8% 47.4% 0.2% Illinois 1 $148 $110 $98 65.9% 88.5% 0.1% Kansas 1 $735 $620 $298 40.5% 48.0% 0.4% Kentucky 1 $518 $463 $144 27.7% 31.1% 0.2% Maryland 3 $955 $840 $245 25.6% 29.1% 0.3% Michigan 1 $13 $13 $8 60.8% 62.2% 0.0% Missouri 1 $167 $171 $46 27.7% 27.0% 0.1% New Mexico 1 $1,252 $775 $202 16.1% 26.1% 0.3% Ohio 2 $12,045 $9,097 $2,394 19.9% 26.3% 3.3% Pennsylvania 1 $13 $13 $10 75.2% 74.6% 0.0% Texas 1 $13,464 $11,984 $2,800 20.8% 23.4% 3.8% Virginia 1 $203 $179 $38 18.5% 21.0% 0.1% Washington 1 $307,022 $188,261 $0 0.0% 0.0% 0.0% West Virginia 1 $104 $101 $38 36.5% 37.7% 0.1% OTS 31 $412,435 $264,591 $29,387 7.1% 11.1% 40.2% OTS, net WAMu 30 $105,414 $76,330 $29,387 27.9% 38.5% 40.2%

TOTAL STATE & FEDE 229 603,313 422,101 73,106 12.1% 17.3% NET OF WAMu 228 296,292 233,841 73,106 24.7% 31.3%

CALIFORNIA BANKERS ASSOCIATION -47- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Cost of Bank Failures By State, regardless of Charter January 2008 to April 30, 2010 Failures ($ millions) Failure Cost to Share of DIF Cost State # Assets Deposits Cost Assets Deposits DIF Cost per Bank Alabama 4 $27,643 $21,855 $4,462 16.1% 20.4% 6.1% $1,116 Arizona 6 $1,135 $982 $266 23.4% 27.0% 0.4% $44 Arkansas 1 $1,896 $1,816 $833 43.9% 45.9% 1.1% $833 California 26 $99,968 $70,714 $22,952 23.0% 32.5% 31.4% $883 Colorado 3 $1,935 $1,611 $890 46.0% 55.2% 1.2% $297 Florida 25 $27,209 $20,930 $9,295 34.2% 44.4% 12.7% $372 Georgia 37 $20,541 $18,082 $6,842 33.3% 37.8% 9.4% $185 Idaho 1 $491 $371 $176 35.8% 47.4% 0.2% $176 Illinois 32 $25,121 $23,326 $4,709 18.7% 20.2% 6.4% $147 Indiana 1 $2,840 $2,254 $788 27.7% 34.9% 1.1% $788 Iowa 1 $504 $394 $101 20.0% 25.5% 0.1% $101 Kansas 4 $2,073 $1,717 $566 27.3% 33.0% 0.8% $142 Kentucky 1 $518 $463 $144 27.7% 31.1% 0.2% $144 Louisiana 1 $243 $208 $38 15.7% 18.3% 0.1% $38 Maryland 3 $955 $840 $245 25.6% 29.1% 0.3% $82 Massachusetts 1 $268 $233 $23 8.5% 9.8% 0.0% $23 Michigan 7 $2,670 $2,368 $1,025 38.4% 43.3% 1.4% $146 Minnesota 11 $1,149 $1,048 $276 24.0% 26.3% 0.4% $25 Missouri 8 $558 $508 $149 26.7% 29.4% 0.2% $19 Nebraska 1 $135 $91 $46 33.6% 50.2% 0.1% $46 Nevada 6 $7,294 $6,590 $2,112 28.9% 32.0% 2.9% $352 New Jersey 2 $211 $201 $33 15.6% 16.4% 0.0% $17 New Mexico 1 $1,252 $775 $202 16.1% 26.1% 0.3% $202 New York 3 $792 $760 $88 11.1% 11.5% 0.1% $29 North Carolina 2 $1,459 $1,171 $380 26.0% 32.4% 0.5% $190 Ohio 3 $12,115 $9,164 $2,411 19.9% 26.3% 3.3% $804 Oklahoma 1 $103 $98 $25 24.3% 25.5% 0.0% $25 Oregon 4 $1,463 $1,371 $302 20.7% 22.0% 0.4% $76 Puerto Rico 3 $20,420 $14,840 $5,284 25.9% 35.6% 7.2% $1,761 Pennsylvania 1 $13 $13 $10 75.2% 74.6% 0.0% $10 South Carolina 1 $602 $516 $130 21.6% 25.2% 0.2% $130 South Dakota 1 $211 $232 $79 37.2% 33.8% 0.1% $79 Texas 8 $19,465 $16,503 $3,813 19.6% 23.1% 5.2% $477 Utah 5 $3,149 $3,080 $1,238 39.3% 40.2% 1.7% $248 Virginia 1 $203 $179 $38 18.5% 21.0% 0.1% $38 Washington 10 $316,209 $196,358 $2,973 0.9% 1.5% 4.1% $297 West Virginia 1 $104 $101 $38 36.5% 37.7% 0.1% $38 Wisconson 1 $327 $273 $99 30.1% 36.1% 0.1% $99 Wyoming 1 $70 $67 $32 45.4% 47.9% 0.0% $32

TOTAL 229 $603,313 $422,101 $73,106 12.1% 17.3% NET OF WAMu 228 $296,292 $233,841 $73,106 24.7% 31.3%

CALIFORNIA BANKERS ASSOCIATION -48- CARPENTER & COMPANY THE CHANGING ENVIRONMENT: Commercial Real Estate

Financial experts hold that commercial real estate will be the “next shoe to drop” in the financial crisis. The subprime mortgage meltdown was viewed as the catalyst for the credit crisis and the ensuing recession that had its roots in 2007. Financing commercial real estate had similarities to sub- prime mortgage lending, such as over-valuation of property and sloppy underwriting. Problems were compounded by cyclical declines in the demand for commercial space and hence in revenues.

Many community banks were not major participants in the origination and syndication of subprime mortgages. Community banks, however, tended to have high concentrations of their loan portfolios in commercial real estate and, thus, may be major participants in downdrafts affecting commercial real estate and its financing.

Market Overview Commercial Real Estate Commercial real estate (CRE) valuations are highly cyclical, Gyrations from peak to trough are amplified by the general Values of commercial real estate business cycle. Due to the protracted period from the under downward pressure ...... 49 conceptualization of a project to completion, commercial properties often come on-stream when the economy is Lower values degrade collateral entering a recession. Thus, the changing economic financed ...... 50 environment from start to completion and reductions in cyclical demand can negatively affect the economics of Commercial real estate financing commercial projects, and the cash flow supporting the trends ...... 50 underlying debt. US banks and CRE trends ...... 52 National Index -- All Commercial Properties Moodys/REAL Commercial Property Price Index Index Value: 2001=1 California banks and CRE 2.1 trends ...... 53 1.9 Prospects ...... 54 1.7

1.5

1.3 CRE Exposure by Size of Bank 1.1

All Banks 0.9 <$100 M Yr: 01 02 03 04 05 06 07 08 09 $100M-$1B Commercial real estate during the current business cycle $1-$10 B experienced an unprecedented plunge in value. Innovations >$10B in the financing of commercial properties, including the CRE Exposure 0% 10% 20% 30% 40% 50%

CALIFORNIA BANKERS ASSOCIATION -49- CARPENTER &COMPANY T HE CHANGING ENVIRONMENT securitization of commercial real estate mortgage- inadequate to provide sufficient cash flow for backed securities (CMBS) combined with debt financing. The decline in operating income generally liberal underwriting criteria, contributed also negatively affected the implied value of to a rapid run-up in the commercial property commercial properties. The combination of the valuations, especially from 2005 to early 2007. real estate asset price bubble, the credit Moodys/REAL Commercial Property Price contraction, and the recession compounded Index, measures the quarterly change in the value problems in the commercial real estate market. of commercial properties, based upon an index Concerns heightened that defaults of CRE loans value of 1 as of 2001. The national all-properties will be more significant in the years ahead. index nearly doubled from the first quarter of 2001 through the first quarter of 2007. From the Asset Quality Trends 2007 peak, the index declined 40% through the third quarter of 2009 before edging up in late In today’s environment, loans written near the 2009. height of the CRE price bubble, i.e., 2006 and 2007, typically carried debt levels that exceeded The surge in the CRE market during the mid- 50% to 80% of current property values. Often 2000s was fueled by accommodative financing the property owner generated sufficient cash flow conditions that flooded the real estate sector with to maintain current debt service payments, unprecedented capital. This environment drove particularly for loans with interest only or property values for commercial real estate to negative amortization payment features. The historic highs and capitalization “cap” rates to underlying value of the subject property, near-historic lows. Cap rates, which measures however, fell significantly below the outstanding current property value, based on future operating debt balance, which is due at loan maturity. income, fell from a range of 8% to 10% in 2001 These underwater properties will continue to to a low of 5% to 7% by 2006. In early 2007, the place downward pressures on CRE valuations. credit crisis adversely affected financial markets, which was strongly felt in the securitization Commercial real estate loan defaults are rising, markets. The turmoil in the credit markets but the general market consensus holds that the reduced the flow of capital into real estate, and full force of the problems with commercial real particularly, into commercial real estate projects. estate debt will not be felt until 2011 and beyond. The financing of commercial real estate typically As the same time, the steep economic downturn is based upon a 50% to 80% loan-to-value ratio, and the subsequent reduction in employment amortized over 30 years but with the loan significantly reduced the demand for office and maturing within three to ten years. At loan commercial space. Sharp declines in consumer maturity, commercial borrowers refinance. The spending resulted in the widespread closure of new loan terms are predicated upon prevailing retail stores and the down-sizing of demand for lease rolls, the current state of the property, and retail properties. Cutbacks in industrial market conditions. Since most commercial real production, reductions in inventory holdings, and estate loans are non-recourse loans, the lender lower international trade volumes during the can look only to the property to recover funds in recession led to decreased demand for industrial the event of loan default. properties. Commercial Real Estate Finance With vacancy rates rising and lease rates declining, net operating income of many Commercial banks represent the largest holders commercial projects declined. Often income was of commercial mortgages. In the current market

CALIFORNIA BANKERS ASSOCIATION -50- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT environment, bank regulatory examinations have the volume of Collateralized Mortgage Backed became more stringent in the review and Securities (“CMBS”) outstanding was down more assessment of loans backed by commercial than 10%. In addition, the collateral in the CMBS properties, both construction and development issuances were typically larger, higher quality and loans and permanent financing on commercial more stable properties, with reliable cash flows. real estate. Banks have been directed to conduct Banks, therefore, carried a higher exposure to multi-factor stress testing of loans, notably those commercial real estate than the CMBS market. for commercial income-producing properties. The testing analyzes the effects of changes in Holders of Commercial Mortgages $ trillions interest rates, vacancy rates, and market rent rates Finance Co., Other, $0.16 to determine the impact on the loan, the overall $0.06 loan portfolio, and the bank’s asset quality, earnings, and capital. CMBS, $0.58

Insurance Co., Regulatory directives recently imposed included $0.26 Commercial Banks, $1.30 the freezing of interest reserves on construction loans, higher required loss reserves, and reduced S&Ls, $0.12 tolerance for loan concentrations. Eroding market conditions contributed first to a sharp increase in construction loan defaults followed by The national consulting firm, Real Capital a significant increase in the volume of non- Analytics, analyzes credit conditions for CRE accrual commercial real estate loans. loans in excess of $2.5 million. As of December 31, 2009, more than $203 billion of these larger At year-end 2009, commercial mortgages loans were considered to be troubled commercial outstanding were estimated at $2.485 trillion, a real estate mortgages, representing nearly 10,000 decline of $93 billion from the fourth quarter properties. Only 13% of these loans were 2008 peak of $2.578 trillion. Commercial banks deemed to be resolved. The remaining 87%, hold the majority (52%, $1.3 trillion) of all representing nearly $180 billion in loans, were commercial mortgages. Issuers of asset-based categorized as troubled, real estate owned, or securities held the second largest concentration troubled debt restructuring. of these mortgages. Since the peak in late 2007,

Troubled Commercial Mortgage U.S. Assets, as of December 2009 CRE Loans in Excess of $2.5 million

Assets Number of Properties Volume ($ millions) Troubled 6,425 $139,500.6 Restructured/Modified 725 17,109.4 Lender Real Estate Owned 1,411 21,992.1 Total Current Distressed 7,651 178,602.1 Resolved 1,314 24,508.3 TOTAL 9,875 $203,110.4 Source: Real Capital Analytics

CALIFORNIA BANKERS ASSOCIATION -51- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Deutsche Bank estimates that a significant with more uncertain cash flows than the volume of commercial mortgages will mature properties collateralizing the CMBS pools. As the beginning in 2010 and cresting in 2012 and 2013 value of CRE began to decline, many small and as indicated in the chart below. mid-sized commercial banks suffered losses, costs and write-downs associated with asset work

Estimated Volume of Maturing Commercial Mortgages -outs. These conditions caused major constraints $ blns 350 337.6 331 on capital and future growth. The concentration 295.9 300 in CRE lending had the secondary negative effect 246.5 250 on the small business community. Local 204 200 community banks, typically a solid source of 161.2 169.6 small business lending, were forced to contract 150 130.2 other lending as problems mounted with their 100 74.8 CRE portfolios. 50 22.4 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Small to mid-size banks in the United States (banks between $100 million and $10 billion in assets) reported that construction and U.S. Banks and CRE commercial real estate loans represented between 44% and 49.5% of their loan portfolios. These Banks, particularly mid-size and small banks, loan categories represented 67% to 68% of their typically financed properties considered to be overall non-accrual loans. more transitional or second/third-tier properties

