CoBiz (COBZ)

Industry Overview

 

The impact of decreased values in real estate related assets, a downturn in the financial markets and a significant tightening in the credit market that plagued the U.S. commercial banking industry in 2008 have continued into the first quarter of 2009.  During 2008, 25 banks failed and went into receivership with the FDIC compared to 10 bank failures in the previous five years.  Between January and April 2009, 23 banks have already gone into receivership.  The FDIC reported that nearly one out of three FDIC-insured institutions reported a net loss in the fourth quarter of 2008, that the industry as a whole reported its first net loss since 1990 and the average net interest margin fell to a 20-year low.  The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the FRB found that 85% of domestic banks responding to the survey had tightened their lending standards on medium-to-large commercial and industrial (C&I) loans during the fourth quarter of 2008.  The survey also found that 98% of domestic respondents had increased the spread on loan rates over their cost of funds for medium-to-large loans in the fourth quarter of 2008.  During this period, loan loss provisions at FDIC-insured institutions reached a 20-year high and absorbed one-third of the industry’s operating revenue, while quarterly earnings for the industry fell below $30 billion for the first time since 2003.

 

To stimulate the lagging economy, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law on February 17, 2009.  Included in the ARRA are investments targeted to save or create jobs including, among other things: a $55.5 billion Making Work Pay tax credit that is intended to provide a tax credit to approximately 95% of working families; $144.0 billion in state and local fiscal relief; $111.0 billion in infrastructure and science and $81.0 billion in protecting the vulnerable.  The targeted mission of the ARRA is to:

 

·                  Create or save more than 3.5 million jobs over the next two years;

 

·                  Take a big step toward computerizing Americans’ health records, reducing medical errors, and saving billions in health care costs;

 

·                  Revive the renewable energy industry and provide the capital over the next three years to eventually double domestic renewable energy capacity;

 

·                  Undertake the largest weatherization program in history by modernizing 75 percent of federal building space and more than one million homes;

 

·                  Increase college affordability for seven million students by funding the shortfall in Pell Grants, increasing the maximum award level by $500, and providing a new higher education tax cut to nearly four million students;

 

·                  As part of the $150 billion investment in new infrastructure, enact the largest increase in funding of our nation’s roads, bridges, and mass transit systems since the creation of the national highway system in the 1950s;

 

·                  Provide an $800 Making Work Pay tax credit for 129 million working households, and cut taxes for the families of millions of children through an expansion of the Child Tax Credit;

 

·                  Require unprecedented levels of transparency, oversight, and accountability.

 

Industry Overview. The U.S. commercial banking industry has been significantly impacted in 2008 by decreased values in real estate related assets, a downturn in the financial markets and a significant tightening in the credit market.  The weakened U.S. housing market has caused the industry to realize significant losses on write-downs of investment securities securitized by real estate and higher credit costs for write-downs of loans issued for investment.  During 2008, 25 banks failed and went into receivership with the FDIC compared to 10 bank failures in the previous five years.  Through February 2009, 16 banks have already gone into receivership.  In September 2008, the Federal Housing Finance Authority placed Fannie Mae and Freddie Mac, who collectively guarantee more than half of the outstanding mortgages in the U.S., into conservatorship.  The FDIC reported that nearly one out of three FDIC-insured institutions reported a net loss in the fourth quarter of 2008 and that the industry as a whole reported its first net loss since 1990.  The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the FRB found that 85% of domestic banks responding to the survey had tightened their lending standards on medium-to-large commercial and industrial (C&I) loans during the fourth quarter of 2008 compared to 19% in the fourth quarter of 2007.  The survey also found that 98% of domestic respondents had increased the spread on loan rates over their cost of funds for medium-to-large loans in the fourth quarter of 2008 compared to 35% in the same period of 2007.  During this period, loan loss provisions at FDIC-insured institutions reached a 20-year high and absorbed one-third of the industry’s operating revenue, while quarterly earnings for the industry fell below $30 billion for the first time since 2003. The overall market conditions led the Federal Open Markets Committee (FOMC) to reduce the target federal funds rate by 100 basis points in the last four months of 2007, the first decrease since 2003.  The FOMC continued this strategy throughout 2008, when the target federal funds rate was decreased an additional 400 basis points until the target reached its floor of 0 to 25 basis points in December.  While the Company does not originate or purchase subprime loans, nearly all financial service organizations have been impacted by the current environment.

 

Industry Overview

 

The U.S. commercial banking industry has been significantly impacted in 2008 by decreased values in real estate related assets, a downturn in the financial markets and a significant tightening in the credit market.  The weakened U.S. housing market has caused the industry to realize significant losses on write-downs of investment securities securitized by real estate and higher credit costs for write-downs of loans issued for investment.  During 2008, 16 banks have failed and gone into receivership with the FDIC compared to 10 bank failures in the previous five years.  In September 2008, the Federal Housing Finance Authority placed Fannie Mae and Freddie Mac, who collectively guarantee more than half of the outstanding mortgages in the U.S., into conservatorship.  The FDIC reported that net income of insured commercial banks and savings institutions for the second quarter of 2008 fell to the second-lowest quarterly total since 1991.

