primer on fdic-assisted transactions: the basics

RESEARCH

Financial Institutions: Banks & Thrifts

November 24, 2009 Corrected/Republished

Paul J. Miller, Jr., CFA . 703.469.1252 . [email protected] Valentin . 703.469.1124 . [email protected] Rochester . 703.312.1832 . [email protected] Ramsey, CFA . 703.312.1760 . [email protected]

Primer on FDIC-Assisted Transactions: The Basics

Summary and Recommendation

We expect that several banks in our coverage universe are likely to take advantage of FDIC-assisted transactions in the near to mediumterm. Generally speaking, we think that the big banks are unlikely to participate in additional deals and that the focus will be on thehealthy super-regionals and smaller regional banks. Bank of America Corporation (BAC), Wells Fargo & Co. (WFC), and JPMorganChase & Co. (JPM) have enough on their plates, in our view, given their recent, sizable acquisitions. As such, we do not expect theregulators to allow the banks that are “too big to fail” to become even bigger. Instead, we expect healthy super-regional banks,specifically BB&T Corporation (BBT) and U.S. Bancorp (USB), to garner additional FDIC-assisted deals. Within our coverageuniverse, we believe that Washington Federal (WFSL), NewAlliance (NAL), People's United (PBCT), and New York Bancorp (NYB)are mostly likely to participate in FDIC-assisted transactions, and the acquisitions are likely to be accretive and meaningful to theirbottom lines. In this report, we provide a sensitivity analysis for these higher conviction names, depicting what earnings, returns ontangible common equity (ROTCE), and tangible book value (TBV) accretion might look like given a 1.0% to 1.5% return on assets(ROA), which is a good approximation of returns in failed bank transactions, in our opinion. We also provide a detailed primer onhow the FDIC-assisted acquisition process works, what the drivers are behind the bids that banks submit in failed bankauctions, and how purchase accounting for failed banks really works. Republished to correct first-loss tranche example.

Key Points

• Benefits of FDIC-assisted transactions. FDIC-assisted transactions are in high demand because acquirers benefit from freedeposits and increased market penetration, which can be very accretive to core operating earnings. Additionally, loss sharing on theacquired assets enables the acquirer to use the combined earnings streams of both banks (acquirer and failed bank) to offset legacycredit costs. The FDIC loss-sharing agreements that we are seeing today are very attractive and create a situation in which, even ifthe entire failed bank's portfolio fell to $0, losses to the acquirer can be relatively minimal. As such, the earnings stream from afailed bank is essentially risk free in many cases.

• ROAs in failed bank acquisitions. By our estimates, the ROAs in failed bank acquisitions are around 1.0% to 1.5%. Currently, themedian ROA for the top 500 banks by total assets is 0.35%, much lower than our estimate of ROAs in failed bank acquisitions dueto significant credit costs flowing through earnings for most banks today. Over the past 20 years, the median ROA for banks withassets greater than $10 billion peaked at 1.42% in 2002 and 2005. ROAs in these acquisitions could be closer to 2.0% depending onthe leverage than an institution is willing to use.

• Expect elevated number of bank failures over next couple years. Already in this crisis 150 banks have failed, which is muchlower than levels seen in the savings and loan (S&L) crisis in the 1980s. However, in terms of total assets, this credit cycle is givingthe S&L crisis a run for its money. In just two years, banks with $514 billion in assets failed—more than half of the total assets ofbanks that failed over a 10-year period in the S&L crisis. Given the number of banks that are subject to cease-and-desist orders withregulators today, we expect the number of bank failures to remain very elevated for the next couple of years.

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Important disclosures can be found on pages 26 - 27 of this report.

Banks Well Positioned to Participate in FDIC-Assisted Deals

We expect that several banks in our coverage universe are likely to take advantage of FDIC-assisted transactions in the near to medium term. We believe that an FDIC-assisted transaction could be meaningful for several names within our coverage universe, and we provide a sensitivity analysis for these, depicting what earnings, return on tangible common equity (ROTCE), and tangible book value (TBV) accretion might look like given a 1.0% to 1.5% return on assets (ROA), which is a good approximation of returns in failed bank transactions, in our opinion. We also believe that there are other possible acquirers under coverage; these banks could participate in transactions, but our conviction is lower for these than for the “likely acquirers” because (1) they have not indicated that they are actively looking for transactions; (2) they are likely to be highly selective, and we believe that the chances of a bank failure that meets their parameters is less likely; and (3) there may be questions surrounding whether regulators would allow them to participate.

In terms of our broader view of FDIC-assisted deals in the financials space, we think that the big banks are unlikely to participate in additional deals and that the focus will be on the healthy super-regionals and smaller regional banks. Bank of America Corporation (BAC), Wells Fargo & Co. (WFC), and JPMorgan Chase & Co. (JPM) have enough on their plates, in our view, given their recent acquisitions of Countrywide, Merrill Lynch, Wachovia, and Washington Mutual. As such, we do not expect the regulators to allow the banks that are “too big to fail” to become even bigger. Instead, we expect healthy super-regional banks, specifically BB&T Corporation (BBT) and U.S. Bancorp (USB), to garner additional FDIC-assisted deals.

We believe that there are not currently enough “good” banks to buy the “bad” banks and that, therefore, private equity groups or other pools of investors will likely remain involved in FDIC-assisted acquisitions.

Likely Acquirers

Washington Federal, Inc. (WFSL – Outperform)

Of the companies in our coverage universe, we have the highest conviction that Washington Federal will complete an accretive FDIC-assisted transaction. The company just raised $300 million in offensive capital, leading us to upgrade the shares to Outperform in anticipation of an accretive FDIC-assisted deal in the near term. With its current excess capital, the company could comfortably acquire a $3 billion-plus institution, and it has indicated that it prefers larger acquisitions to a series of smaller acquisitions. We believe that Washington Federal may consider transactions up to the $10 billion range; if it were to acquire an institution of this size, it would likely raise additional capital.

WFSL

ROA 1.00% 1.25% 1.50% 1.00% 1.25% 1.50% 1.00% 1.25% 1.50%

1,000 $1.38 $1.41 $1.44 8.4% 8.6% 8.7% $13.28 $13.28 $13.28

2,500 $1.55 $1.61 $1.68 9.4% 9.8% 10.2% $13.28 $13.28 $13.28

5,000 $1.82 $1.96 $2.10 11.1% 11.9% 12.8% $13.28 $13.28 $13.28

7,500 $1.99 $2.18 $2.38 12.0% 13.2% 14.4% $13.53 $13.53 $13.53

10,000 $2.03 $2.26 $2.50 12.1% 13.5% 14.9% $13.99 $13.99 $13.99

TBV (3Q09: $13.28)

Assets

Acquired (

$M

)

EPS (Consensus 2011 $1.27) ROTCE (Consensus 2011: 9.6%)

Assumptions: 8% tangible common equity (TCE) after transaction; capital necessary to reach that TCE level is raised at current market price; we use the consensus estimate for 2011 EPS.

Source: FBR Research

People’s United Financial, Inc. (PBCT – Market Perform)

People's United has been looking to deploy excess capital through acquisitions since its 2007 second step, and today has approximately $2.5 billion in excess capital. The company is looking to acquire as much as $30 billion to $40 billion, possibly through multiple transactions, and is considering both assisted and unassisted opportunities. While the ideal candidate is in the northeast corridor between Maine and Washington DC, PBCT would consider any geography, as long as out-of-market transactions are of reasonable size (more than $4 billion or $5 billion) and the target has strong market share in its markets. PBCT prefers commercially oriented franchises. Given PBCT’s existing excess capital, a sizeable transaction could be very accretive to EPS and ROTCE, but the shares’ valuation (40x 2010 EPS and 30x 2011 EPS) already reflects a substantial level of earnings accretion. While any assisted transaction would likely be

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viewed positively, based on the pro forma metrics in the accompanying table, we expect that the acquisition of up to $20 billion in assets is largely priced into PBCT’s shares. If PBCT could acquire $30 billion or more of assets, there is likely good upside for the shares. Given the amount of excess capital on PBCT’s balance sheet, it may be unable to find and successfully bid on assets of sufficient size in an assisted transaction to fully leverage its capital. PBCT is also considering unassisted transactions that are more likely to be dilutive to tangible book value, which could pressure PBCT’s valuation.