Construction and Commercial Real Estate Loans Concentration by Bank Size Fourth Quarter 2009 All U.S. Banks <$100 $100 mln- $1B-$10B >$10 B Bank Size: million $1B Share of total loans – All U.S. Banks Construction & land development 6.5% 11.8% 12.8% 4.8% Commercial real estate 22.4% 32.2% 36.7% 10.5% Share of total non-accrual loans – All U.S. Banks Construction & land development 27.0% 42.0% 45.6% 18.8% Non-residential construction 19.1% 31.6% 32.8% 11.1% Commercial real estate 27.7% 25.0% 22.2% 11.4% Asset Quality, Capital and Other Statistics – All U.S. Banks Noncurrent loans to loans 2.51% 3.62% 4.66% 6.01% Noncurrent assets to assets 2.23% 3.36% 3.78% 3.33% Leverage ratio 11.20% 9.25% 9.24% 8.35% Total risk-based capital 17.60% 13.88% 13.80% 14.17% Return on assets 0.06% -0.01% -0.35% 0.15% Return on equity 0.46% -0.15% -3.16% 1.44% Loans to deposits 72.3% 80.6% 85.3% 73.5% Source: FDIC

CALIFORNIA BANKERS ASSOCIATION -52- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT

Banks in the $100 million to $10 billion category averages in the fourth quarter. Another generally reported higher non-current assets, divergence from the national trend was that lower total risk-based capital ratios, and higher California banks under $100 million reported loan to deposit ratios than the other size high concentrations of construction and CRE categories. In addition, on a nationwide basis, loans, higher concentrations of such loans as these groups reported negative earnings, due to nonaccrual, and more negative earnings ratios asset quality issues. Poor asset quality hindered compared to all U.S. banks under $100 million. the capacity of some banks to grow and to support small business lending. In the United States, many commercial banks between $100 million to under $10 billion in total California Banks and CRE assets faced significant challenges to earnings and the prospects for their on-going operations due In California, the concentration of construction to high concentrations of commercial real estate loans and commercial real estate loans held by loans. In California, this observation generally banks was significantly higher than the national extended to all banks under $10 billion. trends. This higher concentration was reported across all size categories of banks. In addition, Prospects California banks reported that non-accrual construction and CRE loans represented a higher The challenges presented to banks from the share of total non-accrual loans than the national commercial real estate market are likely to persist

Construction and Commercial Real Estate Loans Concentration by Bank Size Fourth Quarter 2009 All California Banks <$100 $100 mln- $1B-$10B >$10 B Bank Size: million $1B Share of total loans – All CA Banks Construction & land development 10.8% 10.0% 8.6% 5.8% Commercial real estate 45.2% 50.2% 46.9% 17.2% Share of total non-accrual loans – All CA Banks Construction & land development 45.4% 37.0% 40.3% 29.3% Non-residential construction 27.4% 25.0% 30.3% 16.8% Commercial real estate 21.1% 37.5% 32.2% 18.8% Asset Quality, Capital and Other Statistics – All CA Banks Noncurrent loans to loans 3.40% 4.35% 5.01% 3.91% Noncurrent assets to assets 3.03% 3.96% 3.97% 2.82% Leverage ratio 15.66% 11.55% 10.21% 8.94% Total risk-based capital 21.37% 14.87% 14.97% 14.03% Return on assets -2.74% -0.88% -0.62% 0.16% Return on equity -15.48% -7.51% -4.75% 1.46% Loans to deposits 86.1% 83.7% 89.8% 98.5% Source: FDIC

CALIFORNIA BANKERS ASSOCIATION -53- CARPENTER & COMPANY T HE CHANGING ENVIRONMENT for a protracted period. An underlying problem is As vacancy rates for commercial properties that upon loan maturity, the current value of the continued to increase, tenants will push for more commercial property could be significantly less rent concessions. Thus, the underlying value of than the book value of the loan. Stricter the collateral of existing commercial mortgages underwriting criteria will be imposed upon the will decline, potentially falling below the reduced property values. Thus, new debt may be outstanding loan amount. Valuation stresses insufficient to repay the existing loan, and the appear to be most problematic in the South and volume of CRE loan defaults could accelerate West where high levels of construction during greatly. the past decade created excess capacity. Since new commercial construction has virtually On December 12, 2006, the OCC, FRB and ceased, the recovering U.S. economy may begin, FDIC issued a guidance that commercial banks albeit slowly, to ease the distress in the should limit their concentration of construction commercial property markets. loans to 100% of total risk-based capital and the sum of construction, multi-family, and Employment of office workers increased during commercial real estate loans to 300% of total risk the initial months of 2010. As these job gains based capital. The Office of Thrift Supervision grow across industries and geographies, sectors stated that it would maintain its CRE statutory of the commercial property markets will improve. limit at 400% of capital. Nationwide, Washington D.C. is likely to show the initial signs of recovery, driven by increased As of December 31, 2009, based upon 8,016 federal government programs, jobs, and space financial institutions reporting, 2,497 financial requirements. institutions, 31% of the total, reported that CRE and construction loan concentrations exceeded The real estate firm, Jones Lang LaSalle. expects 300% of total risk-based capital. Two of these early turnarounds in commercial real estate in the institutions had negative capital, while another following communities: 668 institutions had ratios in excess of 500% of capital, including 58 institutions with • Pittsburgh, where alternative energy demand concentrations over 1000% of capital. Of these has supported gains in occupancy 670 institutions, 214 institutions had leverage • San Francisco, where renewed growth in capital ratios in the fourth quarter below 6%, a technology generated demand for space harbinger of regulatory takeover. • Houston and San Antonio, where renewed growth in employment increased the demand There were 1,827 institutions at year-end 2009 for office space with above guidance levels of construction and CRE loan concentrations. These ratio were less Jones Lang LaSalle holds that follow-on than 500% and more than 300% of capital. These improvements in property markets are likely in institutions could be potential sellers of loans in New York City, Boston, Seattle, and Los order to align CRE loan concentrations with the Angeles. Contributing greatly to the expectation regulatory guidelines. of a turnaround in commercial property markets are those geographic areas that are poised to These statistics implied continued asset quality benefit from renewed export growth, notably to distress for a significant portion of the banking support the production of the goods for export industry with attendant downward pressures on and/or to transport exports. earnings.

CALIFORNIA BANKERS ASSOCIATION -54- CARPENTER & COMPANY

2010

INDUSTRY VALUATIONS

INDUSTRY VALUATIONS

An industry characterized by failures and reduced earnings faces challenging times as measured by stock price movements and market valuations.

The banking industry certainly faced stock price and market value challenges in 2009. Many potential bank acquirers focused on obtaining a failed bank and participating in the loss protection granted by the FDIC. Thus, the number of traditional banking mergers in 2009 was significantly below recent valuations. The mergers that were completed last year typically carried historically low valuations. Bank stock prices, as measured by the major bank indices, rallied beginning in March 2009. Yet, these indices through April 2010 remained below their peak values of June 2007.

The majority of the California publicly traded banks and thrifts experienced annual declines in stock prices and generally traded below tangible book value.

2009 Merger Developments Industry Valuation The number of traditional bank mergers continued to decline during 2009. Acquisition activity was largely Mergers fewer and lower values ...... 55 centered in bidding for failed institutions. The number of traditional bank mergers fell to 153 transactions, the lowest 2010 merger announcements low valuations ...... 56 volume since 1980. Stock prices rallied in 3/09 ...... 57 During 2009, there were 166 announcements of mergers. The merger announcements in 2009 involved $92 billion in Bank indices below 2007 pea ...... 57 total assets. Of the 166 merger announcements, deal terms were reported for 111 of the transactions. For the California bank stocks generally traded below book value ...... 58 transactions with reported terms, the average deal to assets ratio equaled 0.132 times, the average price to book value CA banks under $50 million ...... 59 was 1.005 times, and the average price to tangible book value was 1.06 times. CA banks $50-100 million ...... 60

CA banks $100-$250 million ...... 62 Of the 166 mergers announced during 2009, there were 93 completed transactions, which consisted of 64 closing in CA banks $250-$500 million ...... 63 2009 and 29 closing in 2010. As of April 30, 2010, 30 of the 2009 announced transactions were still pending, and 43 had CA banks $500 million-$1 billion ...... 65 been terminated. Of the 43 terminated mergers, 13 of these banks subsequently were seized by the FDIC through April CA banks $1-$10 billion ...... 66

30, 2010. CA banks $10-$100 billion ...... 67

The 93 announced and completed mergers in 2009 involved CA thrifts ...... 68 targets with assets between $5 million and $5.6 billion and represented $21.4 billion in total assets. Available ratios for

CALIFORNIA BANKERS ASSOCIATION -55- CARPENTER &COMPANY I NDUSTRY VALUATIONS these completed mergers showed an average deal to assets of 0.123 times, the price to book value was 1.077 times, and the average price to tangible book value was 1.114 times. The largest institution to be acquired was Harleysville National Bank by First Niagara Financial Group at a ratio of 1.147 times tangible book value. The highest price to tangible bank value was 2.520 times offer by Sandhills Bancshares for TransPecos Bank of Iraan, Texas, a $23.7 million bank. There were two other completed acquisitions with price to tangible book values in excess of 2.00 times, specifically 2.182 times for First Keyes Bancshares (Oklahoma) and 2.024 times for State Bank of Lobo (Kansas). The lowest reported price to tangible book value was 0.035 times paid by Capital Funding Bancorp for the $146 million AmericasBank Corp. of Towson, Maryland.

Three California banks were acquired based upon mergers announced during 2009. The Capitol Bank subsidiary, Bank of Santa Barbara, was acquired by an investor group for 1.60 times tangible book value. An investor group acquired Gold Country Financial Services (Marysville) in a transaction that closed in late April 2010 for undisclosed terms. CommerceWest Bank, NA acquired Discovery Bancorp of San Marcos for an announced price of 0.523 times tangible book value.

The 30 pending acquisitions that were announced in 2009 represented $24.5 billion in assets. The largest announced acquisition was offered by an investor group for the $19 billion First Republic operations of Bank of America. Deal ratios were available for 21 of these 30 pending acquisitions, but not including the First Republic acquisition. The available ratios for pending acquisitions averaged as follows: deal value of 0.154 times assets and 1.083 times tangible book value. The price to tangible book value ratios ranged from a low of 0.55 times to a high of 2.064 times. The over 2.00 times tangible book value pricing was the offer by Community Bank Partners for Palisades National Bank, a $55 million bank located in Colorado. There were four pending transactions involving California banks. Only one transaction involved another bank as the buyer. Savings Bank of Mendocino County announced last August its intention to buy Bank of Willits for undisclosed terms. Announced acquisitions of California banks involving investor groups included Golden Coast Bank of Long Beach, Santa Ana Business Bank, and the First Republic Bank operations.

2010 Announcements

Year to date through May 10, 2010, 47 acquisitions have been announced. Of this total, two acquisitions were terminated. One bank in a terminated deal subsequently failed. Seven of the recently announced acquisitions had already closed, and 38 were pending. Total assets involved in the 2010 announced mergers equaled $15.4 billion.

Deal ratios were available for 22 of the 47 transactions announced in 2010. The average deal value to assets was 0.138 times. The average price to book value was 1.125 times, and the average price to tangible book value was 1.185 times. Based upon the average price to tangible book value, bidding values picked up in 2010 compared with the available pricing in 2009. The highest price to tangible book value was 2.977 times offered by Texas State Bankshares, Inc. for the $18 million Falfurrias State Bank (Texas). Another deal priced in excess of 2.00 times was the 2.431 times tangible book value offer from Green Dot Corporation for the $34 million Bonneville Bancorp of Provo Utah.

There were four 2010 acquisition announcements involving California banks as the target. One California acquisition already closed, the acquisition by Rabobank of the Capitol Bancorp subsidiary

CALIFORNIA BANKERS ASSOCIATION -56- CARPENTER & COMPANY I NDUSTRY VALUATIONS

There were four 2010 acquisition announcements involving California banks as the target. One California acquisition already closed, the acquisition by Rabobank of the Capitol Bancorp subsidiary, Napa Community Bank. A special purpose fund terminated its planned investment in Pacific City Financial Corp., the Los Angeles-based parent company of Pacific City Bank. Still pending completion is the planned change of control investments in Tri-Valley Bank of San Ramon and Pacific Capital Bancorp (Santa Barbara). Ford Financial Fund seeks to acquire 91% of the $7.5 billion Pacific Capital Bancorp for an investment of $500 million. This particular transaction involved a number of regulatory hurdles, including buy-off from the Treasury for the conversion for the TARP-related preferred securities, the liquidation of other preferred securities and subordinated debt and the usual regulatory approvals.

INDUSTRY VALUATIONS: National Stock Prices

The turning point for stock prices during 2009 was early March. The decline in the Dow and S&P 500 that began in the middle of 2008 continued into early March 2009. The slide in the bank stock indices was more protracted with the downward trend beginning a year earlier, around the middle of 2007. Since March 6, 2009 through year-end 2009, the broader indices and particularly the bank indices rallied significantly.

The following table tracks the performance of the various stock price indices over varying periods:

Percentage Change in Stock Indices

Dow Period KBW S&P Jones S&P 500 Bank Bank Industrial 12/31/08 to 12/31/09 -3.6% -8.9% 18.2% 23.4% 12/31/08 to 3/06/09 -58.0% -64.0% -24.5% -24.3% 3/6/09 to 12/31/09 129.4% 152.7% 57.4% 63.2% 12/31/08 to 4/30/10 25.7% 15.9% 25.4% 31.4% 6/8/07 to 4/30/10 -51.6% -59.7% -18.0% -21.0%

The following graphs chart the weekly indices for the broader stock market relative to bank stock price measurements over the sixteen month period from year-end 2008 to month-end April 2010:

DJIA INDEX: Dow Jones & KBW Banks KBW Banks S&P 500 INDEX: S&P 500 and S&P Banks S&P Banks 11,500 60 1,250 170 55 1,200 160 10,500 1,150 50 150 1,100 9,500 45 1,050 140 40 1,000 130 8,500 35 950 30 120 7,500 900 25 850 110 6,500 20 800 100 12/08 3/09 6/09 9/09 12/09 3/10 12/08 3/09 6/09 9/09 12/09 3/10

DJIA KBW Bank S&P 500 (left) S&P Banks (right)

CALIFORNIA BANKERS ASSOCIATION -57- CARPENTER & COMPANY I NDUSTRY VALUATIONS

INDUSTRY VALUATIONS: California Stock Prices

Declines in stock prices continued to plague the California banking industry in 2009. The majority of California bank stocks traded below book value in 2009. More than 78% of the 170 publicly traded California bank stocks ended 2009 below their year-earlier prices.