 

The overall market conditions led to the issuance of the Emergency Economic Stabilization Act of 2008 (EESA) that was signed into law on October 3, 2008.  The EESA authorized the Troubled Asset Relief Plan (TARP) with an objective to ease the downturn in the credit cycle.  The TARP provides up to $700 billion to the Department of the Treasury to buy mortgages and other troubled assets, to provide guarantees and to inject capital into financial institutions.  As part of the $700 billion TARP, the Department of the Treasury established a Capital Purchase Program (CPP), which allows the Treasury to purchase up to $250 billion of senior preferred shares issued by U.S. financial institutions.  The EESA also temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor until December 31, 2009 and accelerated the date on which the Federal Reserve will begin paying interest on required and excess reserve balances.  The Company is currently in the process of completing the application to participate in the CPP.

 

On October 14, 2008, the FDIC announced the enactment of the Temporary Liquidity Guarantee Program to strengthen confidence and encourage liquidity in the banking system.  Pursuant to the program, the FDIC will  guarantee certain senior unsecured debt issued by participating financial institutions issued on or after October 14, 2008 and before June 30, 2009; and provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts at participating FDIC-insured institutions through December 31, 2009.  All FDIC insured institutions are covered under the program until December 5, 2008 at no cost.  After December 5, 2008, the cost for institutions electing to participate is a 10-basis-point surcharge applied to balances covered by the noninterest-bearing deposit transaction account guarantee and 75-basis-points of the eligible senior unsecured debt guaranteed under the program.  The Company intends to continue to participate in the Temporary Liquidity Guarantee Program with respect to the unlimited coverage for noninterest-bearing transaction accounts.

 

Industry Overview. The U.S. commercial banking industry was significantly impacted in 2007 by increased concerns about the credit quality of mortgages and investment securities collateralized by real estate. As the housing market deteriorated during 2007, losses on subprime mortgages increased and the subprime mortgage market was essentially shutdown. The combination of the real estate downturn and subprime losses led to an overall tightening in the credit market. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve Board found that one-third of domestic banks had tightened their lending standards on commercial and industrial (“C&I”) loans during the fourth quarter of 2007. In addition, 80% of domestic banks had tightened their lending standards on commercial real estate loans during the fourth quarter. During this period, loan loss provisions at FDIC-insured institutions reached a 20-year high and quarterly earnings for the industry fell below $30 billion for the first time since 2003. The overall market conditions led the Federal Open Markets Committee (“FOMC”) to reduce the target federal funds rate by 100 basis points in the last four months of 2007, the first decrease since 2003.  The FOMC continued this strategy in January 2008, when the target federal funds rate was decreased by 125 basis points within a one week period.  While the Company does not originate or purchase subprime loans, nearly all financial service organizations have been impacted by the current environment.

 

Industry Overview. The U.S.
commercial banking industry was significantly impacted in 2007 by increased
concerns about the credit quality of mortgages and investment securities
collateralized by real estate. As the housing market deteriorated during 2007,
losses on subprime mortgages increased and the subprime mortgage market was
essentially shutdown. The combination of the real estate downturn and subprime
losses led to an overall tightening in the credit market. The Senior Loan
Officer Opinion Survey on Bank Lending Practices conducted by the Federal
Reserve Board found that one-third of domestic banks had tightened their
lending standards on commercial and industrial (“C&I”) loans during the
fourth quarter of 2007. In addition, 80% of domestic banks had tightened their
lending standards on commercial real estate loans during the fourth quarter.
During this period, loan loss provisions at FDIC-insured institutions reached a
20-year high and quarterly earnings for the industry fell below $30 billion for
the first time since 2003. The overall market conditions led the Federal Open
Markets Committee (“FOMC”) to reduce the target federal funds rate by 100 basis
points in the last four months of 2007, the first decrease since 2003.  The FOMC continued this strategy in January 2008,
when the target federal funds rate was decreased by 125 basis points within a
one week period.  While the Company does
not originate or purchase subprime loans, nearly all financial service
organizations have been impacted by the current environment.

 

Industry Overview.  The U.S. commercial banking industry remained strong during 2006 as demand in commercial and industrial (“C&I”) and real estate lending supported asset growth.  However, strong competition within the lending industry tightened spreads over banks’ cost of funds.  The flattening of the yield curve also pressured net interest margins and lowered the overall return on assets.  The interest rate environment also resulted in a decrease in investment portfolios and decreased growth in core deposits.  Investment portfolios decreased due to the interest rate impact on market values and efforts to mitigate interest rate risks.  Deposit growth was challenging as depositors were less inclined to maintain liquid deposits as interest rates have risen over the past few years.  Asset quality for the industry remained strong, as nonperforming assets to total assets hit the lowest level in the past five years as of December 31, 2005.  The trend in asset quality was reflected in the allowance for loan losses as a percentage of total loans, which was also at its lowest point in the past five years as of December 31, 2005.