PBCT

ROA 1.00% 1.25% 1.50% 1.00% 1.25% 1.50% 1.00% 1.25% 1.50%

1,000 $0.57 $0.58 $0.58 5.3% 5.4% 5.4% $10.42 $10.42 $10.42

5,000 $0.69 $0.73 $0.76 6.4% 6.7% 7.1% $10.42 $10.42 $10.42

10,000 $0.84 $0.91 $0.99 7.8% 8.5% 9.2% $10.42 $10.42 $10.42

20,000 $1.14 $1.29 $1.44 10.6% 12.0% 13.4% $10.42 $10.42 $10.42

30,000 $1.44 $1.66 $1.89 13.4% 15.4% 17.5% $10.42 $10.42 $10.42

2011 EPS (Consensus $0.54) ROTCE (Consensus 2011: 5.2%) TBV (3Q09: $10.42)

Acquired

Assets

($ M

illio

ns)

Assumptions: 6% TCE after transaction; capital necessary to reach that TCE level is raised at current market price; we use the consensus estimate for 2011 EPS.


New York Community Bancorp, Inc. (NYB – Market Perform)

New York Community is searching for FDIC-assisted transactions outside of its footprint, as there will likely be few in-market opportunities of size. NYB has acknowledged it looked at both Guaranty ($13.5 billion in assets) and BankUnited ($14 billion in assets), and we believe that it has bid on other out-of-market transactions as well. Its primary interest in an assisted transaction is the deposits. While NYB has de minimus “excess capital,” management has indicated that it would raise capital on announcement. Assuming at 1.25% ROA, a $12.5 billion assisted transaction would be 14% accretive to 2011 EPS, 19% accretive to TBV (because of the capital raise), and only modestly dilutive to NYB’s strong ROCTE. We infer from management’s comments that it is seeking returns in excess of a 1.25% ROA, but as failed bank auctions become increasingly competitive, the possibility of a low-priced, high-return transaction is increasingly challenging. While we believe that the accretion of a $10 billion plus transaction could be extremely favorable for NYB’s valuation, we expect that the number of $10 billion plus transactions will be limited and the bidding for them will be competitive, putting the likelihood that NYB successfully bids on such a transaction at risk.

NYB

ROA 1.00% 1.25% 1.50% 1.00% 1.25% 1.50% 1.00% 1.25% 1.50%

2,000 $1.28 $1.29 $1.31 24.1% 24.4% 24.6% $5.32 $5.32 $5.32

5,000 $1.31 $1.34 $1.37 23.5% 24.1% 24.6% $5.56 $5.56 $5.56

10,000 $1.34 $1.40 $1.47 22.6% 23.7% 24.7% $5.94 $5.94 $5.94

12,500 $1.36 $1.43 $1.51 22.3% 23.5% 24.7% $6.11 $6.11 $6.11

15,000 $1.38 $1.46 $1.55 22.0% 23.3% 24.7% $6.26 $6.26 $6.26

Acquired

Assets

($ M

illio

ns)

2011 EPS (Consensus $1.26) ROTCE (Consensus 2011: 24.5%) TBV (3Q09: $5.15)



NewAlliance Bancshares, Inc. (NAL – Outperform)

We upgraded NAL to Outperform (from Market Perform) today, largely because of the strong earnings accretion potential of an assisted transaction, as well as our view that there is a good likelihood that NAL will be able to acquire a few billion dollars of assets through assisted transactions. While the Northeast is viewed as being relatively strong, there are 20 institutions with a Texas ratio over 100%, which is generally viewed as a sign of weakness. Most are in the $100 million to $1 billion range, which is too small for many larger institutions, but still moves the needle for NAL. We calculate that a 1.25% ROA on $3 billion of acquired assets would yield a pro forma ROTCE of 12%, and, assuming no tangible book value accretion, we expect that NAL could reasonably trade to 13.6x 2011 EPS and 1.7x tangible book, implying a 20% upside. A $5 billion transaction would result in pro forma 2011 EPS of $1.28 and a 15% pro forma ROTCE, in which


scenario we estimate a 37% upside for NAL’s shares. NewAlliance has approximately $350 million of excess equity, which could support $5 billion to $6 billion of assets, and it has filed a mixed shelf in order to raise more if it finds the right target. Size, whether large or small, is not a constraint, but we would consider an ideal target to have $2 billion to $6 billion in assets, although something smaller is still meaningfully accretive to EPS and ROTCE, and NAL could acquire multiple smaller institutions. Targeted geographies are along the Amtrak corridor from Boston to Baltimore, and the ideal candidate would have a relatively commercial business mix. NAL is looking at both FDIC-assisted, and unassisted transactions. Unassisted transactions are more likely to be dilutive to tangible book value, which could pressure NAL’s valuation.

NAL

ROA 1.00% 1.25% 1.50% 1.00% 1.25% 1.50% 1.00% 1.25% 1.50%

500 $0.70 $0.71 $0.73 8.1% 8.2% 8.4% $8.09 $8.09 $8.09

1,000 $0.75 $0.78 $0.80 8.7% 8.9% 9.2% $8.09 $8.09 $8.09

3,000 $0.95 $1.03 $1.10 11.0% 11.8% 12.7% $8.09 $8.09 $8.09

5,000 $1.15 $1.28 $1.40 13.3% 14.7% 16.2% $8.09 $8.09 $8.09

10,000 $1.39 $1.61 $1.82 15.3% 17.6% 19.9% $8.61 $8.61 $8.61

Acquired

Assets

($ M

illio

ns)

ROTCE (Consensus 2011: 8%) TBV (3Q09: $8.09)2011 EPS (Consensus $0.65)



Other Possible Acquirers

• BB&T Corporation (BBT – Market Perform). Although BB&T just completed the Colonial acquisition, it still has healthy capital ratios, and we believe that it could participate in additional FDIC-assisted deals down the road. In our view, the likelihood that BB&T participates in another deal is more a matter of its appetite for additional acquisitions than of the bank’s standing with the regulators and its capital levels. If a deal of strategic importance were to present itself, we believe that BB&T would be interested.

• Brookline Bancorp, Inc. (BRKL – Market Perform). Brookline has at least $250 million of excess capital, and has said that it would look at any opportunities in its markets (Boston metro area), but it is unlikely to search outside of its footprint if no in-footprint opportunities arise.

• Cathay General Bancorp (CATY – Market Perform). Cathay is primarily interested in potential deals within the ethnic Chinese banking arena. The company recently raised $76 million in common stock, but, in our view, with United Commercial Bank (UCB) now off the table, there are only a limited number of banks in the ethnic Chinese space that would provide a meaningful enough impact on future profitability via an FDIC-assisted transaction to pique Cathay’s interest. If we were to gain a greater level of conviction that one of these banks could be at greater risk of an FDIC shutdown, we could become more positive on the shares.

• Capital One Financial Corporation (COF – Market Perform). Capital One has stated that it is interested in FDIC-assisted transactions; however, nothing of interest has become available within its footprint (metropolitan New York, Louisiana, Texas, and Washington, D.C.). Following the thrift acquisition of Chevy Chase Bank earlier this year, management recently expressed interest in expanding its commercial real estate operations in the bank’s Mid-Atlantic footprint. Likewise, Capital One has expressed interest in adding to its commercial operations in the Northeast. That said, we do not expect the company to acquire institutions of significant size, given its below-peer tangible capital ratio (6.2% at 3Q09), which will be further reduced by the consolidation of off-balance-sheet credit card trusts in 1Q10.