Market Overview

At year-end 2008, there were 181 publicly traded bank and thrift companies that were followed by Carpenter & Company. At year-end 2009, there were 169 such companies. The net reduction of 12 in the number of California publicly traded banks and thrifts resulted from the reduction of 13 by failure, a loss of one by merger, and the addition of two companies to the tracking report.

Bank stock pricing relative to tangible book value continued on a declining trend in 2009. Only thrifts reported an uptick in reported price to tangible book value. Thrifts, however, experienced the third steepest decline in this metric over the 2006 to 2009 period, as indicated by the table below.

Price to Tangible Book Value (At Year-end) Change CA Bank Size 2006 2007 2008 2009 2006-09 <$50 million 1.40 1.04 0.86 0.85 -39.3% $50-$100 million 2.03 1.40 0.81 0.68 -66.5% $100-$250 million 1.93 1.39 0.79 0.71 -63.7% $250-$500 million 2.28 1.57 0.76 0.65 -71.5% $500 million-$1 billion 2.62 1.65 0.80 0.62 -76.3% $1-$10 billion 2.92 1.75 1.18 1.02 -65.1% >$10 billion 2.49 2.11 1.66 1.47 -40.9% All Thrifts 1.40 0.80 0.41 0.42 -70.0%

With California ranking third as the state with the most banking failures and first in terms of cost of these failures to the deposit insurance fund, the state’s banking industry was under a dark cloud in terms of stock pricing. Additionally, the state’s banks generally had higher concentrations of construction and commercial real estate loans than national averages. Rising loan defaults, initially with construction loans and later with commercial real estate loans, contributed to losses for California banks and the corresponding downward spiral in stock prices.

Stocks of California publicly traded community banks, particularly banks between $250 million and $1 billion, were trading significantly below tangible book value in stark contrast to the values prevailing in 2006. Despite this erosion, the rate of decline in price to book value slowed. The largest year-over-year decline in price to tangible book value was the 19 basis point decline for banks over $10 billion. The average decline in this pricing metric across the eight groups was -11 basis points, compared with the 2008 average decline of -56 basis points.

CALIFORNIA BANKERS ASSOCIATION -58- CARPENTER & COMPANY I NDUSTRY VALUATIONS

As mentioned in the merger section, there was only one completed merger involving a California publicly-traded bank during 2009, the acquisition of Discovery Bancorp with $172 million in assets by CommerceWest Bank, N.A., with $255 million in assets. The pricing terms at the time of the merger completion was 0.712 times tangible book value, compared with the announcement pricing of 0.523 times tangible book value.

The banking failures cut across all sizes of banks, with the exception of banks under $50 million. California banks in the $1 to $10 billion accounted for the largest number of failures at six.

The following sections describe trends for the various size groups of publicly-traded California banks and thrifts.

INDUSTRY VALUATIONS: Banks with Total Assets under $50 Million

At the end of 2009, there were six publicly-traded California banks with assets under $50 million. This count was unchanged from the prior year and was down from 16 banks at the end of 2007. There were no banking failures in this asset class. Two banks grew into the next higher size class, while two banks were added to this category. Four banks remained in this asset class from 2008.

During 2009, there were only two new California banks. Neither bank is publicly traded at this time. With no new bank applications pending, this asset group will continue to decline in number. Based upon first quarter 2010 data, Capital Bank and Vibra Bank already grew into the next asset class. Commerce Bank of Temecula and Community Valley were within $5 million of exceeding $50 million in total assets. An acquisition was announced in late 2009 wherein Grandpoint Capital, Inc. will acquire Santa Ana Business Bank. Terms of this acquisition were not disclosed.

At year-end 2009, none of the six banks in this size class was profitable. Only Pan American Bank was not a de novo bank. The remaining five banks commenced operations in 2007 or 2008. These banks were in their initial period of operations wherein operating expense typically exceeded earnings due to the relatively small asset base. Thus, with negative earnings, price/earnings ratios were not relevant.

Trading activity for these banks was very limited. Only three of the six banks recorded trades in December, and two banks reported no stock trade for the fourth quarter. Community Valley Bank reported the highest annual trading volume at 65,643 shares. The lowest share volume was for Santa Ana Business Bank at 7,421 shares.

Three of the six banks traded above book value based upon year-end 2009 data. Capital Bank reported the highest price to tangible book value at 1.62 times. Also trading above tangible book value were Vibra Bank at 1.08 times and Community Valley Bank at 1.01 times.

Pan American Bank traded at 0.10 times tangible book value, the lowest valuation for this asset class and the fourth lowest among the 169 publicly traded financial institutions analyzed.

CALIFORNIA BANKERS ASSOCIATION -59- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets under $50 million (continued)

Only Capital Bank recorded a gain in its stock price over the course of the year, rising 16.2%. Year- over-year declines in stock prices ranged from -2.0% for Commerce Bank of Temecula to -68.0% for Pan American Bank.

Market capitalization for this size group equaled $50 million, a decline of 35% from the 2008 market capitalization of $77 million. In 2007, when there were 16 banks in this class, the market capitalization was $239 million or $14.9 million per bank. The 2009 average market capitalization was $8.3 million.

Price to Book --CA Banks <$50 Million 1.8 1.8 1.8 1.5 1.6 1.4 1.4 Price Gainers 1.4 1.2 1.1 1.2 1.2 1.0 Banks Under $50 million 1.0 0.9 0.9 0.8 0.6 0.4 Capital Bank +16.2% 0.2 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

INDUSTRY VALUATIONS: Banks with Total Assets between $50 and $100 Million

There were 20 publicly traded banks in this size class at the end of 2009. This total compared with a count of 34 at the end of 2008. Two banks grew into this class. Fifteen banks grew into the next larger size. One bank failed. Eighteen banks carried over in this class from the prior year. There were no mergers in 2009 involving banks from this class. AltaPacific Bank and Suncrest Bank joined this group from the smaller asset class. The failed bank was Metropacific Bank.

Only three of the twenty banks reported full-year profits, namely AltaPacific Bank, Golden Valley Bank, and Mojave Desert Bank. The 20.13 P/E for Mojave Desert Bank was probably the only meaningful ratio of the three reported P/Es. Thus, the price/earnings average for this group at 52.54 times greatly overstated relative earnings and was not reflective of the earnings performance for the entire group.

Four of the twenty banks traded above tangible book value. The highest price to tangible book value was 1.91 times for Community Bank of the Bay. Other banks priced over book value were Sierra Vista Bank (1.31 times), Suncrest Bank (1.23 times) and AltaPacific Bank (1.10 times). The lowest valuation to book was First Vietnamese American Bank, the lowest price to book value for the 169 publicly traded financial companies. Eight other banks in the category traded at less than 50% of their tangible book value.

CALIFORNIA BANKERS ASSOCIATION -60- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $50 and $100 million (continued)

The entire asset class carried a price to tangible book value ratio of 0.68 times, the fourth lowest of the eight asset classes. This ratio declined by 13 basis points relative to the 2008 average.

As with the banks under $50 million, this asset category was characterized by low trading activity. Pacific Alliance Bank was the only bank with no trading activity in the fourth quarter of 2010. Sutter Community Bank reported the lowest annual trading activity in 2009, with 12,861 shares traded. The highest volume of shares traded was Coronado First Bank, with an annual volume of 342,430 shares.

Three banks reported stock price gains in 2009. One bank was unchanged over the year. The largest price gain was the 60.0% advance by Pacific Alliance Bank, followed by the 17.9% rise for Lighthouse Bank, and the 3.4% gain for Sierra Vista Bank. The stock price of AltaPacific Bank ended 2009 unchanged from year-end 2008.

Stock price declines ranged from -8.4% for Promerica Bank to -96.7% for First Vietnamese American Bank. Other banks experiencing stock price declines in excess of 50% were Coronado First Bank, Mother Lode Bank, Pan Pacific Bank, and Saigon National Bank.

The market capitalization of this size category equaled $160 million, compared with $359 million at year end 2008. Adjusting the market capitalization for the fewer number of banks in this size class at the end of 2009, the per bank market capitalization in 2009 averaged $8 million, compared with $10.6 million in 2008, an adjusted decline of 24.2%. The average market capitalization for this size class was lower than the average for the under $50 million class.

Price to Book -- CA Banks $50-$100 Million Price Gainers 2.5 2.2 2.1 2.0 Banks $50 to $100 million 2.0 1.8 1.5 1.5 1.4 1.5 1.3 1.3

0.8 Pacific Alliance Bank 60.0% 1.0 0.7 Lighthouse Bank 17.9% 0.5 Sierra Vista Bank 3.4% 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CALIFORNIA BANKERS ASSOCIATION -61- CARPENTER & COMPANY I NDUSTRY VALUATIONS

INDUSTRY VALUATIONS: Banks with Total Assets between $100 and $250 Million

This was the largest asset class of the California publicly traded banks. At year-end 2009, there were 62 banks in the category, up five from the 57 banks at year-end 2008. Fifteen banks joined this class from a smaller asset size. One bank rejoined this class from a larger asset class. Nine banks grew into the next larger asset class. One bank merged. One bank failed. There were 46 banks that remained in this asset size from 2008.

Discovery Bancorp was the only publicly traded California bank to be acquired during 2009. CommerceWest Bank, N.A., another bank from this asset class in 2008, acquired Discovery Bancorp at a closing pricing ratio of 0.712 times tangible book value. This merger was completed in June 2009. Pacific Coast National Bank was the bank that failed.

This class of banks generally had limited trading volume, although the average annual volume was 30% greater than the smaller asset classes. Eight of the 62 banks in this class had no trades during December 2009. Northern California National Bank had no trades for the entire year. The last stock transaction for America California Bank was made in April, 2009. First Business Bank had no trades throughout the fourth quarter of 2009. The annual volume of trading activity ranged from zero for Northern California National Bank to 515,946 shares for Commerce National Bank.

Only 15 banks, which represented 24% of the asset class, reported full-year profits in 2009. Bank of Santa Maria reported a ratio of price to last 12 month (“LTM”) earnings that was well in excess of 100%. That ratio was reported as N/M, not meaningful, and was not included in the average calculation. The price earnings ratio for this asset class averaged 25.0% based upon the 14 relevant observations.

The price to tangible book value for this group averaged 0.71 times, the fourth highest ratio of the eight asset classes. Twelve of the 62 banks were priced above their tangible book value. The highest value was reported by First Business Bank, N.A. at 1.47 times. Other banks trading above their tangible book value were San Diego Trust Bank (1.42 times), Mission Bancorp (1.26 times), Fresno First Bank (1.20 times), Redwood Capital Bancorp (1.17 times), California Republic Bank (1.12 times), American Principle Bank (1.04 times), Pacific Valley Bank (1.03 times), River Valley Community Bank, California Bank of Commerce (both at 1.02 times), and US Metro Bank, Ojai Community Bank (both at 1.01 times). The lowest price to tangible book value was 0.09 times carried by First Standard Bank. Fifteen other banks in this size class traded below 50% of their tangible book value.

There were 13 banks reporting price gains. This was the largest number of banks with stock price gains but not the largest percentage. Chino Commercial Bancorp reported the largest price gain at 66.7%. All of banks with stock price gains were listed in the table on the following page. Since Northern California National Bank had no trading activity in 2009, this stock price was unchanged over the year. Price declines ranged from -1.2% for Pinnacle Bank to -87.7% for First Standard Bank. There were eight additional banks that reported price declines in excess of 50%, including California Business Bank, Coast Bancorp, Granite Bancshares, Inc., Golden State Bank, Seacoast Commerce Bank, Stellar Business Bank, Ventura County Business Bank, and WCB Holdings, Inc.

CALIFORNIA BANKERS ASSOCIATION -62- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $100 and $250 million (continued)

Total market capitalization of this asset class equaled $775 million in 2009, compared with $911 million at year-end 2008. On a per bank basis, market capitalization averaged $12.5 million in 2009, compared with $16.0 million in 2008, a decline of 22%. The highest market capitalization of this group was California Republic Bank at $52 million. The lowest was First Standard Bank at $1.3 million. Price Gainers Banks $100 to $250 million Price to Book --CA Banks $100-$250 Million

2.5 2.2 Chino Commercial Bancorp 66.7% 2.1 1.9 1.9 2.0 Pacific Valley Bank 34.0% 1.5 1.4 1.5 1.4 1.5 1.3 Fresno First Bank 25.0% Presidio Bank 24.8% 1.0 0.8 0.7 Security Business Bancorp 20.0% 0.5 California Republic Bank 17.7% 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 American Principle Bank 11.8% California Oaks State Bank 10.5% Bank of Santa Clarita 9.3% Bay Commercial Bank 9.2% Security First Bank 8.3% 1st Capital Bank 4.8% River Valley Community Bank 4.6%

INDUSTRY VALUATIONS: Banks with Total Assets between $250 and $500 Million

There were 29 publicly traded California commercial banks in this size range, as of year-end 2009. One year earlier, there were 25 banks in the group. The net addition of four banks for this category was achieved by a variety of changes. Nine banks grew into this size group. One bank declined to a smaller asset group. Three banks grew into the next larger category. One bank failed. Twenty banks carried over in this size category from 2008. There were no mergers involving banks in this size group.

Mirae Bank, the subsidiary bank of Mirae Bancorp, failed in 2009. In 2010, 1st Pacific Bank, the subsidiary of 1st Pacific Bancorp, also failed.

Commerce National Bank reduced its total assets to rejoin the smaller size group. Oak Valley Bancorp, Plumas Bancorp, and Sunwest Bank grew to the next higher asset classification.

This asset class was characterized with more trading activity and greater stock liquidity than the preceding asset groups. All of the 29 banks in this class reported trades during the month of

CALIFORNIA BANKERS ASSOCIATION -63- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $250 and $500 million (continued)

December 2009. The lowest volume of shares traded was recorded by Santa Cruz County Bank at 54,968 shares. The heaviest volume of trading was for Pacific State Bancorp at 2,962,044 shares. Two other banks experienced trading volumes in excess of 2 million shares, notably 1st Century Bancshares, Inc. and 1st Pacific Bancorp.

