Current Banking Credit Issues

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• Current Banking Credit Issues
• Jim Hojnacki - Executive Vice President and Chief
  Lending Officer, Liberty Bank

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• Introduction/Agenda
• Section I Overview of Liberty Bank
• Section II State of the Economy
• Section III The Current Banking/Credit Situation
• Section IV Effect on Small Business Credit
• Section V Wrap-Up/Discussion

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• Overview of Liberty Bank
• History/Capitalization
• Locations
• Markets Served
• Types of Lending

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• State of the Economy
• U.S. Economy
•  Has the U.S. economy suffered a recession or
  depression? What are the underlying causes of
  the economy's problems? When will the housing
  market find a bottom? What other financial
  shoes could drop? Have oil and other commodity
  prices moderated? Just how decoupled is the
  global economy from the U.S.? Is credit
  available to businesses and consumers?
• World Economy
•  Just how decoupled is the global economy from
  the U.S.?

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• New data show the U.S. economys troubles
  deepening, with nonfarm payroll declining sharply
  in March reaching their highest level since the
  2001 recession and factory orders tumbling
  sharply.
• Unemployment rate rose from 8.1 to 8.5.
• Since the recession began in December, 2007, 5.1
  million jobs have been lost, with almost
  two-thirds (3.3 million) of the decrease
  occurring in the last five months (source U.S.
  Labor Department).
• According to the IMF, the world economy is now
  expected to experience slower growth. The 2009
  forecast was slashed from 3.9 to 3, which would
  be the weakest level since 2002 and around the
  threshold of what the IMF considers a global
  recession.

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• Bruce Bittles, chief investment strategist at
  R.W. Baird, writes
• The combination of falling home values and a drop
  in mortgage rates will dramatically improve
  housing affordability and along with plunging
  energy prices improve consumer discretionary
  income. This is the first step in the recovery
  process that is expected to stabilize the economy
  by mid-2009.
• April 28 (Bloomberg) -- Consumer confidence in
  the U.S. jumped by the most since 2005 this month
  as stocks rallied, mortgage rates dropped and
  Americans anticipated more jobs would become
  available. There certainly is starting to be a
  shift here, where the data is either less bad or
  even starting to improve, according to Michael
  Darda, chief economist at MKM Partners LP in New
  York. While we certainly havent turned the
  corner yet the economy could bottom out between
  June and October of this year and then start
  growing.

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• The Current Banking Situation
• Significant write-downs and capital erosion.
• Increased rate of bank failures (e.g.- IndyMac,
  etc.). FDIC presently has over 100 banks on its
  Watch List.
• Some banks have exited certain lending segments
  (e.g. construction and student lending) and
  tightened lending standards. Many loans
  downgraded.
• Those institutions with weaker capital positions
  are cutting back on lending and/or seeking to
  raise capital.
• Well capitalized institutions are increasing
  market share as other banks are pulling back.
  Many community banks are increasing lending
  activities.
• Government has invested in preferred shares of
  large banks and is initiating the purchase
  illiquid securities.
• Temporary increase in FDIC insurance limits
  through 12/31/09.

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• Effects on Small Business Credit
• Certain types of credit less available (e.g.
  unsecured, etc.).
• Credit standards tightened (e.g.- higher credit
  scores, larger capital requirements, evidence of
  ability to service debt based upon historic cash
  flow, shorter amortization periods, stronger
  guarantees, etc.).
• Higher rates and fees resulting from greater
  pricing for risk and higher levels of loan loss
  reserves.
• Requirement of additional sources of repayment
  (e.g. SBA guarantees).
• Credit freeze has negatively impacted business
  and created the need for stronger capital bases,
  well documented business plans and solid cash
  flow as a means of demonstrating repayment
  ability.

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• Outlook
• Rough ride expected for economy through 2009.
• Continued deleveraging of corporate and personal
  balance sheets.
• U.S. government infusion of capital into banks
  and purchase of illiquid securities will help
  instill confidence.
• Coordinated efforts to reduce interest rates will
  aid businesses and consumers.
• Massive worldwide government actions and infusion
  of liquidity will help.
• 2009 Recovery Act provisions will provide for (i)
  improvement in the secondary market for 7(a) and
  first lien 504 loans (ii) temporary increase in
  SBA guarantee levels and (iii) temporary
  elimination of certain SBA fees for borrowers and
  third party lender.
• New business formation and wealth creation
  opportunities.

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