• City National Corporation (CYN – Market Perform). We believe that City National is well positioned for an FDIC-assisted transaction, as it continues to post steady earnings at a time when several of its competitors are consistently posting sizable losses, and we believe that the company has enough capital to support meaningful adverse macro scenarios. The company has acquired one branch through an FDIC-assisted deal, buying the deposits and some loans of a San Jose, California, branch from Westamerica Bancorp. We believe management will consider deals for banks with less than $5


billion in assets and within its California or Nevada footprint. If opportunities do not arise in the banking space, we believe management may attempt to expand its wealth management unit without FDIC assistance.

• Fifth Third Bancorp (FITB – Outperform). We believe Fifth Third could make a small FDIC-assisted acquisition, likely of a size less than $2 billion or $3 billion in assets. FITB continues to work through credit deterioration in its legacy loan portfolios, and we believe management is not very interested in the distraction that a larger acquisition would pose at this time. However, management has indicated interest in smaller FDIC-assisted deals, and we believe the company’s area of focus is largely the southeast—the region that FITB views most attractive in terms of future growth. FITB already has a presence in the southeast, largely in Florida but also in Nashville, Charlotte, and Atlanta, and we believe augmenting this footprint with smaller acquisitions would be positive for the company.

• First Citizens BancShares Inc. (FCNCA – Outperform). In 3Q09, FCNCA completed two FDIC-assisted transactions totaling $2.5 billion in assets. In the last two cycles, FCNCA has completed eight FDIC-assisted deals, more than any other bank in the country, and management has stated its openness to pursing additional transactions within its 17-state footprint. Given the company’s current tangible common equity ratio of 7.65%, we estimate that it could acquire a bank with around $5 billion in assets in an FDIC-assisted transaction without requiring additional capital.

• Hudson City Bancorp Inc. (HCBK – Outperform). Although Hudson City’s primary focus is on organic growth (including de novo expansion), management stated at a recent conference that it likes the structure of FDIC transactions, and that it looks at opportunities as they come along because such transactions are attractive ways to accelerate deposit growth. On the other hand, there have been few transactions in the Northeast, and Hudson City is not looking outside of this region at present.

• KeyCorp (KEY – Market Perform). Although KeyCorp has strong capital levels at 7.6% as of 3Q09, we do not expect the company to acquire a failed bank of a size that would affect Key’s bottom line, as we believe the company is primarily focused on working through its large exit portfolio. That said, KeyCorp could pick up a small bank with a couple of branches through an FDIC auction. Of Key’s three primary regions, the Northeast, Midwest, and Pacific Northwest, we would expect Key to be most focused on solidifying its footprint in the Pacific Northwest and Rocky Mountains area, as this is the most attractive of the three regions in terms of growth opportunities.

• Nara Bancorp, Inc. (NARA – Market Perform). After its recent $82 million common equity raise, we believe that Nara, with a pro forma TCE ratio above 9%, may be interested in relatively small FDIC-assisted transactions within its California footprint, specifically within the ethnic Korean banking arena. That said, the company may take a more cautious approach as a result of its substantial late-cycle exposure, with nearly 90% of loans in the commercial real estate (CRE) and commercial and industrial (C&I) sectors.

• PacWest Bancorp (PACW – Market Perform). During the past few years, PacWest has completed FDIC-assisted transactions for Affinity Bank and Security Pacific Bank. Despite continued credit pressure due to its large combined CRE, C&I, and construction exposure, we view the company’s capital position as solid, with only minor burn-down expected during the next year. Although we do not expect any additional transactions in the near term, we believe that the company will continue to evaluate opportunities within its California footprint.

• Regions Financial Corporation (RF – Outperform). The southeast has been a hotbed for bank failures, given the stress in the real estate market and the aggressive strategies employed by many of the region’s banks as they stretched for growth. We expect RF to participate in only relatively small (i.e., those not requiring any type of capital issuance), in-market FDIC-assisted transactions. Although we believe that Regions has sufficient capital to survive the credit cycle, we view management as fully occupied with its own credit issues.


• SunTrust Banks, Inc. (STI – Market Perform). Much like Regions, we expect SunTrust to participate only in relatively small, in-market deals. In public appearances, management has stated that it views FDIC-assisted transactions as less attractive than unassisted ones, given the historically poor quality of the franchises and the disruptive integration process.

• U.S. Bancorp (USB – Market Perform). U.S. Bancorp has been active in FDIC-assisted transactions, with its recent deal for the nine bank units of FBOP Corp. and notable 2008 deals for Downey Savings & Loan Association and PFF Bank & Trust. Although we do not expect another meaningful transaction to occur in the near term, as management will likely focus on integrating FBOP, should another opportunity arise down the road, we believe management would be interested.

Why FDIC-Assisted Transactions Are in High Demand

FDIC-assisted transactions are in high demand because acquirers benefit from free deposits and increased market penetration, which can be very accretive to core operating earnings. Additionally, loss sharing on the acquired assets enables the acquirer to use the combined earnings streams of both banks (acquirer and failed bank) to offset legacy credit costs. Although these deals are certainly very attractive, we note that the benefits of completing an FDIC-assisted transaction are subject to operational risk and the acquirer’s ability to integrate the failed bank and cut costs effectively.

Benefits of FDIC-Assisted Transactions

Failed Bank's Earnings

Acquirer's Earnings Acquirer's Expenses

Failed Bank's Expenses

Less Less

Acquirer's Credit Costs

Failed Bank's Credit Costs

Expenses driven lower

through synergies

Credit costs could be minimal

given FDIC loss sharing

Potential for

Immediate

Accretion to

Earnings


• Risk-free earnings stream. Garnering an earnings stream that is accompanied by very little credit risk due to FDIC loss wraps is the most attractive aspect of FDIC-assisted deals, in our view. Not only are transactions typically immediately accretive to earnings, but the risk-free stream of earnings also helps banks to earn through the crisis by providing additional income to offset credit losses in the acquirer’s legacy portfolio. By our estimates, the ROAs in failed bank acquisitions are around 1.0% to 1.5%. Today, the median ROA for the top 500 banks by total assets is 0.35%, much lower than our estimate of ROAs in failed bank acquisitions due to the presence of significant credit costs for most banks today. Over the past 20 years, the median ROA for banks with more than $10B in assets peaked at 1.42% in 2002 and 2005. Keep in mind that ROAs for larger institutions are generally higher as institutions of size generally utilize more leverage.


Historical ROAs for Top 500 Banks by Assets

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1Q

90

4Q

90

3Q

91

2Q

92

1Q

93

4Q

93

3Q

94

2Q

95

1Q

96

4Q

96

3Q

97

2Q

98

1Q

99

4Q

99

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

4Q

08

3Q

09

RO

A (

%)

Median ROA $10B+ Median ROA $1B to $10B Median ROA Less than $B

Median ROAs for banks with

$10B+ in assets peaked at

1.42% in 2002 and 2005

Source: SNL and FBR Research

• Can be accretive to TCE ratio and TBV. Depending on the dynamics of the acquirer’s bid and the gain on the transaction, FDIC-assisted transactions can be accretive to the tangible common equity ratio and tangible book value. This accretion drives higher valuations for the acquirers.

• Realize synergies and cross-sell product. As with all M&A deals, the acquirer has the opportunity to realize synergies and drive efficiency ratios higher upon integration of the failed bank. Some of the highest cost savings can be achieved through in-market transactions, and we believe that because of these cost savings, we often see more competitive bids from in-market participants. Banks also have the opportunity to garner customers from the failed bank and drive more business by cross-selling products to new customers.