Ten of these 29 banks reported full year profits. Three of the banks, California United Bank, Greater Sacramento Bancorp, and Private Bank of California, reported a ratio of price to LTM earnings well in excess of 100, a level that was characterized as not meaningful and thus was not incorporated in the average P/E statistic for the group. Net of these banks, the average price to earnings ratio was 23.6% for the asset class.

Only two banks in this asset class traded above their tangible book value, 1st Enterprise Bank at 1.26 times and Mission Valley Bancorp at 1.11 times. The banks priced below tangible book ranged from 0.09 times for Pacific State Bank to 0.99 times for Santa Lucia Bancorp. In addition to Pacific State Bank, six other banks traded below 50% of their tangible book value, specifically, Canyon Bancorp, 1st Pacific Bancorp, NorCal Community Bancorp, Northern California Bancorp, Inc., United American Bank, and Valley Commerce Bancorp.

Seven banks reported price gains during 2009, with California United Bank reporting the largest rise, up 40.0%. One company, First Commerce Bancorp, reported no change in stock price. The largest price decline was registered by Pacific State Bancorp, dropping 80.5%. Banks experiencing a larger than 50% decline in share price over the year included Citizens Bancorp, 1st Pacific Bancorp, NorCal Community Bank, and United American Bank.

The market capitalization of this asset class declined to $590 million in 2009 from $658 million in 2008. On a per bank basis, the decline was even greater from an average of $26.3 million in 2008 to an average of $20.3 million in 2009, a decrease of 23.2%. Market capitalization ranged from a low of $1.4 million for Pacific State Bancorp to a high of $53.8 million for California United Bank.

Price to Book -- CA Banks $250-$500 Million Price Gainers

3.0 2.6 2.6 Banks $250 to $500 million 2.3 2.5 2.2 2.0 1.7 1.7 1.6 1.5 1.6 California United Bank 40.0% 1.5

0.8 Summit State Bank 19.4% 1.0 0.7 0.5 Northern California Bancorp, Inc. 18.3%

0.0 ICB Financial 16.7% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Private Bank of California 14.1% 1st Enterprise Bank 6.1%

CALIFORNIA BANKERS ASSOCIATION -64- CARPENTER & COMPANY I NDUSTRY VALUATIONS

INDUSTRY VALUATIONS: Banks with Total Assets between $500 Million and $1 Billion

There were 19 banks in this asset class at the end of 2009, one bank fewer than at the end of 2008. Sixteen banks remained in this classification. Three banks grew into this asset class. Two banks grew into the next size. Two banks failed over the course of 2009. In early 2010, another bank in this class failed.

Bank of Marin Bancorp and RCB Corp. grew into the next asset class. The subsidiary banks of 1st Centennial Bancorp and San Joaquin Bancorp failed during 2009. Tamalpais Bank, the subsidiary of Tamalpais Bancorp, failed in April 2010.

This class of banks was characterized by significant volumes of trading activity. All of the banks in the group recorded stock trades during the month of December. The smallest annual volume of trades was the 604 shares of Sunwest Banks that traded in 2009. The highest volume of trades was the 8.1 million shares of Tamalpais Bancorp. Three other banks reported share trades in excess of 2 million shares during 2009, specifically United Security Bancshares, Pacific Premier Bancorp, Inc., and Heritage Oaks Bancorp.

Only one bank in this group was priced above tangible book value. American Business Bank traded at 1.44 times tangible book value. The lowest price to tangible book value at year-end 2009 was Saehan Bancorp at 0.08 times, followed by the failing Tamalpais Bancorp at 0.11 times. There were six other banks trading at less than 50% of their tangible book value, specifically Community Valley Bancorp, Community West Bancshares, FNB Bancorp, North Valley Bancorp, Plumas Bancorp, and Pacific Premier Bancorp, Inc.

Price to tangible book value for this group averaged 0.62 times, the second lowest valuation of the eight groups and the lowest among the banking categories. This group experienced the steepest decline since 2006 in P/TBV of the eight categories analyzed.

Less than 50% of the banks in this class reported full-year profitability. Eight of the 19 reported profits and yielded an average P/E ratio of 16.3.

Only four of the nineteen banks registered stock price gains over the course of 2009. The largest price gain was the 81.3% advance in the price of Bridge Capital Holdings.

The largest price decline was registered by Saehan Bancorp, off 91.5%. There were four additional banks that experienced a greater than 50% decline in stock prices during 2009, specifically Community Valley Bancorp, Plumas Bancorp, Tamalpais Bancorp, and United Security Bancshares.

The total market capitalization of this group equaled $605 million, as of year-end 2009, compared with $912 million in 2008. On a per-bank basis, market capitalization fell to $31.87 million in 2009 from $45.6 million in 2008, a decline of 30.2%.

CALIFORNIA BANKERS ASSOCIATION -65- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $500 million and $1 billion (continued)

Price to Book --CA Banks $500 Million-$1 Billion Price Gainers

2.7 2.8 3.0 2.6 2.6 Banks $500 million to $1 billion 2.5 1.8 2.0 1.7 1.7 1.6 1.5 Bridge Capital Holdings 81.3% 1.5 0.8 Sunwest Bank 38.7% 1.0 0.6 0.5 Bank of Commerce Holdings 24.8%

0.0 American Business Bank 14.3% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

INDUSTRY VALUATIONS: Banks with Total Assets between $1 and $10 Billion

The year 2009 ended with 21 banks in this asset class, a decline of five banks from the 26 publicly traded banks for the class at year-end 2008. Bank of Marin Bancorp and RCB Corp grew into the group. SVB Financial Group grew into the next higher asset size. Twenty banks remained in this size category from the prior year. Six of the 2008 banks failed.

This asset group accounted for the most failures of any of the groups. Since the beginning of 2010, another bank in this class failed. Failed banks in 2009 included the subsidiary banks of Alliance Bancshares, Beverly Hills Bancorp, Inc., Capital Corp of the West, Imperial Capital Bancorp, Temecula Valley Bancorp, Inc., and Vineyard National Bancorp. Failing in the first quarter of 2010 was the subsidiary bank of First Regional Bancorp.

This asset class was characterized by robust stock trading, with variations noted based upon stock pricing. The stocks of three banks were priced in excess of $350 a share. The volumes of shares traded for Mechanics Bank (priced at $11,000 per share), Farmers & Merchants Bank (priced at $3,795 per share) and Farmers & Merchants Bancorp (passed at $370 per share) were significantly lower than the volumes reported for the other companies in the class. The highest volume of annual trades was 294,799,282 shares of CVB Financial Corp.

Ten of the 21 companies in this class reported full-year profitability in 2009. The average price to LTM earnings for this group equaled 22.74 times.

Eight of the 21 banks in this class traded above tangible book value. At a price to tangible book value of 4.84 times, Westamerica Bancorp had the highest such metric of any of the California publicly traded banks and thrifts and was nearly 300 basis points above the next highest ratio for any California publicly-traded bank and thrift.

CALIFORNIA BANKERS ASSOCIATION -66- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $1 and $10 billion (continued)

The lowest price to tangible book value for this group was First Regional Bancorp at 0.19 times. There were five other banks priced at less than 50% of tangible book value, notably Hanmi Financial Corp, Pacific Capital Bancorp, Preferred Bank, Pacific Mercantile Bancorp, and RCB Corp. Overall, this size class reported an average price to tangible book value of 1.02 times, the second highest of the eight groups.

Only three banks reported stock price gains over the course of 2009. Bank of Marin Bancorp recorded the largest gain, a 35.7% increase. The steepest decline in stock prices was the 94.3% drop in the price of Pacific Capital Bancorp stock. There were five other banks with a greater than 50% decline in stock prices, specifically Sierra Bancorp, First California Financial Group, First Regional Bancorp, Heritage Commerce Corp, and Preferred Bank.

Total market capitalization for this asset class was $5.7 billion, down from $7.7 billion in 2008. On a per-bank basis, market capitalization of this group declined to $271.4 million in 2009 from $308.7 million in 2008, a 12% reduction. By company, market capitalization ranged from a high of $1.6 billion for Westamerica Bancorp to a low of $4.2 million for First Regional Bancorp.

Price to Book -- CA Banks $1-$10 Billion Price Gainers 3.5 3.1 2.9 3.0 Banks $1 to $10 billion 2.5 2.6 2.6 2.3 2.5 2.1 2.0 1.8 2.0 Bank of Marin Bancorp 35.7% 1.5 1.2 1.0 1.0 Napa Bancorp, Inc. 15.4% 0.5 Westamerica Bancorp 8.3% 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

INDUSTRY VALUATIONS: Banks with Total Assets between $10 and $100 Billion

There were four California publicly traded banks with assets in excess of $10 billion and under $100 billion. Wells Fargo Bancorp is not included in this survey. The number of banks was unchanged from 2008, with SVB Financial Group growing into this group. The subsidiary bank of UCBH Holdings, Inc. failed during 2009.

This was an actively traded group of banks. East West Bancorp, Inc. reported the most shares traded at 377,707,554. All of the banks in the category, except for Cathay General Bancorp, were priced above tangible book value. City National Corp reported the highest price to tangible book value at 1.85 times, followed by East West Bancorp, Inc. at 1.81 times. City National Corp reported full year profits in 2009. The calculated price to LTM earnings was deemed to be not meaningful, since the ratio was in excess of 100%.

CALIFORNIA BANKERS ASSOCIATION -67- CARPENTER & COMPANY I NDUSTRY VALUATIONS

Banks with Total Assets between $10 and $100 billion (continued)

SVB Financial Group was the only company to record a gain in stock prices in the class during 2009. SVB Financial stock price rose 58.8%. Cathay General Bancorp experienced the steepest decline at 68.2%. Total market capitalization for this group equaled $5.6 billion in 2009, a 5.7% gain over 2008.

Price Gainer

Banks $10 to $100 billion

SVB Financial Group 58.8%

INDUSTRY VALUATIONS: California Thrifts

There were eight publicly traded California thrifts tracked by this report, a decline of one from year- end 2008. In 2009, FirstFed Financial Corp. failed.

Provident Financial Holdings, Inc., BOFI Holding, Inc., and Harrington West Financial Group, Inc. all reported annual stock trading activity in excess of 1 million shares. Provident reported that more than 6.2 million shares were traded. The lowest annual trading volumes were experienced by Broadway Financial Corp and Malaga Financial Corp.

Three of the eight thrifts reported full-year profits for a group average price to LTM earnings of 7.4 times. Only the stock of Malaga Financial Corp traded above tangible book value at 1.23 times. BOFI Holding Inc. traded above 50% of tangible book value at a ratio of 0.88 times. The lowest price to tangible book value was reported by Harrington West Financial Group at 0.15 times. California thrifts reported the lowest average price to tangible book value of the eight groups analyzed. This sector, however, was the only class to record an uptick in this average ratio from 2008 to 2009.

Three thrifts reported price gains in 2009, led by the 110.5% rise in the price of BOFI Holding, Inc. The steepest decline was the 79.5% price drop for Harrington West Financial Group, Inc. San Luis Trust Bank, FSB also reported a greater than 50% decline in its stock price last year.

Total market capitalization for all California thrifts equaled $225 million, little changed from the 2008 capitalization of $239 million. On a per thrift basis, market capitalization increased to $28.1 million in 2009 from $26.6 million in 2008, a gain of 5.6%.

Price to Book -- CA Thrifts

2.5 Price Gains 2.1 1.9 2.0 1.6 Thrifts 1.4 1.4 1.5 1.3 1.0 0.8 BOFI Holding, Inc. 110.5% 0.4 0.4 0.5 Broadway Financial Corp 55.7% 0.0 Malaga Financial Corp 28.5% 2001 2002 2003 2004 2005 2006 2007 2008 2009

CALIFORNIA BANKERS ASSOCIATION -68- CARPENTER & COMPANY

2010

INDUSTRY RANKINGS

INDUSTRY RANKINGS: Returns

The following tables present an alphabetical listing of California financial in- stitutions, as of December 31, 2009. The annual returns on average assets and average equity, obtained from the SNL Database, have been ranked based upon the following:

• Absolute return on assets and return on equity and • Relative year-over-year change in these two measures.

Disclaimer Regarding Industry Ranking

Note: No adjustments in the returns and therefore in the rankings have been made for any factor, including the following factors that may have the tendency to distort the return ratios in comparison with other financial insti- tutions:

• A financial institution that is a Sub-chapter S corporation. • A financial institution with a high dependency on fee income. • A financial institution that is owned by a holding company, especially the situation in which the holding company absorbs a portion of the operating expenses of the individual financial institution. • A financial institution with a large income tax loss carry-forward or for a variety of reasons does not have earnings that are fully tax-adjusted.

Banks with short operating histories are not included in the rankings.

