Managing Concentration Risk

FDIC Kansas City Region

Teleconference Call

February 10, 2010

•James LaPierre, Regional Director, DSC•Al McGregor, Supervisory Examiner, DSC•Rich Cofer, Regional Manager, DIR

2

Source: FDIC, insured institutions based in metropolitan areas FDIC, DIR-KC, 2/2010

CRE Lending Exposure Grew Sharply

0

100

200

300

400

500

600

700

95 85 75 65 55 45 35 25 15 5

0

100

200

300

400

500

600

700

CRE Loans (YE2007)

CRE Loans (YE1997)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

12

3

…Including C&D Loans

Source: FDIC, insured institutions based in metropolitan areas FDIC, DIR-KC, 2/2010

0

100

200

300

400

500

600

70095 85 75 65 55 45 35 25 15 5

0

100

200

300

400

500

600

700

C&D Loans (YE2007)

C&D Loans (YE1997)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

12

How Did the Industry End Up Here?

•Technology

•Financial Innovation

•Competitive Landscape

FDIC, DIR-KC, 2/2010

5

Margin Compression – A Major Symptom

Source: FDIC, all commercial banks FDIC, DIR-KC, 2/2010

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1976

1980

1984

1988

1992

1996

2000

2004

2008

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Net Interest Margin (left scale)

Loan-to-Asset Ratio (right scale)

Year-end

Median Median

6

Residential RE Markets Soured

FDIC, DIR-KC, 2/2010

Q2:07Q2:07

Q3:05Q4:05

Q1:07Q2:06

Q1:06Q2:06

Q2:07Q2:06

Q1:06Q2:06

Q2:06

Q2:06

Q2:06

Q3:06

Q1:06Q1:06

Q2:07

Memphis, TN

Dallas, TX

St. Louis, MO

Kansas City, MO

Chicago, IL

Atlantic City, NJ

New York, NY Cape Coral, FL

Atlanta, GA

Merced, CA

San Francisco, CA

80 100 120 140 160 180 200 220 240 260 280 300 320

Ann Arbor, MI

Detroit, MI

Modesto, CA

Washington, DC

Naples, FL

Denver, CO

Minneapolis, MN

Ocean City, NJ

Case-Shiller Home Price Index – Q1:2000=100

Source: Moody's Economy.com

Maximum Index Value/QQ:YY Index Value as of Q3:2009

7

Recent Failed Banks Often Have High CRE Exposure…

FDIC, DIR-KC, 2/2010Source: FDIC, 12-31-2007, all insured institutions

0

200

400

600

800

1,000

95 85 75 65 55 45 35 25 15 5

0

200

400

600

800

1,000Failed Institutions 2008-2/1/2010

All metro-based institutions

Percent of institutions at or above concentration level

CRE Loans as Percent of Total Risk-based Capital

Median

8

…Including C&D Loans

Source: FDIC, 12-31-2007, all insured institutionsFDIC, DIR-KC, 2/2010

0

100

200

300

400

500

600

700

80095 85 75 65 55 45 35 25 15 5

0

100

200

300

400

500

600

700

800Failed Institutions 2008-2/1/2010

All metro-based institutions

Percent of institutions at or above concentration level

C&D Loans as Percent of Total Risk-based Capital

Median

Lessons for Kansas City Region Ag Lenders?

FDIC, DIR-KC, 2/2010

10

Nearly Two-Thirds of the Nation’s Farm Banks Are in the Kansas City Region

Source: FDIC, 9-30-2009, farm banks FDIC, DIR-KC, 2/2010

11

Ag Credit Concentrations Have Been Steady

Source: FDIC, commercial banks based outside metropolitan areas. FDIC, DIR-KC, 2/2010

0

100

200

300

400

50095 85 75 65 55 45 35 25 15 5

0

100

200

300

400

500Total Ag loans (YE1997)