Bank Failures Are Picking Up, and Garnering One Is a Prize

The number of bank failures thus far in this crisis totals 150, much lower than levels seen in the savings and loan (S&L) crisis in the 1980s. However, in terms of total assets, this credit cycle is giving the S&L crisis a run for its money. In just two years, banks with $514 billion in assets failed—more than half of the amount that failed over a 10-year period in the last crisis. Additionally, the number of bank failures is certainly ramping up today, and we expect to see elevated levels of bank failures during the next few years. As such, the landscape is ripe for M&A opportunities, and banks are scrambling to garner FDIC-assisted acquisitions, as these transactions are very attractive in terms of accretion.


Bank Failures Ramping Up but Remain Far Below Historical Levels

2240

11999 106

180204

262

470

534

382

271

181

50

15 8 6 1 3 8 7 4 11 3 4 0 026

3

124

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100

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Number of Bank Failures Assets

Total Assets from

Bank Failures

1980-93:

$922 billion

Total Assets from

Bank Failures

2008-present:

$514 billion

Source: FDIC, as of November 20, 2009

As expected, states such as California, Florida, and Nevada, which have experienced significant home price depreciation following the housing bubble, have had a high number of bank failures, totaling 40 among these three states alone. Georgia actually leads the U.S. in bank failures at 26 failures since January 2008, largely because many new charters were issued in Georgia during the past few decades, and newer banks generally fare worse in severe recessions. Interestingly, Illinois also has a very high number of bank failures, primarily driven by the unit banking model in the state, which fostered the creation of many independent banks with only one branch. Unit banking creates a system in which banks are highly levered to the local economy, which is likely driving elevated bank failures in Illinois during this crisis.


Georgia Blazes the Trail in Bank Failures by State

Bank Failures per State 0 1 2-3 4-5 >5

WA

OR

C A

N V

A Z

UT

ID

C O

N M

M T

WY

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7

62

5

7

20

26

26

14

20

0

1

1

2

Note: Some holding companies have multiple charters, which are counted as separate bank failures.

Source: FDIC, as of November 20, 2009

More Banks on the Brink

At the end of 3Q09, the number of institutions on the FDIC’s problem institutions list totaled 552, representing institutions with about $346 billion in assets. The FDIC does not disclose the methodology that determines whether an institution is classified as “problem,” other than to say that the classification is based on a sliding scale of 1 to 5. Problem institutions generally receive scores of 4 or 5, which is based on “financial, operational, or managerial weaknesses that threaten the continued financial viability” of the institution. Relative to levels in the S&L crisis, the number of institutions on the FDIC’s problem list is small, but the list is growing quickly. The size and growth rate of the FDIC’s list is an indicator of the future trend in bank failures. Given the growth in problem institutions and the macro environment that continues to be plagued by rising unemployment, we would expect the number of bank failures to remain elevated for some time.


Number of Problem Institutions Is Accelerating

1496

318

193117 92 84 79 94 114 136 116 80 52 50 76

552416

305252

575

1066

1430

0

200

400

600

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1000

1200

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1600

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$500

$600

$700

$800

$900

As

se

ts (

$ i

n b

illi

on

s)

Number of Institutions

Total Assets ($ in Billions)

Source: FDIC Quarterly Banking Profile

In this environment of heightened regulatory scrutiny, the number of banks subject to formal agreements with regulators has increased materially. In 3Q09, the regulators issued cease-and-desist orders (C&Ds) to 82 institutions, and they have issued another 22 C&Ds so far in 4Q09. C&Ds can require banks to raise additional capital, and if banks cannot meet the deadline, they must submit contingency plans to their regulators, which could involve merging with another entity, being acquired, liquidating, or accessing other sources of capital. A material number of banks is currently subject to heightened scrutiny by regulators, and if the economy does not improve significantly in the next several quarters, these banks could continue to struggle (in the appendix of this report, we list the banks that have been issued C&Ds over the past two years).

Heightened Regulatory Scrutiny: More Banks Are Receiving C&D Orders

14 4 3

8

19

63

82

22

48

28

6

0

10

20

30

40

50

60

70

80

90

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 to

date

Nu

mb

er

of

Ag

ree

me

nts

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

As

se

ts (

$ in

billio

ns

)

C&Ds Issued Assets

Note: Includes all bank holding companies, commercial banks, savings banks, and savings institutions. Bank holding companies with multiple subsidiaries that are subject to C&D orders are counted separately.

Source: SNL, as of November 17, 2009


FDIC Deposit Insurance Fund: Evaluating Bids Is All about Preserving the Fund

The FDIC’s directive is to resolve bank failures in such a way as to provide the least cost to the FDIC Deposit Insurance Fund (DIF). So, what does “least cost to the fund” really mean? The FDIC Improvement Act of 1991 established this directive, which mandates that the FDIC consider the cost of each bid received and compare it to the amount it would cost the FDIC to liquidate the bank by paying off depositors and selling assets at a later date. Therefore, even if there is just one bidder on a failed bank, it does not mean that the bidder will automatically win because the bidder is essentially competing against the liquidation value of the failed bank; the bid must still cost less than the amount that the FDIC would lose by liquidating the failed bank’s assets itself. According to the FDIC Improvement Act, the only time that the FDIC can deviate from the least-cost directive is in situations in which the failed bank poses systemic risk to the banking system. Additionally, it is important to note that the FDIC cannot consider qualitative factors—the focus is on the comparative cost of the resolution options.

As bank failures have escalated during the past year, the DIF balance has dropped to it’s lowest level as a percentage of insured deposits since 1992; it totaled ($8.2) billion, or about (0.16%) of total insured deposits, at the end of 3Q09. The FDIC just passed a ruling that requires banks to prepay their assessments for the next three years (2010–2012), which should net the FDIC an estimated $45 billion. Banks generally supported this mandate, as it will not hit capital levels like the FDIC special assessments because banks will just create a prepaid expense (an asset) on their balance sheets and amortize it over three years. We anticipate that prepaid assessments will help boost the FDIC DIF by year-end. The FDIC needs to grow the fund as it currently estimates that it will lose about $100 billion due to bank failures from 2009 through 2013, although this estimate could prove to be somewhat light, given the number of problem banks in the system.

Deposit Insurance Fund Is Shrinking

$36.8

($8.2)

$49.2

$48.6$48.4

$17.3

$13.0 $10.4

$45.2

$34.6

$49.6 $50.0 $50.2 $50.7 $51.2 $51.8 $52.4 $52.8

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 Pro

forma

Depo

sit I

nsu

ran

ce F

un

d B

ala

nce (

$ in B

illio

ns)

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

DIF

Rese

rve t

o T

ota

l In

sure

d D

eposits

Source: FDIC, as of September 30, 2009

The Process: Behind the Scenes, Leading Up to Bank Failures

A bank interested in acquiring a failed institution through an FDIC-assisted transaction must have approval from its primary federal regulator. The primary federal regulator must first give the institution a “blanket” approval as a qualified bidder. Additionally, the primary federal regulator must also approve any bid that the institution submits to the FDIC. Because each bid requires approval, the primary federal regulator can determine the types of transactions on which a potential acquirer can bid. For example, the primary federal regulator can decide whether a New York bank can bid for an out-of-footprint bank in Florida and whether a thrift can bid for a commercial bank given factors such as the operational fit, management’s integration abilities, and the capital levels required. There are no set criteria for determining which banks qualify as qualified bidders and what specific judgments the primary regulator will make. Generally, qualified bidders must have a 1 or 2 CAMELS rating to qualify, but the FDIC can make exceptions. CAMELS ratings are based on a sliding scale of 1 to 5 and incorporate capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.