These rankings, while a useful measure, are not a precise indication of the relative performances of the various banks and financial institutions

CALIFORNIA BANKERS ASSOCIATION -69- CARPENTER &COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

1st Capital Bank 192,297 Commercial Bank -0.45 -2.60 136 129 32 41 1st Century Bank, N.A. 272,128 Commercial Bank -2.79 -15.12 227 202 249 214 1st Enterprise Bank 383,826 Commercial Bank 0.64 6.13 43 43 53 31 1st Pacific Bank of California 359,698 Commercial Bank -4.04 -79.76 255 279 51 260 Alta Alliance Bank 176,252 Commercial Bank -2.62 -22.42 222 233 21 23 AltaPacific Bank 84,175 Commercial Bank 0.63 1.81 44 89 45 55 America California Bank 138,494 Commercial Bank -2.04 -16.73 205 212 248 235 American Business Bank 901,300 Commercial Bank 0.87 13.86 28 14 95 64 American Continental Bank 137,256 Commercial Bank -0.91 -8.70 162 175 198 199 American Plus Bank, N.A. 128,096 Commercial Bank -0.98 -5.06 167 150 34 62 American Premier Bank 104,848 Commercial Bank -1.05 -7.39 171 167 113 100 American Principle Bank 202,968 Commercial Bank -0.96 -4.27 165 143 92 114 American River Bank 592,452 Commercial Bank 0.28 2.43 84 83 201 201 American Riviera Bank 133,145 Commercial Bank -1.45 -10.14 186 178 219 190 American Security Bank 417,343 Commercial Bank -1.12 -8.96 174 176 223 202 Americas United Bank 124,020 Commercial Bank -3.55 -19.21 247 221 172 183 Armed Forces Bank of California, N.A. 23,821 Commercial Bank 1.66 4.88 11 48 190 123 Asian Pacific National Bank 49,892 Commercial Bank 0.44 2.71 66 80 89 76 Balboa Thrift and Loan Assoc. 198,903 Industrial Bank 0.17 1.91 95 87 94 77 Banamex USA 1,248,038 Commercial Bank -1.01 -4.83 168 147 228 176 Bank of Agriculture and Commerce 447,668 Commercial Bank 1.26 12.85 16 15 148 145 Bank of Alameda 247,213 Commercial Bank -1.71 -15.21 196 203 203 194 Bank of America California, N.A. 23,478,273 Commercial Bank 2.14 31.77 7 1 60 35 Bank of Feather River 33,697 Commercial Bank -2.28 -10.72 211 180 69 134 Bank of Hemet 465,128 Commercial Bank 1.52 16.54 12 9 174 182 Bank of Internet USA 1,353,065 Savings Institution 1.39 18.44 13 8 50 19 Bank of Manhattan, N.A. 151,506 Commercial Bank -3.36 -13.86 243 192 19 39 Bank of Marin 1,121,748 Commercial Bank 1.20 12.53 18 17 129 106 Bank of Napa, N.A. 84,266 Commercial Bank -0.91 -4.02 163 142 31 46 Bank of Rio Vista 179,350 Commercial Bank -0.60 -4.83 145 146 220 197 Bank of Sacramento 356,680 Commercial Bank 0.28 2.89 85 77 128 111 Bank of San Francisco 87,757 Commercial Bank 0.06 0.63 107 104 107 92 Bank of Santa Barbara 72,237 Commercial Bank -7.97 -81.44 284 281 279 273 Bank of Santa Clarita 173,307 Commercial Bank 0.38 3.13 73 71 109 91 Bank of Stockton 1,947,723 Commercial Bank 0.44 4.33 67 55 142 112 Bank of the Orient 629,249 Commercial Bank -0.25 -2.81 128 133 169 175 Bank of the Sierra 1,331,122 Commercial Bank 0.76 7.11 36 35 154 156 Bank of the West 60,000,590 Commercial Bank -0.63 -4.54 147 144 183 164 Bank of Whittier, NA 56,331 Commercial Bank 0.63 4.62 45 52 91 68 Bank of Willits 132,447 Commercial Bank 0.73 4.69 37 50 66 52 Bay Cities National Bank 281,316 Commercial Bank -0.63 -14.42 148 197 41 13 Bay Commercial Bank 143,410 Commercial Bank 0.26 2.29 87 84 117 88 Beach Business Bank 255,321 Commercial Bank -2.22 -14.75 210 201 177 158 Borel Private Bank & Trust Co. 1,625,429 Commercial Bank 0.81 9.03 30 27 167 168

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -70- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Borrego Springs Bank, N.A. 103,559 Commercial Bank 0.62 7.11 47 36 11 6 Bridge Bank, N.A. 843,901 Commercial Bank 0.35 2.78 77 79 47 24 Broadway Federal Bank, F. S. B. 529,221 Savings Institution 0.49 6.27 60 41 138 140 Butte Community Bank 537,813 Commercial Bank -4.59 -59.84 265 268 272 272 California Bank & Trust 11,254,808 Commercial Bank -0.46 -3.75 137 139 187 177 California Bank of Commerce 193,764 Commercial Bank -0.97 -6.64 166 161 7 14 California Business Bank 115,411 Commercial Bank -3.33 -27.67 241 245 207 208 California Community Bank 220,638 Commercial Bank -0.29 -2.37 130 127 137 121 California First National Bank 300,077 Commercial Bank 2.31 12.67 5 16 42 37 California General Bank, N.A. 45,879 Commercial Bank -17.72 NA 291 NA NA NA California Oaks State Bank 125,427 Commercial Bank -0.44 -3.30 135 138 70 47 California Pacific Bank 73,642 Commercial Bank 0.81 2.88 31 78 194 150 California Republic Bank 277,848 Commercial Bank -1.74 -7.22 199 166 54 116 California United Bank 456,737 Commercial Bank 0.18 1.33 94 97 155 122 Canyon National Bank 244,685 Commercial Bank -6.34 -72.48 277 274 273 267 Capital Bank 58,748 Commercial Bank -4.19 -16.24 258 210 8 1 Capital Bank and Trust Co., FSB 151,231 Savings Institution 15.26 21.70 1 6 14 44 CapitalSource Bank 5,677,354 Industrial Bank -1.23 -8.02 179 170 NA NA Cathay Bank 11,572,905 Commercial Bank -0.54 -4.57 140 145 202 193 Centennial Bank 848,350 Industrial Bank -0.87 -8.47 160 173 247 243 Center Bank 2,190,165 Commercial Bank -1.88 -18.59 203 218 244 242 Central Valley Community Bank 765,032 Commercial Bank 0.38 3.37 74 66 171 170 Charter Oak Bank 153,379 Commercial Bank -2.45 -21.53 215 228 263 257 Chinatrust Bank USA 2,269,063 Commercial Bank -11.37 -114.75 289 287 282 280 Chino Commercial Bank, N.A. 103,469 Commercial Bank 0.61 6.18 48 42 125 93 Circle Bank 261,896 Industrial Bank 0.80 10.72 32 23 124 113 Citizens Bank of Northern California 370,742 Commercial Bank -3.31 -38.69 240 258 157 203 Citizens Business Bank 6,734,787 Commercial Bank 1.05 9.42 21 26 108 131 City National Bank 20,748,593 Commercial Bank 0.41 4.12 68 57 150 144 Coast National Bank 153,985 Commercial Bank -2.66 -29.13 223 247 232 232 Commerce Bank of Temecula Valley 45,498 Commercial Bank -4.66 -18.18 266 216 26 149 Commerce National Bank 229,100 Commercial Bank -0.24 -1.72 126 123 131 108 CommerceWest Bank, N.A. 349,716 Commercial Bank -0.33 -2.68 131 131 217 189 Commercial Bank of California 264,691 Commercial Bank 0.20 1.64 91 92 33 22 Commonwealth Business Bank 336,185 Commercial Bank -0.16 -1.07 122 117 136 117 Community 1st Bank 154,079 Commercial Bank -1.01 -8.31 169 172 87 105 Community Bank 2,439,754 Commercial Bank 0.30 3.15 80 70 158 148 Community Bank of San Joaquin 145,901 Commercial Bank -1.69 -14.36 195 196 73 67 Community Bank of Santa Maria 134,947 Commercial Bank -0.58 -5.12 143 151 175 166 Community Bank of the Bay 83,743 Commercial Bank -3.77 -39.93 252 260 111 195 Community Banks of Northern CA 145,485 Commercial Bank -8.97 -122.33 285 289 269 275 Community Business Bank 124,955 Commercial Bank -3.11 -21.03 236 225 251 227 Community Commerce Bank 406,516 Industrial Bank 0.00 -0.01 110 110 176 179 Community Valley Bank 43,484 Commercial Bank -4.58 -21.37 264 226 5 102

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -71- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Community West Bank, N.A. 684,246 Commercial Bank -0.84 -10.04 158 177 209 220 Cornerstone Community Bank 70,632 Commercial Bank 0.12 0.87 99 101 20 16 Coronado First Bank 93,681 Commercial Bank -1.94 -16.54 204 211 205 207 County Commerce Bank 160,067 Commercial Bank 0.68 7.91 40 33 114 90 Delta Bank, N.A. 119,662 Commercial Bank -3.76 -31.34 250 252 259 246 Desert Commercial Bank 140,968 Commercial Bank -2.78 -29.52 226 248 80 129 East West Bank 20,559,554 Commercial Bank 0.61 5.04 49 47 49 30 Eastern International Bank 101,634 Commercial Bank 0.56 4.07 52 58 115 95 El Dorado Savings Bank, F.S.B. 1,655,772 Savings Institution 0.65 7.15 41 34 98 71 Embarcadero Bank 45,425 Commercial Bank -1.37 -2.33 181 126 55 80 Evertrust Bank 555,298 Commercial Bank -0.80 -4.97 157 149 192 165 Excel National Bank 216,996 Commercial Bank 0.11 1.54 100 95 25 9 Exchange Bank 1,531,833 Commercial Bank -0.24 -2.64 127 130 52 20 Far East National Bank 2,080,112 Commercial Bank -2.13 -20.78 207 224 230 224 Farmers & Merchants Bank of Central CA 1,782,913 Commercial Bank 1.20 12.19 19 20 145 135 Farmers & Merchants Bank of Long Beach 3,980,769 Commercial Bank 1.03 7.07 22 37 88 63 Finance & Thrift Co. 114,193 Industrial Bank 0.56 2.58 53 81 85 79 Fireside Bank 938,513 Industrial Bank -0.04 -0.19 111 111 40 27 First American Trust FSB 1,025,718 Savings Institution -0.15 -3.05 121 134 193 237 First Business Bank, N.A. 111,629 Commercial Bank -0.86 -5.34 159 154 3 11 First California Bank 1,456,873 Commercial Bank -0.13 -1.12 117 118 191 172 First Choice Bank 147,845 Commercial Bank -0.74 -5.98 154 158 139 126 First Commerce Bank 340,765 Commercial Bank 0.32 2.97 78 76 56 38 First Commercial Bank (USA) 457,028 Commercial Bank 0.07 0.62 105 105 106 96 First Community Bank 751,532 Commercial Bank -0.72 -7.52 153 169 165 162 First Credit Bank 493,871 Commercial Bank 4.43 22.42 2 5 63 33 First Foundation Bank, FSB 236,734 Savings Institution -1.64 -11.22 193 183 22 74 First FSLA of San Rafael 176,012 Savings Institution 0.63 3.46 46 65 93 85 First General Bank 189,038 Commercial Bank 0.22 1.54 89 94 161 132 First Mountain Bank 137,720 Commercial Bank -1.41 -12.15 184 185 231 219 First National Bank of Northern CA 708,289 Commercial Bank 0.09 0.76 103 103 164 160 First National Bank of Southern CA 217,408 Commercial Bank -1.22 -14.03 178 194 222 226 First Northern Bank of Dixon 747,621 Commercial Bank -0.14 -1.27 120 122 100 78 First Private Bank & Trust 523,410 Commercial Bank -2.35 -19.18 212 220 1 3 First Regional Bank (failed) 2,082,684 Commercial Bank -5.21 -71.52 273 273 267 269 First Security Business Bank 322,882 Industrial Bank 1.35 15.19 14 11 90 32 First Standard Bank 120,161 Commercial Bank -4.09 -39.07 256 259 240 234 First Vietnamese American Bank 57,072 Commercial Bank -4.86 -74.58 269 275 35 258 Five Star Bank 381,280 Commercial Bank -0.61 -6.07 146 159 250 244 Focus Business Bank 107,912 Commercial Bank -3.54 -15.97 246 208 225 191 Folsom Lake Bank 102,610 Commercial Bank -2.54 -16.20 218 209 64 169 Founders Community Bank 108,573 Commercial Bank -1.51 -14.44 188 198 235 228 Fremont Bank 2,359,188 Commercial Bank 0.72 8.49 38 29 123 104 Fresno First Bank 122,369 Commercial Bank 0.54 4.49 56 54 15 12

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -72- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Friendly Hills Bank 80,992 Commercial Bank -2.11 -11.10 206 182 178 163 Fullerton Community Bank, FSB 734,726 Savings Institution -0.34 -4.01 132 141 168 173 Gateway Bank, FSB 424,764 Savings Institution -1.38 -22.83 183 234 75 54 Gateway Business Bank 216,229 Commercial Bank -1.63 -12.80 192 187 224 206 GBC International Bank 302,121 Commercial Bank 0.77 8.06 34 30 119 99 Gilmore Bank 184,847 Commercial Bank -3.06 -34.79 235 256 67 137 Global Trust Bank 51,624 Commercial Bank -7.04 -12.86 281 188 NA NA Gold Country Bank, N.A. 99,404 Commercial Bank -1.37 -14.05 182 195 121 127 Golden Coast Bank 36,427 Commercial Bank -11.11 -86.26 286 282 216 264 Golden Security Bank 164,617 Industrial Bank -1.62 -21.39 191 227 241 252 Golden State Bank 159,647 Commercial Bank -3.72 -45.24 249 263 149 238 Golden Valley Bank 92,579 Commercial Bank 0.41 2.49 69 82 76 60 Granite Community Bank, N.A. 108,551 Commercial Bank -4.21 -71.01 259 271 105 256 Hanmi Bank 3,155,992 Commercial Bank -3.19 -39.98 237 261 181 225 Heritage Bank of Commerce 1,360,951 Commercial Bank -0.69 -5.15 152 152 195 180 Heritage Oaks Bank 940,318 Commercial Bank -0.74 -7.02 155 165 197 198 Home Bank of California 163,092 Commercial Bank 2.02 23.17 8 4 186 187 Independence Bank 356,254 Commercial Bank -0.95 -10.98 164 181 211 217 Inland Community Bank, N.A. 282,018 Commercial Bank -1.76 -15.77 200 207 239 230 Innovative Bank (failed) 268,891 Commercial Bank -5.30 -55.90 274 265 254 262 International City Bank, N.A. 214,793 Commercial Bank -2.39 -23.27 214 236 43 36 JPMorgan Bank and Trust Co., N.A. 10,048,662 Commercial Bank 2.15 20.99 6 7 NA NA Kaiser Federal Bank (MHC) 874,358 Savings Institution 0.30 3.29 81 67 141 133 La Jolla Bank, FSB (failed) 3,646,071 Savings Institution -6.63 -93.04 280 284 280 282 Liberty Bank 230,558 Commercial Bank 0.15 1.47 98 96 144 142 Lighthouse Bank 91,155 Commercial Bank -0.26 -1.22 129 120 9 21 Los Angeles National Bank 212,262 Commercial Bank 0.49 3.99 61 60 44 28 Los Padres Bank 934,291 Savings Institution -4.03 -80.59 254 280 262 271 Luther Burbank Savings 3,539,310 Savings Institution 1.30 15.44 15 10 143 138 Malaga Bank F.S.B. 809,979 Savings Institution 1.25 13.99 17 12 81 65 Manufacturers Bank 1,966,375 Commercial Bank 0.01 0.04 108 109 160 141 Mechanics Bank 2,944,942 Commercial Bank 0.54 5.20 57 46 99 82 Mega Bank 139,212 Commercial Bank -3.29 -15.33 239 205 18 2 Merchants Bank of California, N.A. 76,136 Commercial Bank -0.13 -0.79 118 115 215 184 Merchants National Bank of Sacramento 163,607 Commercial Bank 1.03 10.15 23 25 96 70 Metro United Bank 476,306 Commercial Bank -1.01 -6.75 170 162 180 153 Metropolitan Bank 154,621 Commercial Bank 0.59 7.04 50 39 212 211 Mission Bank 214,554 Commercial Bank 1.06 10.47 20 24 173 152 Mission Community Bank 192,738 Commercial Bank -2.89 -25.33 229 241 206 185 Mission National Bank 175,057 Commercial Bank 1.02 12.20 24 19 126 103 Mission Oaks National Bank 197,484 Commercial Bank -4.25 -47.28 260 264 264 263 Mission Valley Bank 263,365 Commercial Bank -0.05 -0.57 112 114 182 188 Mizuho Corporate Bank of California 290,731 Commercial Bank -0.34 -1.90 133 125 179 154 Mojave Desert Bank, N.A. 90,560 Commercial Bank 0.29 3.06 82 73 135 125

