Tarp Impact on Bank Capital and Funding Activity February 2009

1. Tarp Impact on Bank Capital and Funding Activity February 2009 Will Taylor - Vining Sparks

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3. A Full Plate of Issues • Bank Capital under pressure as losses mount • Growing list of banks in trouble • FHLB suspends payment of stock dividends • Bank Preferred Stocks may suspend dividends • Nationalization of large banks • Liquidity concerns • Fed Funds target 0 to 25 basis points • Legislators, accountants, the FED intervening in the MBS and possibly treasury markets resulting in low yields on security purchases • Agency preferred stocks trading near zero • Other credit risk products, CDO, Whole Loans • Municipal Security Insurer downgrades • Other-than-temporary impairment Issues • Not sure what’s next Will Taylor - Vining Sparks 3

4. Capital considerations • Capital is scarce outside TARP • Trust preferred pools are non-existent • Options: • Insiders and friends (including institutions) • Public Markets • Evaluate • Importance • Specific need (Tier 1, Tier 2) • Alternatives Will Taylor - Vining Sparks 4

5. Current Liquidity Options FHLB • Increasing Margin • Collateral Required • Purchase Stock Will Taylor - Vining Sparks 5

6. Brokered Deposits • In order to accept or roll over brokered deposits, • Institutions must be “well capitalized” OR • Obtain prior written permission from FDIC • Many deposit brokers will only deal with “well capitalized” banks • Institutions fearful of falling to adequately capitalized are locking in liquidity NOW Will Taylor - Vining Sparks 6

7. American Express Bank of America Citigroup General Electric Goldman Sachs HSBC John Deere JP Morgan Key Bank Morgan Stanley New York Community Bank PNC Funding Regions Bank Sovereign Bank Suntrust Bank Wells Fargo The 16 FDIC guaranteed TLGP Issuers The list above is comprised of corporations that the US Government is allowing to issue corporate debt that is also guaranteed (full faith & credit) by the FDIC. The sixteen banks and FDIC approved financing units have raised $128 billion in Temporary Liquidity Guarantee bonds through the FDIC’s Temporary Liquidity Guarantee Program (TLGP) based on Bloomberg data as of January 23, 2009. Will Taylor - Vining Sparks 7

8. Senior Unsecured Debt Ratings of the TLGP 16 The sixteen banks and FDIC approved financing units have raised $114.7 billion in Temporary Liquidity Guarantee bonds through the FDIC’s Temporary Liquidity Guarantee Program (TLGP) based on Bloomberg data. The program, announced in October to help thaw the credit markets, assures investors they will get a timely payment of principal and interest should an issuer go bankrupt. The FDIC’s website says that they created this program to strengthen confidence and encourage liquidity in the banking system by confidence in the financial markets is a stated goal of Secretary Paulson and Chairman Bernanke. The TLGP is one of many programs instituted by the US government to avoid a repeat of the Lehman Brothers bankruptcy and the damage that it caused. Guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies. Will Taylor - Vining Sparks 8

9. Corporate Issues – Two Tracks of Debt Track 1 FDIC Guarantee Wells Fargo FDIC Guaranteed Floater Due 12/2011 Yield 1.41% (3 Month LIBOR DM +18) Yield if Libor Drops to zero 0.18% 20% risk weight US Gov. Guarantee Track 2 Corp. Guarantee Wells Fargo Sr. Unsecured Debt Due 3/1/2012 Yield 5.24% (3 Month LIBOR DM +401) Yield if Libor Drops to zero 4.01% 100% risk weight Corp. Guarantee Aa3/AA/AA Neg. Outlook Will Taylor - Vining Sparks 9

10. Intervention in the MBS Market title Will Taylor - Vining Sparks 10

11. Intervention in the MBS Market title Will Taylor - Vining Sparks 11

12. The MBS Refinance Application Index • We could see a wave of refinance activity similar to the 02/03 wave later this year Will Taylor - Vining Sparks 12

13. Intervention in the MBS Market • Senator McConnell has made proposals for 30 year 4% government backed mortgages. • Plans such as the Hubbard Meyer Plan calls for the Government to subsidize the refinance of loans where a borrower has negative equity are being considered. • Proposals have been seriously discussed which would allow bankruptcy judges or even servicers to modify loans to • Lower principal balances • Extend maturities • Lower the interest rate • The bottom line – there are many forces on the move that could result in a massive refinance wave. Will Taylor - Vining Sparks 13