FDIC data room. Once an institution is blessed as a qualified bidder by its primary federal regulator, it will have access to the FDIC’s data room. The data room is a Web site used to facilitate failed bank auctions. Qualified bidders can enter parameters for acquisitions in which they would be interested, which might be institutions with assets in the $5 billion to $10 billion range in the southeast. Then, if an institution with $3 billion in assets in Georgia, for example, is identified as a potential failure, the FDIC will blast an e-mail to all qualified bidders that have submitted parameters that the potential failure meets. Generally, six to eight weeks before the FDIC actually closes the bank, the FDIC sends out this e-mail, which contains a short executive summary of the bank. If qualified bidders find the executive summary interesting, they can login to the FDIC’s Web site, contact the FDIC, and sign a nondisclosure agreement (NDA) to get more details. After signing the NDA, qualified bidders can view detailed data on the bank pending failure, including the bank’s name, target failure date, and comprehensive financial data. Qualified bidders generally have the opportunity to conduct due diligence at least one month before the target bank failure date, except in situations in which the time line is accelerated, most commonly in situations when liquidity concerns arise. Given the government forbearance that we have seen over the past year through programs like TARP and TGLP, we believe that only a few failures have been driven by liquidity concerns since fall 2008.

Resolution of Failed Banks

The resolution of failed banks can generally occur in multiple ways, some of which are outlined in the table below. Although deposit-only transactions were common with small bank failures early in the credit cycle, the most common resolution today involves the purchase of assets with loss sharing and the assumption of liabilities, which is typically referred to as a “whole bank with loss sharing” transaction.

Resolution of Failed Banks

Type Acquirer Bids… Example

1) Deposits only Deposit premium Integrity Bank of Georgia (acquired by

Regions)

2) Whole bank with loss

sharing*

Deposit premium and asset discount; involves

loss sharing, generally just on loan portfolio

Downey (acquired by U.S. Bancorp), Bank

United (acquired by consortium of

investors)

3) Deposits and certain

assets

Deposit premium and offers prices on specific

asset that it wants to acquire; no loss sharing

Corus (acquired by MB Financial)

4) Bridge Bank/

Conservatorship

When the FDIC cannot auction off the bank,

then the FDIC may assume control and either

wind down the operations or sell the bank at a

later date

Indymac (which was subsequently

acquired by OneWest); Silverton Bank

5) Deposit Payoff No buyers, so FDIC pays off insured depositors Omni National Bank

*Note: Can also assume whole bank without loss sharing, as in JPM’s acquisition of Washington Mutual.


FDIC Loss Sharing: The Basics

Accounting for FDIC-assisted acquisitions is one of the biggest areas of confusion for investors, largely because purchase accounting marks and negative bids are not everyday transactions. The key to understanding how loss sharing with the FDIC works is to understand the different loss-sharing tranches. As illustrated in the table below, loss-sharing agreements that we have seen in this crisis so far involve three tranches of loss sharing.


Typical Loss-Sharing Parameters

Loss Tranche

Buyer FDIC

First Tranche 100% 0% Size of first-loss tranche determined by bidder

Second Tranche 20% 80% Threshold between 80/20 and 95/5 loss sharing determined by FDIC

Third Tranche 5% 95%

Loss Sharing


To provide a better understanding of how loss sharing in each of these tranches works and the size of the tranche relative to the total amount of assets covered in the loss-sharing agreement, we describe each tranche in detail in the following paragraphs.

First-Loss Tranche: 100% Buyer, 0% FDIC

It is important to note that very few transactions in this crisis have involved the first-loss tranche, but we have included a discussion of first-loss tranches because it is important to understand what it means, and it helps explain the whole loss-sharing process. In the first-loss tranche, the buyer absorbs 100% of losses, which essentially means that in this tranche there is no loss sharing with the government. The size of the first-loss tranche relative to the total amount of assets covered in the loss-sharing agreement is determined by the acquirer during the bidding process. The calculation for the size of the first-loss tranche is as follows:

+ Asset Premium / (Discount)

+ Deposit Premium / (Discount)

+ Equity Adjustment =Assets Acquired - Liabilities Assumed

• If the sum is a positive number, then that number represents the size of the first-loss tranche, or the amount of losses that the acquirer will have to absorb. For example, assume that a bank with $500 in assets and $400 in liabilities fails. The FDIC sets the threshold at $200. Assume a qualified bidder submits a $50 asset premium and $10 deposit premium bid.

+ $50 Asset Premium

+ $10 Deposit Premium

+ $100 Equity Adjustment ($500-$400)

= $160 Size of first-loss tranche

Bid = $60

The buyer would absorb 100% of losses up to $160, then 20% of losses between $160 and the $200 threshold, and 5% of losses above $200.

• If the sum is a negative number, then the size of the first-loss tranche is $0. In other words, the acquirer does not have to absorb 100% of any of the losses. Instead, when the first dollar of losses occurs, the acquirer absorbs 20%, and the FDIC covers the other 80%. In the same example, assume that the qualified bidder submits a $120 asset discount and a $10 deposit premium bid on the failed bank.

+ ($120) Asset Discount

+ $10 Deposit Premium

+ $100 Equity Adjustment ($500-$400)

= ($10) Therefore, size of first-loss tranche is $0

Bid = ($110)

Second-Loss Tranche: 20% Buyer, 80% FDIC

In most failed bank acquisitions that have occurred in this crisis, the second tranche of loss sharing began immediately because the negative bid plus net assets (assets – liabilities) was a negative number, so the size of the first-loss tranche was $0. In the second-loss tranche, the FDIC covers 80% of losses, and the buyer absorbs the remaining 20% of losses. The size of the second-loss tranche is determined by the FDIC’s threshold—a number that the FDIC posts before bids are accepted. To calculate the threshold, the FDIC


essentially estimates the likely amount of total losses on the portfolio and sets the threshold dollar value at this level. If the FDIC estimates losses to be $250 on a $1,000 portfolio (and assuming the first-loss tranche is $0), then the FDIC would cover 80% of losses between $0 and $250, or $200 of the losses. The buyer would absorb the remaining 20%, or $50, in losses.

Third-Loss Tranche: 5% Buyer, 95% FDIC

For any losses above the FDIC’s threshold, the buyer only absorbs 5%, and the FDIC covers the remaining 95%. In our view, the loss-sharing agreements that banks are receiving today are very attractive, as acquirers really only have to absorb 5% of losses on any loss above the FDIC’s estimate. As bids on FDIC-assisted transactions get increasingly competitive throughout this credit cycle, we would expect the FDIC to eventually eliminate the 95/5 loss sharing and just have 80/20 loss sharing throughout the whole portfolio. This change in the structure of loss-sharing agreements will likely take place before we start seeing qualified bidders submit premium bids on the assets of failed banks. Remember, right now we are just seeing discount bids on the assets.

FDIC Loss-Sharing Example

Here is an example of how loss sharing works on a typical failed bank’s portfolio. In this scenario, we assume a bank with $1,000 in assets fails. Typically, the loan portfolio is covered in the loss-sharing agreement, but securities are not, as they are marked to market upon consolidation of the failed bank’s balance sheet. Assume that the FDIC estimates that total losses on the $800 loan portfolio will be about 30% and sets the threshold at $250. As illustrated in the example below, if a buyer submits a negative bid for this failed bank that is greater than the net assets assumed, then the maximum amount of losses that the buyer must absorb if the entire loan portfolio goes to $0 is $77.5. The FDIC would absorb the other $722.5 in losses.

Maximum Losses on a Failed Bank's Portfolio

Assets $1,000

Securities $200

Loans $800

Liabilities $900

Deposits $900

FDIC Threshold: $250

Loss Tranche

Buyer FDIC Total Cum Loss

First Loss (100/0) $0.0 $0.0 $0.0 $0.0 Assumes negative bid is greater than net assets assumed

Second Loss (20/80) $50.0 $200.0 $250.0 $250.0

Third Loss (5/95) $27.5 $522.5 $550.0 $800.0

Maximum Loss $77.5 $722.5 $800.0 $800.0 If entire loan portfolio goes to zero, acquirer loses $77.5,

which can be offset with net cash received from FDIC

Loss Sharing

Failed Bank's Balance Sheet

Note: Assumes that just the $800 loan portfolio is covered by FDIC loss sharing, which is typical in FDIC-assisted transactions.