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -73- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Montecito Bank & Trust 954,988 Commercial Bank 0.98 11.00 26 22 82 58 Monterey County Bank 272,156 Commercial Bank 0.69 7.99 39 31 127 118 Mother Lode Bank 63,520 Commercial Bank -4.41 -57.54 262 266 238 261 Murphy Bank 120,449 Commercial Bank 1.93 13.95 9 13 140 128 Napa Community Bank 166,905 Commercial Bank 0.32 3.05 79 74 170 161 Nara Bank 3,224,876 Commercial Bank -0.13 -1.22 119 119 147 136 National Bank of California 391,945 Commercial Bank -0.90 -7.42 161 168 208 192 Neighborhood National Bank 133,545 Commercial Bank -1.79 -24.03 201 240 210 229 New Resource Bank 159,475 Commercial Bank -3.04 -22.32 233 232 17 10 North Valley Bank 881,973 Commercial Bank -2.58 -23.44 220 237 255 247 Northern California National Bank 101,371 Commercial Bank 0.48 3.23 62 69 68 53 Oak Valley Community Bank 524,599 Commercial Bank 0.40 3.54 70 64 120 115 Oceanic Bank 191,001 Commercial Bank 0.29 1.81 83 90 162 130 Ojai Community Bank 112,452 Commercial Bank -1.64 -13.82 194 191 227 213 OMNI Bank, N.A. 154,350 Commercial Bank -0.59 -3.28 144 137 184 151 OneCalifornia Bank, FSB 99,333 Savings Institution -3.23 -18.09 238 215 6 73 OneWest Bank, FSB 23,300,256 Savings Institution NA NA NA NA NA NA Orange Community Bank 204,266 Commercial Bank 0.17 1.77 96 91 103 87 Orange County Business Bank 255,367 Commercial Bank -0.67 -3.20 151 136 189 147 Pacific Alliance Bank 88,944 Commercial Bank -2.15 -17.90 208 214 29 94 Pacific Capital Bank, N.A. 7,530,503 Commercial Bank -4.74 -66.36 267 270 266 268 Pacific City Bank 536,936 Commercial Bank -2.81 -25.82 228 242 260 255 Pacific Coast Bankers' Bank 615,196 Commercial Bank -1.24 -13.94 180 193 233 236 Pacific Commerce Bank 200,479 Commercial Bank -0.40 -3.96 134 140 62 40 Pacific Enterprise Bank 138,759 Commercial Bank -0.52 -2.72 139 132 12 29 Pacific Mercantile Bank 1,201,300 Commercial Bank -1.16 -15.72 176 206 130 124 Pacific Premier Bank 802,424 Commercial Bank 0.01 0.16 109 108 133 120 Pacific State Bank 369,581 Commercial Bank -5.54 -77.49 275 278 265 270 Pacific Trust Bank, FSB 893,945 Savings Institution -0.11 -1.24 116 121 112 101 Pacific Valley Bank 180,881 Commercial Bank -3.05 -32.06 234 253 236 233 Pacific Western Bank 5,315,240 Commercial Bank 0.11 0.99 101 99 2 4 Palm Desert National Bank 294,699 Commercial Bank -6.39 -76.95 278 277 281 279 Pan American Bank 40,965 Commercial Bank -1.71 -15.26 197 204 229 222 Pan Pacific Bank 82,660 Commercial Bank -2.93 -22.96 230 235 253 240 Partners Bank of California 86,045 Commercial Bank -4.17 -23.68 257 239 4 61 Pinnacle Bank 144,587 Commercial Bank -3.88 -32.06 253 254 71 221 Plaza Bank 158,824 Commercial Bank -1.58 -14.55 190 200 23 5 Plumas Bank 527,665 Commercial Bank -1.73 -18.27 198 217 242 239 Point Loma Community Bank 66,700 Commercial Bank -2.68 -27.93 225 246 261 259 Preferred Bank 1,307,114 Commercial Bank -4.99 -59.54 270 267 268 266 Premier Business Bank 98,977 Commercial Bank -3.35 -26.06 242 244 74 186 Premier Commercial Bank, N.A. 365,924 Commercial Bank 0.19 2.04 93 86 151 143 Premier Service Bank 163,871 Commercial Bank -0.50 -4.86 138 148 156 146 Premier Valley Bank 474,454 Commercial Bank 0.38 3.10 75 72 86 69

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -74- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Presidio Bank 244,181 Commercial Bank -1.44 -10.36 185 179 46 49 Private Bank of California 282,515 Commercial Bank 0.07 0.52 106 107 102 89 Private Bank of the Peninsula 308,004 Commercial Bank -0.17 -1.81 123 124 58 34 Professional Business Bank 302,544 Commercial Bank -11.35 -99.37 288 285 39 245 Promerica Bank 95,354 Commercial Bank -3.45 -13.76 244 190 57 110 Provident Savings Bank, FSB 1,414,535 Savings Institution -0.23 -3.17 125 135 84 59 Rabobank, N.A. 9,434,171 Commercial Bank 0.17 0.83 97 102 134 107 Rancho Santa Fe Thrift & Loan Assoc. 46,911 Industrial Bank 0.21 0.53 90 106 36 45 Redding Bank of Commerce 807,264 Commercial Bank 0.84 8.81 29 28 78 51 Redwood Capital Bank 186,294 Commercial Bank 0.45 5.67 65 45 104 84 Regents Bank, N.A. 343,030 Commercial Bank 0.39 4.21 71 56 110 109 River City Bank 1,031,869 Commercial Bank -0.57 -6.39 142 160 122 119 River Valley Community Bank 109,460 Commercial Bank 0.65 4.51 42 53 132 86 Royal Business Bank 179,326 Commercial Bank -4.37 -8.25 261 171 NA NA Saehan Bank 667,456 Commercial Bank -6.45 -89.85 279 283 270 274 Saigon National Bank 65,039 Commercial Bank -11.51 -103.08 290 286 278 276 San Diego Private Bank 129,628 Commercial Bank -2.55 -29.56 219 249 246 254 San Diego Trust Bank 152,141 Commercial Bank 0.51 3.91 59 61 101 83 San Luis Trust Bank, FSB 331,205 Savings Institution -1.53 -19.34 189 222 245 251 Santa Ana Business Bank 26,395 Commercial Bank -11.18 -35.20 287 257 13 215 Santa Clara Valley Bank, N.A. 139,698 Commercial Bank -2.17 -23.47 209 238 252 253 Santa Cruz County Bank 265,105 Commercial Bank 0.08 1.06 104 98 97 75 Santa Lucia Bank 269,518 Commercial Bank -0.63 -5.83 149 157 214 205 Savings Bank of Mendocino County 766,331 Commercial Bank 1.01 6.94 25 40 37 26 Scott Valley Bank 449,576 Commercial Bank 0.39 3.25 72 68 116 98 Seacoast Commerce Bank 104,048 Commercial Bank -5.09 -41.70 271 262 258 249 Security Bank of California 314,734 Commercial Bank -0.78 -5.34 156 153 204 174 Security Business Bank of San Diego 196,348 Commercial Bank 0.20 1.58 92 93 65 43 Security First Bank 107,938 Commercial Bank 0.78 4.86 33 49 10 17 Sierra Vista Bank 105,013 Commercial Bank -2.35 -21.84 213 230 16 81 Silicon Valley Bank 12,191,463 Commercial Bank 0.92 11.60 27 21 188 178 Silvergate Bank 362,659 Commercial Bank 0.56 5.73 54 44 77 48 Sonoma Valley Bank 357,254 Commercial Bank -5.62 -71.41 276 272 277 277 South County Bank, N.A. 190,640 Commercial Bank -2.58 -30.18 221 250 59 57 State Bank of India (California) 851,868 Commercial Bank 0.46 4.05 64 59 159 157 Stellar Business Bank 95,473 Commercial Bank -1.21 -6.80 177 164 28 42 Summit Bank 178,542 Commercial Bank 0.28 3.02 86 75 152 155 Summit State Bank 340,400 Commercial Bank 0.59 3.74 51 63 79 66 Suncrest Bank 70,142 Commercial Bank -3.51 -14.50 245 199 NA NA Sunrise Bank 103,488 Commercial Bank -1.07 -8.59 173 174 226 204 Sunrise Bank of San Diego 83,825 Commercial Bank -2.45 -22.22 216 231 256 250 Sunrise Community Bank 42,204 Commercial Bank -7.65 -62.40 283 269 274 265 Sunwest Bank 649,937 Commercial Bank 2.86 31.24 3 2 24 7 Sutter Community Bank 62,691 Commercial Bank 0.10 0.94 102 100 27 15

Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -75- CARPENTER & COMPANY I NDUSTRY RANKINGS: 2009 Return on Average Assets and Average Equity

2009 RELATIVE PERFORMANCE OF CA FINANCIAL INSTITUTIONS 2009 RANKINGS BASED ON Assets Change in Co. Name ($000) Type ROAA ROAE ROAA ROAE ROAA ROAE

Tamalpais Bank (failed) 628,903 Commercial Bank -5.18 -75.58 272 276 276 278 TomatoBank, N.A. 436,713 Commercial Bank -2.48 -20.49 217 223 243 231 Torrey Pines Bank 1,161,785 Commercial Bank -0.19 -2.47 124 128 30 8 Trans Pacific National Bank 173,337 Commercial Bank -2.96 -31.24 231 251 237 241 Tri Counties Bank 2,169,282 Commercial Bank 0.54 4.66 58 51 153 139 Tri-Valley Bank 87,236 Commercial Bank -3.76 -34.54 251 255 146 200 Tustin Community Bank 58,104 Commercial Bank 0.47 3.85 63 62 72 50 Union Bank, N.A. 85,195,743 Commercial Bank -0.09 -0.83 115 116 166 171 United American Bank 401,551 Commercial Bank -1.47 -16.96 187 213 196 210 United Labor Bank, F.S.B. 271,649 Savings Institution 0.56 7.94 55 32 83 56 United Pacific Bank 164,814 Commercial Bank -1.05 -13.17 172 189 199 216 United Security Bank 694,022 Commercial Bank -0.66 -5.46 150 155 213 196 Uniti Bank 227,697 Commercial Bank -2.98 -25.82 232 243 257 248 Universal Bank 531,016 Savings Institution -1.14 -11.84 175 184 218 209 US Metro Bank 116,740 Commercial Bank -2.67 -18.82 224 219 234 212 Valley Business Bank 340,090 Commercial Bank -0.06 -0.46 114 113 185 181 Valley Community Bank 221,100 Commercial Bank 0.24 2.24 88 85 38 18 Valley Republic Bank 139,710 Commercial Bank -3.71 NA 248 NA NA NA Ventura County Business Bank 93,022 Commercial Bank -7.28 -120.04 282 288 275 281 Vibra Bank 51,536 Commercial Bank -4.51 -12.29 263 186 NA NA Visalia Community Bank 194,590 Commercial Bank -0.56 -6.77 141 163 221 223 Wedbush Bank 139,084 Savings Institution 0.38 1.88 76 88 NA NA Wells Fargo Bank, Ltd. 237,578 Commercial Bank -4.85 -5.48 268 156 271 167 Wells Fargo Central Bank 27,755 Commercial Bank -0.05 -0.27 113 112 118 97 Wells Fargo HSBC Trade Bank NA 1,513,443 Commercial Bank 1.92 12.41 10 18 61 72 WestAmerica Bank 4,940,885 Commercial Bank 2.53 24.96 4 3 48 25 Western Commercial Bank 107,112 Commercial Bank -1.82 -21.75 202 229 200 218 Wilshire State Bank 3,431,942 Commercial Bank 0.77 7.06 35 38 163 159

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Any ranking in the top 25 is highlighted.

CALIFORNIA BANKERS ASSOCIATION -76- CARPENTER & COMPANY

2010

STOCK PERFORMANCE CALENDAR YEAR 2009

STOCK PERFORMANCE: 2009 Annual Report

CARPENTER AND COMPANY - STOCK PERFORMANCE REPORT 12/31/2009 AVERAGE LTM P/E RATIOS BY ASSET GROUP

Average LTM* P/E Ratio

12/31/2009 12/31/2008 % Change YTD Total Assets: Less than $50M N/M N/M - $50M - $100M 20.13 21.96 -8.32% $100M - $250M 22.62 20.54 10.15% $250M - $500M 23.58 15.38 53.35% $500M - $1Bn 16.27 13.59 19.76% $1Bn - $10Bn 22.74 15.46 47.04% Over $10Bn N/M 20.08 NM CA Thrifts 7.37 16.60 -55.59%

25

20

15

10

5

0 $50M - $100M - $250M - $500M - $1Bn - Over CA Thrifts $100M $250M $500M $1Bn $10Bn $10Bn

12/31/2008 12/31/2009

*LTM= Last Twelve Months. LTM P/E calculated based on last twelve months earnings through 9/30/09, when available.