14. Comforts – Overall Credit Quality • Comfort areas • Agency MBS, CMO, ARM, and Senior Agency Debt • UTGO Municipal Securities with “A” or better underlying credit • Municipal Securities with insurance providers that remain AAA rated • Assured Guaranty • Texas Permanent School Fund • FSA • SBAs • Pools, DCPC and SPIC offers • Full Faith & Credit, Yield near 6%, 15 year final Will Taylor - Vining Sparks 14

15. Munis Key to high performing portfolios Review credit quality of Insurance Provider Understand insurance role Understand credit considerations Will Taylor - Vining Sparks 15

16. Muni’s Importance Will Taylor - Vining Sparks 16

17. Moody's Cumulative Default Rates10-yr Cumulative Source: Moody’s “The U.S. Municipal Bond Rating Scale:Mapping to the Global Rating Scale And Assigning Global Scale Ratings to Municipal Obligations” from March 2007 17 Will Taylor - Vining Sparks

18. Municipal Insurer Ratings Will Taylor - Vining Sparks 18

19. Private Label / Whole Loan CMOs Opportunities amid land mines Avoid loans originated prior to 2004 Review cross collateralization Prices can decline dramatically for a small uptick in delinquencies Extremely illiquid Will Taylor - Vining Sparks 19

20. Private Label / Whole Loan CMOs • Consider the: • Collateral • Be aware of cross collateralization • Coverage • Cash flow • Front-end sequential benefits • Locked-out cash flow risks Will Taylor - Vining Sparks 20

21. Challenges in reviewing deals Group 1 Seniors Group 2 Seniors Group 3 Seniors Group 1 Seniors Group 2 Seniors Group 3 Seniors Mezzanine and Subordinate Classes provide credit support to the whole deal Mez/Support for G1 & G2 Mez/ Support for G3 • Cross collateralization is frequent • Credit support comes from broader collateral than cash flow group • Bloomberg defaults to cash flow group, not credit support group • Determining estimated losses or even sizing up credit risk of collateral involves broad review of collateral statistics & performance Will Taylor - Vining Sparks 21

22. Opportunities Abound • Cash purchases • Leverages • Credit Swaps • MBS for Sweet 16 Corporate Bonds • Municipals • Corporate issuers that are receiving government assistance Will Taylor - Vining Sparks 22

23. Putting it all together Investments can and should play a role in all of these considerations Will Taylor - Vining Sparks 23

24. Framework for Investment Decision Making • Identify Asset / Liability Exposure to Rate Shifts • Positive or Negative Gap • What structure / performance do I Need in the investment portfolio • Determine Objectives & Constraints • Liquidity, Earnings, Deposit Maturity / Runoff • Determine Rate Bias • Prefer Bonds with Defensive or Offensive Characteristics • Consider Investment Policy Risk Levels • Market Price Volatility, Cash Flow Volatility, Liquidity • Compare Alternatives Using Spread, Grade, Price Volatility, Total Return & Cash Flow Characteristics • Focus on Bonds Addressing Risks, Policy Limits & Rate Bias Will Taylor - Vining Sparks

25. William M. J. Taylor, Director, Senior Vice President • Will has been involved in the banking and investment business sine 1986. His career began as an employee of Shelby County, TN working in the investment and distribution of public funds. Will later moved to the correspondent banking group of Union Planters Bank. Under his management, the group grew to over $3.5 billion in warehouse lending . In this capacity Will was appointed to a number of key committees and subcommittees of the Mortgage Bankers Association of America. In addition to working in the lending area, Will was active in the trading operation. During his tenure he oversaw the financing and securitization of Collateralized Mortgage Backed Obligations (CMOs), Fixed and Adjustable Mortgage Backed Securities ( with emphasis on Multifamily projects) and Small Business Administration Loan Securities. Will joined Vining Sparks as a result of a combination of Union Planters dealer operation with Vining Sparks in September 1990. • Will received his B.A. in finance from the University of Mississippi in Oxford. During his career Will has lobbied and testified before congress and government agencies, as well as speaking to various groups at FDIC and OCC sponsored seminars. Will has been published in the following periodicals: Texas Banking; Technical Topics of the Municipal Treasurers of the Association of the United States & Canada; and Bankers Monthly. He has served on the faculty of the Mid-South School of Banking and holds the National Association of Securities Dealers' Series 7 and 63 General Securities Representative Licenses. Will Taylor - Vining Sparks