Submitting Bids on Failed Banks: ROE Thresholds Matter

A qualified bidder’s internal ROE threshold for a failed bank acquisition and its loss estimate on the total portfolio really determine the bid in today’s failed bank auctions. The actual bids that banks submit in failed bank auctions are very straightforward and consist solely of two numbers:

(1) deposit discount/premium

(2) asset discount/premium

Assume that Bank A and Bank B bid on the failed bank in the example above; Bank A bids a higher deposit premium than Bank B at 1.0% versus 0.5%, respectively. However, Bank A also bids a higher asset discount than Bank B at 20%, or $200, versus 17.5%, or $175. As discussed earlier, the FDIC assesses these bids based on the least cost to the deposit insurance fund. Assuming that the FDIC only receives bids from Banks A and B in the auction, then the FDIC will evaluate the estimated aggregate cost of each of those two bids against the cost of liquidating the failed bank itself. When evaluating the aggregate cost of the bids from Banks A and B, the FDIC would look at the net bid amounts, labeled in the table below, in addition to the amount that the FDIC would have to pay for its portion of losses under the loss-sharing agreements and any other extraneous costs to the FDIC.

Sample Bids on Failed Bank

Percent Dollars Percent Dollars

Deposit premium (+) 1.0% $9.0 Deposit premium (+) 0.5% $4.5

Asset discount (–) 20.0% $200.0 Asset discount (–) 17.5% $175.0

Net Bid Evaluated by FDIC: ($191.0) Net Bid Evaluated by FDIC: ($170.5)

Bank B's BidBank A's Bid

Least Cost to the Deposit

Insurance Fund -

Bank B wins!

Note: Uses $1,000 in assets and $900 in deposits from the failed bank's balance sheet in the example above.


What Drives the Numbers Behind Asset Discounts/Premium Bids?

The asset discount/premium portion of bids for the failed bank’s assets is not solely based upon expected losses in the portfolio. Generally, it includes an assumption for expenses related to asset workouts, as well as an estimate on the gain, or negative goodwill, which can make the transaction immediately accretive to the buyer. The negative goodwill is a very important aspect of the bid. Essentially, negative goodwill is what the FDIC pays you to take the bank. It’s basically a fee that the acquirer receives for working out the bad bank. It can be difficult for qualified bidders to hit their internal ROE targets by just assuming the assets and liabilities of failed banks; the negative goodwill is what enables acquirers to hit their ROE targets in many cases.

In our example, Bank B’s bid is lower for one of two reasons: either Bank B assumes that losses will be lower, or Bank B has a lower internal ROE threshold, or a combination of the two factors. In general, qualified bidders with lower internal ROE targets and/or lower assumptions on the losses in a portfolio will have more competitive bids. If a bidder has a lower ROE target, the negative goodwill baked into its asset discount bid will generally be lower. A lower ROE target might be driven by higher risk tolerance at the bank. Some bidders may be comfortable with a TCE ratio of 6% after a transaction while others will maintain higher capital levels. Additionally, if a bidder expects losses on a portfolio to be lower than competing bidders, the loss estimate in the asset discount bid will be lower.


How Do Banks Determine Asset Discounts for Their Bids?

Bank B's portion of total estimated losses + $52.5 Given $300 in losses, Bank B would only absorb $52.5*

Asset workout expense + $50.0 Covers labor and training costs to divest bad assets

Negative goodwill + $72.5 Essentially, what the FDIC pays acquirer to buy the failed bank;

depending on how bank books gain, can use as yield maintenance

to offset lost NII on nonperforming loans

Total Asset Discount + $175.0

*Note: $52.5 equals 20% of $250 in losses and 5% of the additional $50 in losses.


Accounting Impact: It's All in the Numbers

One of the most common questions that investors ask us is how the accounting works for FDIC-assisted transactions. In the following figures, we walk through the impact that the failed bank acquisition has on Bank B’s balance sheet and then illustrate how Bank B and the failed bank’s balance sheets are combined.

Impact on Bank B’s Balance Sheet

Assets:

Cash

Asset Discount + $175.0

Less: Deposit Premium - $4.5

Less: Equity Adjustment - $100.0 Assets of $1,000 less liabilities of $900 from failed bank

Net Cash Impact + $70.5 FDIC gives bank cash up-front

Securities + $200.0 Securities & other assets fair valued; in this example, assume fair value equals par

Loans

Par Value + $800.0

Less: Estimated Losses - $300.0 Buyer's estimate of total losses on portfolio

Net Impact to Loans + $500.0 Brought over at par, marked down through purchase accounting

FDIC Receivable + $247.5 FDIC's portion of the $300 in estimated losses

Core Deposit Intangible + $15.0 Based on stream of fee income expected to be earned from these deposits over

time; assume $15 in this example

Total Change in Assets + $1,033.0

Liabilities:

Deposits + $900.0 Consolidated at market value

Total Change in Liabilities + $900.0

Net Gain + $133.0 Net assets assumed; must be tax effected; generally booked in 1 of 2 ways: (1) pretax

gain that flows straight through equity; (2) contra asset booked against performing

loans and accretes through NII and NIM over time



Cash impact. The net cash impact to Bank B is the asset discount less the deposit premium and the equity adjustment. The equity adjustment is calculated as the difference between the assets acquired and liabilities assumed. In this example, Bank B is acquiring $1,000 in assets and assuming $900 in liabilities. Therefore, the equity adjustment is $100. The FDIC actually pays the acquirer the net cash amount up-front, and the acquirer can use this cash to offset its portion of losses. In this example, Bank B would receive $70.5 in cash from the FDIC, and it can use this cash to offset its maximum loss on the total portfolio, or $77.5, which we calculated earlier. Therefore, if the entire loan portfolio were to fall to $0, Bank B would only lose $7 (which equals the $77.5 maximum loss minus the $70.5 in cash that the FDIC paid up-front).

Securities and other assets. Securities and any other assets acquired are consolidated at fair value. Loss sharing generally does not cover securities, just the loan portfolio, because securities are marked-to-market when they are consolidated on the acquirer’s balance sheet. In this example, we assume that the fair value is equivalent to the par value for simplicity purposes.

Loan portfolio. The loan portfolio is consolidated at par and simultaneously marked down through purchase accounting. The buyer creates a purchase accounting reserve against the loans in the amount of estimated losses. In this example, Bank B assumes that losses on the $800 loan portfolio will total $300, so the loans are effectively marked to $500 on Bank B’s books. However, Bank B will not have to absorb the full $300 of estimated losses; its portion is just $52.5 (20% up to $250 and 5% of the extra $50 in losses). Therefore, Bank B creates a receivable for the $247.5, which represents the amount of estimated losses that the FDIC will cover. (Note that in practice, the FDIC receivable would actually be less than $247.5 because a bank would book the present value of the FDIC receivable on its balance sheet. However, in order to keep this example simple we do not make discount rate assumptions and take the present value).

Deposits. On the liability side, Bank B consolidates the deposits at market value, which we assume is equivalent to the par value of $900 for simplicity purposes in this example. In most transactions, the buyer creates a core deposit intangible asset on the balance sheet, which incorporates a number of factors, including the present value of the stream of fee income that the acquirer assumes it will earn over the life of those deposits. Core deposit intangibles are generally quite small and are amortized over the life of the deposits.

Pretax Net Gain – How Do Banks Account for it?

The net gain from this transaction is $133, which represents the difference between the total change in assets and the total change in liabilities, or more simply stated, it equals Bank B’s bid less Bank B’s portion of the losses on the loan portfolio. We have seen banks account for these net gains in one of two ways.

(1) Book gain up-front. Bank B could book the $133 pretax gain in earnings, which would flow straight to equity. Some banks strategically account for the gain in this manner because it directly boosts capital levels. This method could be viewed as more aggressive because if the losses you realize on the loan portfolio are higher than your assumptions, you will have to back out a portion of the gain at a later date.