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -77- CARPENTER &COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - STOCK PERFORMANCE REPORT 12/31/2009 PRICE/BOOK RATIOS BY ASSET GROUP

Average Price/T. Book Ratio

12/31/2009 12/31/2008 % Change YTD Total Assets: Less than $50M 0.85 0.86 -0.59% $50M - $100M 0.68 0.82 -17.52% $100M - $250M 0.71 0.79 -9.73% $250M - $500M 0.65 0.76 -14.68% $500M - $1Bn 0.62 0.80 -22.11% $1Bn - $10Bn 1.02 1.18 -13.88% Over $10Bn 1.47 1.66 -11.26% CA Thrifts 0.42 0.41 3.38%

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Less than $50M - $100M - $250M - $500M - $1Bn - Over CA $50M $100M $250M $500M $1Bn $10Bn $10Bn Thrifts

12/31/2008 12/31/2009

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -78- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - STOCK PERFORMANCE REPORT 12/31/2009 INDUSTRY-WIDE RATIO COMPARISON

Carpenter California Banks - SNL Bank Index: Price/Tangible Book Ratio (x)

12/31/2009 12/31/2008 California Banks SNL Banks California Banks SNL Banks Total Assets: Less than $250M 0.71 0.78 0.81 1.05 Less than $500M 0.70 0.91 0.81 0.98 $250M - $500M 0.65 0.94 0.80 0.97 $500M - $1Bn 0.62 1.14 0.82 1.27 Over $10Bn 1.47 1.79 1.62 2.09 Thrifts 0.42 1.69 0.45 1.83

Current Month Comparison

2.0

1.5

1.0

0.5

0.0 Less than Less than $250M - $500M - Over $10Bn Thrifts $250M $500M $500M $1Bn California Banks SNL Banks

Carpenter California Banks - SNL Bank Index: Price/LTM EPS Ratio (x) 12/31/2009 12/31/2008 California Banks SNL Banks California Banks SNL Banks Total Assets: Less than $250M 22.44 11.51 20.88 14.32 Less than $500M 22.82 16.17 18.45 14.33 $250M - $500M 23.58 16.33 16.03 14.33 $500M - $1Bn 16.27 17.69 13.87 13.72 Over $10Bn NM 27.11 12.92 13.60 Thrifts 7.37 19.48 16.60 20.05

P./E Current Month Comparison

30 25 20 15 10 5 0 Less than Less than $250M - $500M - Over $10Bn Thrifts $250M $500M $500M $1Bn California Banks SNL Banks

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -79- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS LESS THAN $50 MILLION TOTAL MARKET CAPITALIZATION: $50 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

CBJC CAPITAL BANK 30-Dec 11.50 39,654 17,253,703 NEG 1.62 1.60 16.16% CKTM COMMERCE BANK OF TEMECULA V 29-Dec 5.00 34,570 7,511,870 NEG 0.68 -0.10 -1.96% CMUV COMMUNITY VALLEY BANK 31-Dec 6.00 65,643 8,059,188 NEG 1.01 -3.00 -33.33% PAMB PAN AMERICAN BANK 6-Nov 0.40 21,025 610,481 NEG 0.10 -0.85 -68.00% SABB SANTA ANA BUSINESS BANK 22-Sep 3.50 7,421 4,331,250 NEG 0.63 -0.50 -12.50% VBBK VIBRA BANK 15-Sep 17.00 9,200 12,560,705 NEG 1.08 -1.00 -5.56% Average N/M 0.85

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS BETWEEN $50 MILLION AND $100 MILLION TOTAL MARKET CAPITALIZATION: $160 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

ABNK ALTAPACIFIC BANK 31-Dec 10.00 190,178 27,500,000 N/M 1.10 0.00 0.00% BNNP BANK OF NAPA NA 23-Dec 4.50 121,603 10,299,978 NEG 0.62 -1.50 -25.00% CBYAA COMMUNITY BANK OF THE BAY 24-Dec 4.10 217,942 8,233,161 NEG 1.91 -0.90 -18.00% CDFB CORONADO FIRST BANK 31-Dec 3.30 342,430 4,595,174 NEG 0.45 -3.70 -52.86% CRSB CORNERSTONE COMMUNITY BANK 31-Dec 3.60 32,321 4,320,000 NEG 0.50 -1.40 -28.00% FHLB FRIENDLY HILLS BANK 31-Dec 4.80 99,865 7,756,800 NEG 0.58 -2.70 -36.00% FOLB FOLSOM LAKE BANK 3-Dec 7.50 29,954 11,948,333 NEG 0.95 -1.50 -16.67% FVAB FIRST VIETNAMESE AMERICAN BAN 31-Dec 0.08 92,154 121,000 NEG 0.04 -2.32 -96.67% GVYB GOLDEN VALLEY BANK 11-Dec 7.05 49,742 14,529,987 N/M 0.99 -0.95 -11.88% LGHT LIGHTHOUSE BANK 22-Dec 8.25 18,834 15,287,481 NEG 0.94 1.25 17.86% MOJA MOJAVE DESERT BANK 23-Dec 16.40 34,480 6,262,122 20.13 0.70 -7.10 -30.21% MOLB MOTHER LODE BANK 28-Dec 0.57 61,699 856,701 NEG 0.20 -3.18 -84.80% PFBN PACIFIC ALLIANCE BANK 3-Sep 4.00 23,500 6,630,744 NEG 0.64 1.50 60.00% PMRA PROMERICA BANK 24-Dec 1.55 97,669 4,262,500 NEG 0.21 -0.15 -8.82% PPFC PAN PACIFIC BANK 28-Dec 1.50 85,031 2,376,750 NEG 0.25 -2.50 -62.50% SAGN SAIGON NATIONAL BANK 23-Dec 0.30 157,419 423,631 NEG 0.18 -2.40 -88.89% SBKK SUNCREST BANK 22-Dec 9.25 32,600 17,682,087 NEG 1.23 -2.75 -22.92% SUTB SUTTER COMMUNITY BANK 29-Dec 3.00 12,861 2,855,034 NEG 0.43 -3.00 -50.00% SVBA SIERRA VISTA BANK 29-Dec 7.29 28,304 10,586,378 NEG 1.31 0.24 3.40% TRVB TRI-VALLEY BANK 29-Dec 1.75 179,208 3,082,214 NEG 0.33 -1.25 -41.67% Average 20.13 0.68

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -80- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS BETWEEN $100 MILLION AND $250 MILLION TOTAL MARKET CAPITALIZATION: $775 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

ACAL AMERICA CALIFORNIA BANK 22-Apr 10.00 1,400 13,692,130 NEG 0.96 -4.00 -28.57% APBA AMERICAN PRINCIPLE BANK 30-Dec 9.50 183,723 40,391,815 NEG 1.04 1.00 11.76% ARBV AMERICAN RIVIERA BANK 30-Dec 4.50 188,108 11,280,402 NEG 0.61 -0.50 -10.00% AUNB AMERICAS UNITED BANK 7-Dec 4.30 51,450 12,368,890 NEG 0.57 -1.30 -23.21% BCML BAY COMMERCIAL BANK 28-Dec 7.75 196,222 12,010,904 N/M 0.77 0.65 9.15% BKOT BANK ON IT INC 21-Dec 3.20 47,152 4,743,539 NEG 0.41 -1.30 -28.89% BSCA BANK OF SANTA CLARITA 28-Dec 6.56 185,683 14,559,979 20.14 0.74 0.56 9.33% CABB CALIFORNIA BUSINESS BANK 30-Dec 1.50 92,748 2,792,849 NEG 0.21 -6.00 -80.00% CABC CALIFORNIA BANK OF COMMERCE 30-Dec 7.25 83,158 19,937,500 NEG 1.02 -0.26 -3.46% CABK CALIFORNIA COMMUNITY BANK 31-Dec 9.35 111,400 19,628,390 NEG 0.84 -0.55 -5.56% CALW CALWEST BANCORP 29-Dec 2.00 173,169 4,700,578 NEG 0.46 -0.90 -31.03% CBBC COMMUNITY BUSINESS BANK 21-Dec 2.80 150,148 5,988,914 NEG 0.40 -1.45 -34.12% CCBC CHINO COMMERCIAL BANCORP 30-Nov 15.00 42,794 10,519,665 33.06 1.63 6.00 66.67% CFBN COMMUNITY 1ST BANK 30-Dec 6.50 113,627 11,440,000 NEG 0.76 -0.20 -2.99% CHOB CHARTER OAK BANK 31-Dec 5.35 417,281 9,774,932 NEG 0.56 -5.15 -49.05% CNBF COMMERCE NATIONAL BANK 31-Dec 5.85 515,946 15,564,469 NEG 0.56 -0.15 -2.50% CNYB COUNTY COMMERCE BANK 31-Dec 9.25 130,738 9,974,414 10.61 0.77 -3.10 -25.10% COSB CALIFORNIA OAKS STATE BANK 31-Dec 5.80 151,157 8,670,078 NEG 0.61 0.55 10.48% CRPB CALIFORNIA REPUBLIC BANK 30-Dec 10.00 92,410 52,000,000 NEG 1.12 1.50 17.65% CTBP COAST BANCORP 31-Dec 4.00 102,196 2,894,800 NEG 0.30 -5.25 -56.76% CYSM COMMUNITY BANK OF SANTA MARIA 31-Dec 4.50 150,002 8,849,250 N/M 0.57 -4.50 -50.00% DCBC DESERT COMMERCIAL BANK 30-Dec 2.70 350,605 5,959,559 NEG 0.46 -0.85 -23.94% DEBC DELTA NATIONAL BANCORP 14-Oct 6.50 20,355 2,471,970 NEG 0.16 -0.50 -7.14% FBBN FIRST BUSINESS BANK NA 5-Aug 9.00 1,615 23,782,806 NEG 1.47 -0.95 -9.55% FBCP FOUNDERS BANCORP 28-Dec 9.00 31,737 10,075,500 NEG 0.92 -6.00 -40.00% FCSB FOCUS BUSINESS BANK 31-Dec 5.00 50,076 13,750,000 NEG 0.63 -1.00 -16.67% FISB 1ST CAPITAL BANK 31-Dec 7.60 76,442 23,998,512 NEG 0.88 0.35 4.83% FMBP FIRST MOUNTAIN BANCORP 29-Dec 5.70 247,509 8,893,493 NEG 0.58 -0.85 -12.98% FSNF FRESNO FIRST BANK 29-Dec 10.00 92,270 16,744,970 NEG 1.20 2.00 25.00% FSTA FIRST STANDARD BANK 16-Dec 0.40 35,549 1,293,506 NEG 0.09 -2.85 -87.69% GBSI GRANITE BANCSHARES INC 31-Dec 1.75 345,201 2,385,047 NEG 0.33 -3.65 -67.59% GSBB GOLDEN STATE BANK 31-Dec 1.75 117,696 3,228,050 NEG 0.25 -3.75 -68.18% LIBC LIBERTY BANCORP INC 3-Dec 18.25 7,100 14,074,893 16.52 0.59 -1.75 -8.75% MISS MISSION COMMUNITY BANCORP 30-Dec 6.25 31,351 8,410,013 NEG 0.48 -3.80 -37.81% MNBO MNB HOLDINGS CORP 12-Nov 17.59 6,431 8,052,227 5.04 0.54 -12.41 -41.37% MNHN MANHATTAN BANCORP 17-Dec 7.00 421,365 27,913,417 NEG 0.96 -0.85 -10.83% MOKB MISSION OAKS BANCORP 31-Dec 2.10 254,813 9,444,754 NEG 0.91 -1.65 -44.00% MSBC MISSION BANCORP 23-Dec 22.51 49,490 27,987,403 14.49 1.26 -5.49 -19.61% NCNB NORTHERN CALIFORNIA NATIONAL BA 31-Dec 5.51 0 7,455,581 21.42 0.56 0.00 0.00% NWBN NEW RESOURCE BANK 31-Dec 2.90 72,030 10,934,183 NEG 0.50 -2.85 -49.57% OCBN ORANGE COMMUNITY BANCORP 30-Dec 5.35 94,081 13,703,180 44.62 0.64 -0.70 -11.57% OJCB OJAI COMMUNITY BANK 22-Dec 5.50 35,005 8,454,067 NEG 1.01 -5.25 -48.84% PBNK PINNACLE BANK 21-Dec 4.00 169,774 11,000,000 NEG 0.72 -0.05 -1.23% PDOB PRESIDIO BANK 31-Dec 6.25 156,383 25,000,000 NEG 0.90 1.24 24.75% PFCI PACIFIC COMMERCE BANK 31-Dec 5.00 93,793 12,221,275 NEG 0.80 -2.15 -30.07% PLZB PLAZA BANK 31-Dec 1.56 56,619 13,198,536 NEG 0.71 -0.44 -22.00% PSBK PREMIER SERVICE BANK 31-Dec 5.00 80,539 6,305,000 NEG 0.48 -1.00 -16.67% PVBK PACIFIC VALLEY BANK 30-Dec 6.70 116,056 18,558,692 NEG 1.03 1.70 34.00% RVVY RIVER VALLEY COMMUNITY BANK 30-Dec 11.50 14,820 15,781,427 27.16 1.02 0.50 4.55% RWCB REDWOOD CAPITAL BANCORP 29-Dec 6.98 89,734 12,096,577 NEG 1.17 -3.02 -30.20% SBBC SECURITY BUSINESS BANCORP 29-Dec 9.00 274,530 16,028,262 27.71 0.76 1.50 20.00% SCCB SEACOAST COMMERCE BANK 31-Dec 3.00 83,372 6,410,736 NEG 0.69 -3.25 -52.00% SCVE SANTA CLARA VALLEY BANK NA 31-Dec 7.25 38,032 7,786,986 NEG 0.82 -3.75 -34.09% SDBK SAN DIEGO TRUST BANK 31-Dec 12.00 125,732 23,479,152 46.35 1.42 -1.00 -7.69% SFRK SECURITY FIRST BANK 13-Nov 7.80 18,229 13,260,000 NEG 0.84 0.60 8.33% SLRB STELLAR BUSINESS BANK 31-Dec 3.00 84,475 6,885,813 NEG 0.38 -6.00 -66.67% SMAL SUMMIT BANCSHARES INC 30-Dec 8.00 103,972 10,401,424 9.25 0.60 -4.00 -33.33% UIFC UNITI FINANCIAL CORP 28-Dec 1.20 174,617 6,652,654 NEG 0.28 -1.05 -46.67% USMT US METRO BANK 5-Nov 7.00 46,410 13,860,000 NEG 1.01 -0.50 -6.67% VCBB VENTURA COUNTY BUSINESS BANK 30-Dec 1.00 119,304 1,704,343 NEG 0.31 -3.00 -75.00% VCBC VALLEY COMMUNITY BANK 18-Dec 5.85 215,674 10,991,366 17.71 0.56 -0.15 -2.50% WCBH WCB HOLDINGS INC 30-Dec 1.75 105,337 2,403,011 NEG 0.23 -4.25 -70.83% Average 22.62 0.71 Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -81- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS BETWEEN $250 MILLION AND $500 MILLION TOTAL MARKET CAPITALIZATION: $590 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