Total Ag loans (YE2007)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

12

But Players Move Up & Down the Spectrum

Source: FDIC, commercial banks based outside metropolitan areas. FDIC, DIR-KC, 2/2010

0

100

200

300

400

50095 85 75 65 55 45 35 25 15 5

0

100

200

300

400

500Total Ag loans (YE1997)

Total Ag loans (YE2007)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

Bank Anytown USA

13

Farm RE Lending Up but Ag Production Lending Down

Source: FDIC, commercial banks based outside metropolitan areas. FDIC, DIR-KC, 2/2010

0

50

100

150

200

250

300

350

95 85 75 65 55 45 35 25 15 5

0

50

100

150

200

250

300

350

Farm RE loans (YE1997)

Farm RE loans (YE2007)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

0

50

100

150

200

250

300

350

95 85 75 65 55 45 35 25 15 5

0

50

100

150

200

250

300

350

Ag production loans (YE1997)

Ag production loans (YE2007)

Percent of institutions at or above concentration level

Percent of Total Risk-based Capital

14

0

500

1,000

1,500

2,000

2,500

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Chart 1: In 2008 Dollars, Present Farmland Prices Exceed the Two Price Booms of the 20th Century

Source: USDA National Agricultural Statistics Service.

$9471914

$1,9401981

$2,3502008

Farmland Price Per Acre2008 dollars

FDIC, DIR-KC, 2/2010

15

Although Agricultural Credit Conditions Remain Favorable

Profitability and Asset Quality in Other Loan Segments Has Weakened

FDIC, DIR-KC, 2/2010

16

The Percentage of Unprofitable Institutions Has Tripled in the Last Two Years

Source: FDIC, all insured institutions. FDIC, DIR-KC, 2/2010

38.5%

15.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2005 2006 2007 2008 2009

Third Quarter

Percent Unprofitable

Metro-based institutions

Nonmetro-based

17

Nonmetro Institutions Have Not Been Immune to Rising Credit Problems

Source: FDIC, all insured institutions. FDIC, DIR-KC, 2/2010

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.5019

84

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50Median Noncurrent Loan Ratio

Third Quarter

Metro-based institutions

Nonmetro-based institutions

18

Less Than One-Third of Nonmetro Institutions Report Noncurrent Ag Loans

Source: FDIC, nonmetropolitan-based institutions. FDIC, DIR-KC, 2/2010

3Q:2007

3Q:2007

3Q:2007

3Q:2009

3Q:2009

3Q:2009

0% 20% 40% 60% 80% 100%

92%

27%

27%

22%

28%

88%

Nonagricultural Loans

Loans Secured by Farmland

Ag Production Loans

Percent of Institutions Reporting Noncurrent Balances

19

For Those Institutions Reporting Noncurrent Loans – Nonag Loans Are Most Problematic

Source: FDIC, nonmetropolitan-based institutions. FDIC, DIR-KC, 2/2010

0.00

0.50

1.00

1.50

2.00

2.50

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

NonagriculturalLoan Portfolio

Farmland LoanPortfolio

Ag Production Loan Portfolio

Median Noncurrent Ratios of Institutions Reporting Noncurrent Balances

Third Quarter Data

20

Pertinent Links at WWW.FDIC.GOV

FDIC, DIR-KC, 2/2010

FIL-61-96 Analysis and Classification of Agricultural Credits http://www.fdic.gov/news/news/financial/1996/fil9661.html

•FDIC Risk Management Manual of Examination Policies, Section 3.2 http://www.fdic.gov/regulations/safety/manual/section3-2_toc.html

FIL-104-2006 Commercial Real Estate Lending: Joint Guidance http://www.fdic.gov/news/news/financial/2006/fil06104.html

FIL-22-2008 Managing Commercial Real Estate Concentrations in a Challenging Environment http://www.fdic.gov/news/news/financial/2008/fil08022.html

FIL-61-2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts http://www.fdic.gov/news/news/financial/2009/fil09061.html