(2) Accrete gain over time. Bank B may also choose to book the gain as a contra asset against the acquired loan portfolio, effectively setting up another reserve. The balance would accrete through net interest income and net interest margin over time. This method can be viewed as more conservative, and the trade-off is higher earnings power in the future instead of higher capital levels at the time of the transaction.

Calculating the net gain is one of the biggest points of confusion among investors. In order to break down the net gain further, think about it as follows:

+ $170.5 Bank B's net bid ($175 asset discount, $4.5 deposit premium)

- $52.5 Bank B's portion of $300 in estimated losses on loan portfolio

= $118.0 Tangible net gain on transaction

+ $15.0 Core deposit intangible

= $133.0 Total pretax net gain

Essentially, the $118 is the tangible net gain. Then, Bank B adds the core deposit intangible of $15 which is noncash and is amortized over time. We would highlight that the core deposit intangible is created when the transaction occurs, but it does not really impact the benefits of the deal.


Bank B - Winning Bank Failed Bank Purchase Accounting Adjustments Combined Bank's Balance Sheet

Assets: $2,000.0 Assets: $1,000.0 Assets: $3,033.0

Cash $100.0 Net cash impact + $70.5 Cash $170.5

Securities $400.0 Securities $200.0 Securities $600.0

Loan portfolio $1,500.0 Loan portfolio $800.0 Loan mark - $300.0 Loan portfolio $2,000.0

FDIC Receivable + $247.5 FDIC Receivable $247.5

Core Deposit Intangible + $15.0 Core Deposit Intangible $15.0

Liabilities: $1,800.0 Liabilities: $900.0 Liabilities: $2,700.0

Deposits $1,500.0 Deposits $900.0 Deposits $2,400.0

Borrowings $300.0 Borrowings $300.0

Equity: $200.0 Equity: $100.0 Net Gain + $133.0 Equity: $333.0

Equity gets wiped out Source: FBR Research


Industry Risks

• Bank failures occur at the discretion of the FDIC and are very difficult to predict, both in terms of timing and in terms of which institutions may fail.

• The loss-sharing terms and bidding procedure discussed in this report are accurate to the best of our knowledge, but there is no guarantee that the rules cannot change or have not changed.

• There is no guarantee that financial institutions mentioned in this report are able to garner an FDIC-assisted acquisition. Further, estimates regarding the accretive nature of FDIC-assisted transactions are based on a number of assumptions, including the size of the asset discount bid and the negative goodwill booked by financial institutions. If a bank overpays for a failed institution, the deal may not be as accretive as suggested herein.

• Some of the deal scenarios discussed in this report would require banks to raise capital, and pricing on capital raises could be worse than expected. Further, if the economy deteriorates meaningfully in the near term, some institutions may not be able to access the capital markets to raise money for deals.