BBBC BEACH BUSINESS BANK 31-Dec 4.50 434,042 18,166,428 NEG 0.63 0.25 5.88% CUNB CALIFORNIA UNITED BANK 29-Dec 10.85 475,586 53,826,188 N/M 0.95 3.10 40.00% CWBB COMMONWEALTH BUSINESS BANK 21-Dec 8.50 140,650 26,358,347 NEG 0.64 -6.50 -43.33% CWBK COMMERCEWEST BANK NA 31-Dec 6.50 730,997 28,574,449 NEG 0.73 -2.75 -29.73% CYBA CANYON BANCORP 31-Dec 2.50 152,099 7,354,348 NEG 0.30 -2.00 -44.44% CZNB CITIZENS BANCORP 31-Dec 4.00 125,575 7,663,924 NEG 0.83 -5.00 -55.56% FCCC FIRST COMMERCE BANCORP 30-Dec 2.15 500,605 20,056,789 NEG 0.64 0.00 0.00% FCTY 1ST CENTURY BANCSHARES INC 31-Dec 3.45 2,573,687 31,114,512 NEG 0.62 -0.70 -16.87% FENB 1ST ENTERPRISE BANK 23-Dec 13.00 143,861 36,249,850 35.31 1.26 0.75 6.12% FPBN 1ST PACIFIC BANCORP 31-Dec 0.70 2,221,364 3,486,337 NEG 0.18 -1.30 -65.00% GSCB GREATER SACRAMENTO BANCORP 29-Dec 6.00 332,735 15,395,358 N/M 0.54 -3.56 -37.24% ICBN ICB FINANCIAL 28-Dec 3.50 505,381 17,923,014 NEG 0.66 0.50 16.67% MVLY MISSION VALLEY BANCORP 31-Dec 6.00 201,073 14,974,548 NEG 1.11 -1.38 -18.70% NCAL NCAL BANCORP 18-Dec 12.75 85,926 29,918,041 NEG 0.74 -4.25 -25.00% NCLC NORCAL COMMUNITY BANCORP 31-Dec 2.05 439,061 6,503,510 NEG 0.27 -3.75 -64.66% NRLB NORTHERN CALIFORNIA BANCORP INC 30-Dec 3.55 46,348 6,330,467 2.83 0.38 0.55 18.33% OCBB ORANGE COUNTY BUSINESS BANK NA 31-Dec 5.75 549,719 27,166,312 NEG 0.51 -2.25 -28.13% PBCA PRIVATE BANK OF CALIFORNIA 29-Dec 7.70 271,760 28,377,773 N/M 0.80 0.95 14.07% PBKH PENINSULA BANK HOLDING CO 30-Dec 7.75 123,730 20,167,639 NEG 0.94 -4.00 -34.04% PCBP PREMIER COMMERCIAL BANCORP 31-Dec 7.49 186,727 25,483,399 22.22 0.67 -1.01 -11.88% PSBC PACIFIC STATE BANCORP 31-Dec 0.37 2,962,044 1,377,213 NEG 0.09 -1.53 -80.53% PVLY PREMIER VALLEY BANK 31-Dec 2.60 698,516 31,827,120 NEG 0.72 -0.76 -22.70% SBNK SONOMA VALLEY BANCORP 31-Dec 7.05 226,482 16,403,961 NEG 0.57 -6.05 -46.18% SCAF SECURITY CALIFORNIA BANCORP 24-Dec 8.50 203,253 25,404,086 NEG 0.74 -1.00 -10.53% SCZC SANTA CRUZ COUNTY BANK 31-Dec 8.83 54,968 14,678,462 42.63 0.75 -3.17 -26.42% SLBA SANTA LUCIA BANCORP 31-Dec 11.00 191,209 21,576,655 43.65 0.99 -3.50 -24.14% SSBI SUMMIT STATE BANK 31-Dec 5.49 1,121,558 26,048,513 10.50 0.59 0.89 19.35% UABK UNITED AMERICAN BANK 29-Dec 5.00 164,577 12,095,975 NEG 0.46 -6.00 -54.55% VCBP VALLEY COMMERCE BANCORP 31-Dec 5.80 205,224 15,128,239 7.90 0.48 -3.58 -38.17% Average 23.58 0.65

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -82- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS BETWEEN $500 MILLION AND $1 BILLION TOTAL MARKET CAPITALIZATION: $605 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

AMBZ AMERICAN BUSINESS BANK 31-Dec 20.85 414,086 82,793,911 11.70 1.44 2.60 14.25% AMRB AMERICAN RIVER BANKSHARES 31-Dec 7.86 1,168,717 45,568,609 14.15 0.97 -2.21 -21.95% BBNK BRIDGE CAPITAL HLDG 31-Dec 7.25 1,552,561 50,747,419 28.15 0.93 3.25 81.25% BOCH BANK OF COMMERCE HOLDINGS 31-Dec 5.28 464,248 45,996,694 11.06 0.99 1.05 24.82% CVCY CENTRAL VALLEY COMMUNITY BANCORP 31-Dec 5.55 853,130 42,539,651 12.36 0.80 -0.61 -9.90% CVLL COMMUNITY VALLEY BANCORP 31-Dec 1.44 554,772 9,647,428 NEG 0.28 -2.81 -66.12% CWBC COMMUNITY WEST BANCSHARES 30-Dec 2.75 600,576 16,266,608 NEG 0.35 -0.84 -23.40% FNBG FNB BANCORP 30-Dec 7.84 224,635 24,946,400 24.54 0.39 -3.06 -28.10% FNRN FIRST NORTHERN COMMUNITY BANCORP 31-Dec 4.85 288,220 43,522,178 N/M 0.67 -0.92 -15.93% HEOP HERITAGE OAKS BANCORP 31-Dec 5.00 2,212,871 38,802,525 NEG 0.71 -0.02 -0.40% NOVB NORTH VALLEY BANCORP 31-Dec 2.09 1,876,358 15,666,258 NEG 0.28 -1.65 -44.12% OVLY OAK VALLEY BANCORP 30-Dec 4.41 506,378 33,877,078 21.92 0.72 -1.59 -26.50% PFCF PACIFIC CITY FINANCIAL CORP 14-Dec 3.10 47,616 21,818,439 NEG 0.58 -1.90 -38.00% PLBC PLUMAS BANCORP 31-Dec 3.00 372,968 14,329,017 NEG 0.49 -4.50 -60.00% PPBI PACIFIC PREMIER BANCORP INC 31-Dec 3.38 2,373,781 16,911,664 NEG 0.29 -0.62 -15.50% SAEB SAEHAN BANCORP 31-Dec 0.17 1,007,195 2,725,513 NEG 0.08 -1.83 -91.50% SWBC SUNWEST BANK 31-Dec 2,400.00 604 41,140,800 6.31 0.88 670.00 38.73% TAMB TAMALPAIS BANCORP 31-Dec 0.84 8,068,159 3,211,853 NEG 0.11 -7.63 -90.08% UBFO UNITED SECURITY BANCSHARES 31-Dec 4.40 5,749,020 54,440,192 NEG 0.81 -6.84 -60.87% Average 16.27 0.62

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -83- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS BETWEEN $1 BILLION AND $10 BILLION TOTAL MARKET CAPITALIZATION: $5.7 BILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

BMRC BANK OF MARIN BANCORP 31-Dec 32.56 4,021,231 170,190,892 13.32 1.58 8.57 35.72% BSRR SIERRA BANCORP 31-Dec 7.63 5,904,214 88,664,346 21.61 0.70 -13.37 -63.67% CLFC CENTER FINANCIAL CORP 31-Dec 4.60 22,917,980 77,234,120 NEG 0.54 -1.57 -25.45% CVBF CVB FINANCIAL CORP 31-Dec 8.64 294,799,282 917,840,255 12.44 1.56 -3.26 -27.39% EXSR EXCHANGE BANK 24-Dec 39.40 102,275 67,545,154 NEG 0.65 -4.20 -9.63% FCAL FIRST CALIFORNIA FINANCIAL GROUP 31-Dec 2.74 3,051,244 31,854,234 NEG 0.50 -2.78 -50.36% FMBL FARMERS & MERCHANTS BANK 31-Dec 3,795.00 4,250 496,871,760 14.83 0.85 -204.99 -5.12% FMCB FARMERS & MERCHANTS BANCORP 23-Dec 370.00 18,129 289,119,850 14.39 1.74 -40.00 -9.76% FRGB FIRST REGIONAL BANCORP 31-Dec 0.36 16,616,969 4,260,966 NEG 0.19 -2.88 -88.89% HAFC HANMI FINANCIAL CORP 31-Dec 1.20 89,844,587 61,441,668 NEG 0.34 -0.86 -41.75% HTBK HERITAGE COMMERCE CORP 31-Dec 4.02 13,867,387 47,518,446 NEG 0.54 -7.22 -64.23% MCHB MECHANICS BANK 24-Dec 11,000.00 393 213,180,000 28.04 0.71 -2000.00 -15.38% NARA NARA BANCORP INC 31-Dec 11.34 55,211,186 298,429,972 NEG 1.34 1.51 15.36% PACW PACWEST BANCORP 31-Dec 20.15 87,097,556 681,789,033 75.63 1.41 -6.75 -25.09% PCBC PACIFIC CAPITAL BANCORP 31-Dec 0.96 267,089,204 44,856,000 NEG 0.21 -15.92 -94.31% PFBC PREFERRED BANK 31-Dec 1.80 6,510,022 28,380,827 NEG 0.21 -4.20 -70.00% PMBC PACIFIC MERCANTILE BANCORP 31-Dec 3.02 2,842,074 31,512,688 NEG 0.41 -1.88 -38.37% RCBC RCB CORP 8-Dec 40.00 29,014 40,905,760 NEG 0.45 -20.00 -33.33% TCBK TRICO BANCSHARES 31-Dec 16.65 14,918,043 262,866,087 22.44 1.41 -8.32 -33.32% WABC WESTAMERICA BANCORP 31-Dec 55.37 72,158,142 1,617,191,590 13.28 4.84 4.22 8.25% WIBC WILSHIRE BANCORP INC 31-Dec 8.19 41,252,754 240,898,670 11.38 1.18 -0.89 -9.80% Average 22.74 1.02

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -84- CARPENTER & COMPANY S TOCK PERFORMANCE

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA BANKS WITH TOTAL ASSETS OVER $10 BILLION TOTAL MARKET CAPITALIZATION: $5.6 BILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

CATY CATHAY GENERAL BANCORP 31-Dec 7.55 233,050,328 400,694,733 NEG 0.58 -16.20 -68.21% CYN CITY NATIONAL CORP 31-Dec 45.60 238,419,167 2,348,353,807 N/M 1.85 -3.10 -6.37% EWBC EAST WEST BANCORP INC 31-Dec 15.80 377,707,554 1,448,757,806 NEG 1.81 -0.17 -1.06% SIVB SVB FINANCIAL GROUP 31-Dec 41.66 187,718,180 1,383,211,442 NEG 1.64 15.43 58.83% Average N/M 1.47

CARPENTER AND COMPANY - ANNUAL STOCK PERFORMANCE REPORT 12/31/2009 CALIFORNIA THRIFTS TOTAL MARKET CAPITALIZATION: $225 MILLION

Symbol NameLast Trade Annual Mkt Cap LTM Price/ 2009 Change Date Price ($) Volume ($) P/E T. Book ($) (%)

BOFI BOFI HOLDING INC 31-Dec 10.00 4,078,117 81,649,140 6.45 0.88 5.25 110.53% BYFC BROADWAY FINANCIAL CORP 30-Dec 5.98 130,661 10,425,323 7.47 0.31 2.14 55.73% FPTB FIRST PACTRUST BANCORP INC 31-Dec 5.35 855,106 22,727,522 NEG 0.23 -4.30 -44.56% HWFG HARRINGTON WEST FINANCIAL GROUP IN 31-Dec 0.41 1,594,386 3,019,276 NEG 0.15 -1.59 -79.50% MLGF MALAGA FINANCIAL CORP 22-Dec 12.85 130,675 74,537,389 8.20 1.23 2.85 28.50% PROV PROVIDENT FINANCIAL HOLDINGS INC 31-Dec 2.76 6,223,460 17,168,453 NEG 0.16 -1.76 -38.94% RMGC RMG CAPITAL CORP 29-Dec 4.00 188,129 11,247,616 NEG 0.24 -2.50 -38.46% SNLS SAN LUIS TRUST BANK FSB 31-Dec 1.05 388,428 4,585,273 NEG 0.16 -1.65 -61.11% Average 7.37 0.42

Information is gathered from sources believed to be reliable, however, the accuracy of the data cannot be guaranteed.

CALIFORNIA BANKERS ASSOCIATION -85- CARPENTER & COMPANY CARPENTER & COMPANY Carpenter & Company, founded in 1974, has provided strategic consulting and investment banking services to over 1,100 insured depository institutions. Within the Carpenter group of companies is a FINRA regulated broker dealer, an SEC registered investment advisor ,and the Carpenter Community BancFunds, a bank holding company that invests in community banks to help them prosper and build long-term value. -term value.