Company nameTop

Level

Ticker

Total Assets

($M)Region State

Date C&D

Issued

Cease and Desist Orders: 4Q09 to date

1 Allegiance Bank of North America ABPA $148 MA PA 11/13/2009

2 Grand Mountain Bank, FSB $149 SW CO 11/09/2009

3 Maritime Savings Bank $381 MW WI 11/06/2009

4 First Arizona Savings, A FSB $345 WE AZ 11/02/2009

5 San Luis Trust Bank, FSB SNLS $403 WE CA 11/02/2009

6 Colombo Bank $169 MA MD 10/28/2009

7 West Coast Bank WCBO $2,649 WE OR 10/26/2009

8 Edgebrook Bank $86 MW IL 10/23/2009

9 R-G Premier Bank of Puerto Rico RGFC $6,399 MA PR 10/23/2009

10 Edgewater Bank $180 MW MI 10/20/2009

11 Liberty Savings Bank, FSB $1,400 MW OH 10/19/2009

12 Park View Federal Savings Bank PVFC $886 MW OH 10/19/2009

13 Benchmark Bank BHMK $173 MW IL 10/15/2009

14 McIntosh State Bank MITB $419 SE GA 10/15/2009

15 Sterling Savings Bank STSA $11,320 WE WA 10/15/2009

16 Liberty Bank $154 SE FL 10/14/2009

17 Los Padres Bank HWFG $1,056 WE CA 10/14/2009

18 Second Federal S&L Association of Chicago $250 MW IL 10/13/2009

19 Palos Bank and Trust Company $525 MW IL 10/12/2009

20 Eurobank EUBK $2,806 MA PR 10/09/2009

21 Lincoln Federal Savings Bank of Nebraska $368 MW NE 10/06/2009

22 Waterfield Bank $197 MA MD 10/01/2009

Cease and Desist Orders: 3Q09

1 First Bank FRBA $223 MA NJ 09/30/2009

2 Peoples Bank & Trust Company $84 MW KY 09/30/2009

3 Rainier Pacific Savings Bank RPFG $764 WE WA 09/30/2009

4 Citizens Bank & Trust Company of Chicago $81 MW IL 09/29/2009

5 Sunrise Bank of Albuquerque CBC $80 SW NM 09/29/2009

6 Gunnison Valley Bank $78 SW UT 09/25/2009

7 Independent Bankers' Bank $584 MW IL 09/24/2009

8 Maple Bank $61 MW MN 09/23/2009

9 Sunshine State Community Bank $155 SE FL 09/21/2009

10 First Mariner Bank FMAR $1,303 MA MD 09/18/2009

11 Freedom Bank $82 MW IL 09/18/2009

12 Peoples State Bank PSBG $474 MW MI 09/18/2009

13 Valley Bank $138 SE FL 09/18/2009

14 Valley Bank $659 MW IL 09/18/2009

15 Western Commercial Bank WCBH $120 WE CA 09/18/2009

16 Highland Community Bank $122 MW IL 09/15/2009

17 Tamalpais Bank TAMB $694 WE CA 09/15/2009

18 Atlantic Southern Bank ASFN $1,083 SE GA 09/11/2009

19 First Cherokee State Bank $285 SE GA 09/11/2009

20 Fox River State Bank $111 MW WI 09/11/2009

21 La Jolla Bank, FSB $3,847 WE CA 09/09/2009

22 Regal Financial Bank $155 WE WA 09/03/2009

23 Business Bank $122 WE WA 09/01/2009

24 Washington First International Bank $610 WE WA 09/01/2009

25 First Resource Bank $19 MW MN 08/31/2009

26 Gwinnett Community Bank $505 SE GA 08/31/2009

27 Domestic Bank $241 NE RI 08/28/2009

Source: SNL Financial


28 Mother Lode Bank MOLB $63 WE CA 08/28/2009

29 Twin City Bank $42 WE WA 08/28/2009

30 Bank of Granite GRAN $1,008 SE NC 08/27/2009

31 Bank of the Cascades CACB $2,270 WE OR 08/27/2009

32 Peoples National Bank $183 SW CO 08/27/2009

33 OceanFirst Bank OCFC $1,874 MA NJ 08/25/2009

34 Professional Business Bank $312 WE CA 08/24/2009

35 Western Community Bank $120 SW UT 08/24/2009

36 Goshen Community Bank CBC $80 MW IN 08/21/2009

37 Savings Bank of Maine $916 NE ME 08/20/2009

38 Security State Bank of Lewiston $70 MW MN 08/20/2009

39 NexBank, SSB $569 SW TX 08/19/2009

40 Home Loan Investment Bank, F.S.B. $215 NE RI 08/18/2009

41 North County Bank $362 WE WA 08/18/2009

42 Oconee State Bank $291 SE GA 08/18/2009

43 Providence Bank $127 SE GA 08/18/2009

44 Golden State Bank GSBB $162 WE CA 08/17/2009

45 Chinatown Federal Savings Bank $165 MA NY 08/14/2009

46 Anchor Mutual Savings Bank $616 WE WA 08/12/2009

47 Border Trust Company BBME $84 NE ME 08/12/2009

48 Bank of Tacoma CBC $44 WE WA 08/11/2009

49 Ohio State Bank OSBI $154 MW OH 08/07/2009

50 Security Savings Bank, FSB $570 MW KS 08/07/2009

51 First Standard Bank FSTA $127 WE CA 08/05/2009

52 Ventura County Business Bank VCBB $104 WE CA 08/05/2009

53 Heritage Bank of North Florida $176 SE FL 08/04/2009

54 Sterling Bank and Trust, FSB $754 MW MI 08/04/2009

55 Community Security Bank $120 MW MN 08/03/2009

56 Independence Federal Savings Bank IFSB $167 MA DC 08/03/2009

57 Advantage Bank CAFI $890 MW OH 07/31/2009

58 Bank of Ontario $30 MW WI 07/30/2009

59 Central Bank of Georgia $326 SE GA 07/28/2009

60 Citizens State Bank $175 MW WI 07/24/2009

61 Northern Star Bank NSBK $46 MW MN 07/24/2009

62 State Bank of Delano $95 MW MN 07/24/2009

63 Guardian Trust Company, FSB $7 MA NY 07/23/2009

64 CIT Bank CITGQ $9,366 SW UT 07/16/2009

65 LibertyPointe Bank $212 MA NY 07/16/2009

66 Royal Bank America RBPAA $1,273 MA PA 07/16/2009

67 Utah Community Bank $50 SW UT 07/16/2009

68 Woodlands Bank $375 SE SC 07/16/2009

69 First Midwest Bank $154 MW SD 07/15/2009

70 Ravenswood Bank $328 MW IL 07/15/2009

71 Mt. Washington Co-operative Bank $501 NE MA 07/14/2009

72 ShoreBank $2,546 MW IL 07/14/2009

73 St. Stephen State Bank $25 MW MN 07/14/2009

74 Commerce Bank of Southwest Florida $71 SE FL 07/09/2009

75 Northside Bank $136 SE GA 07/09/2009

76 Mesa Bank CBC $206 WE AZ 07/08/2009

77 Security Bank $77 MW WI 07/08/2009

78 Desert Hills Bank $526 WE AZ 07/02/2009

79 Union Federal Savings Bank FMD $235 NE RI 07/02/2009

80 Advanta Bank Corp ADVNQ $2,284 SW UT 07/01/2009

81 Commercial State Bank of El Campo $132 SW TX 07/01/2009



82 MBank MBNC $277 WE OR 07/01/2009


1 American Express Centurion Bank AXP $25,456 SW UT 06/30/2009

2 Bank of Georgia GABA $442 SE GA 06/30/2009

3 Satilla Community Bank $158 SE GA 06/30/2009

4 American Express Bank, FSB AXP $31,617 SW UT 06/29/2009

5 City Bank CTBK $1,219 WE WA 06/29/2009

6 Community Bank, (Mass. Cooperative Bank) $360 NE MA 06/29/2009

7 Nevada Security Bank TBHS $538 WE NV 06/29/2009

8 AnchorBank, fsb ABCW $4,640 MW WI 06/26/2009

9 Centennial Bank $244 SW UT 06/26/2009

10 AMCORE Bank, NA AMFI $4,359 MW IL 06/25/2009

11 Grand Rivers Community Bank $14 MW IL 06/25/2009

12 Prime Alliance Bank $142 SW UT 06/23/2009

13 High Desert State Bank $87 SW NM 06/22/2009

14 Park State Bank & Trust $95 SW CO 06/22/2009

15 Inter Savings Bank, FSB $754 MW MN 06/19/2009

16 Mountain Heritage Bank $122 SE GA 06/17/2009

17 New Liberty Bank PFNL $113 MW MI 06/17/2009

18 Hicksville Bank EBSH $138 MW OH 06/10/2009

19 Americana Community Bank $186 MW MN 06/09/2009

20 Arcola Homestead Savings Bank $19 MW IL 06/09/2009

21 Prosper Bank $91 SW TX 06/09/2009

22 Savoy Bank $61 MA NY 06/08/2009

23 Seattle Bank $677 WE WA 06/08/2009

24 American Patriot Bank $123 SE TN 06/03/2009

25 Valley Bank & Trust $239 SW CO 06/01/2009

26 Town & Country Bank $91 MW KS 05/29/2009

27 Bank of Commerce $221 MW IL 05/27/2009

28 Liberty Bank $17 SW UT 05/26/2009

29 Westernbank Puerto Rico WHI $13,487 MA PR 05/22/2009

30 Capital Community Bank $132 SW UT 05/20/2009

31 Royal Palm Bank of Florida MBR $149 SE FL 05/20/2009

32 Farmers & Merchants Bank $121 SE GA 05/19/2009

33 Farmers & Merchants Bank $637 SE GA 05/19/2009

34 Premier American Bank $351 SE FL 05/18/2009

35 AmericanWest Bank AWBC $1,762 WE WA 05/11/2009

36 Community Bank & Trust $1,211 SE GA 05/11/2009

37 Crescent Bank & Trust Company CSNT $1,029 SE GA 05/11/2009

38 First Commercial Bank of Tampa Bay FCBF $151 SE FL 05/11/2009

39 Gordon Bank $34 SE GA 05/11/2009

40 Golden Security Bank $169 WE CA 05/08/2009

41 HomeStreet Bank $3,207 WE WA 05/08/2009

42 Peoples Bank of Kentucky, Inc. $188 MW KY 05/08/2009

43 Darien Rowayton Bank $103 NE CT 05/07/2009

44 Coffee County Bank $127 SE TN 05/01/2009

45 First State Bank $200 SE AR 05/01/2009

46 Badger State Bank $97 MW WI 04/30/2009

47 Cherokee Bank, National Association CHKJ $214 SE GA 04/29/2009

48 Plaza Bank PLZB $159 WE CA 04/29/2009

49 New Resource Bank NWBN $166 WE CA 04/28/2009

50 First National Bank of the South FNSC $786 SE SC 04/27/2009

51 Appalachian Community Bank APAB $1,061 SE GA 04/24/2009

52 Gateway Bank, FSB $433 WE CA 04/24/2009



53 Georgia Heritage Bank GHBD $87 SE GA 04/24/2009

54 Independence Bank $361 WE CA 04/24/2009

55 West Suburban Bank WNRP $1,870 MW IL 04/23/2009

56 Coastal Community Bank $383 SE FL 04/22/2009

57 Baytree National Bank & Trust Company $211 MW IL 04/17/2009

58 Butler Bank (MHC) $273 NE MA 04/17/2009

59 Community Capital Bank $202 SE GA 04/16/2009

60 Citizens National Bank of Springfield $317 MW MO 04/07/2009

61 Carson River Community Bank $50 WE NV 04/03/2009

62 Rocky Mountain Bank & Trust Florence $202 SW CO 04/02/2009

63 K Bank $659 MA MD 04/01/2009


1 Heartland Bank MBR $190 MW KS 03/30/2009

2 First Bank & Trust $873 MW SD 03/26/2009

3 First National Bank of Logan $29 MW IA 03/25/2009

4 Statewide Bank $254 SW LA 03/25/2009

5 Bank of Bonifay $245 SE FL 03/23/2009

6 Century Bank of Kentucky, Inc. $110 MW KY 03/23/2009

7 Pan American Bank PAMB $41 WE CA 03/23/2009

8 Frontier Bank FTBK $3,767 WE WA 03/20/2009

9 Nexity Bank NXTY $1,052 SE AL 03/20/2009

10 State Bank of Aurora $28 MW MN 03/19/2009

11 Farmers Bank $18 MW NE 03/13/2009

12 Nuestro Banco $17 SE NC 03/12/2009

13 Guaranty Bank (MHC) GFCJ $1,366 MW WI 03/11/2009

14 RiverBank $498 MW MN 03/11/2009

15 Security Exchange Bank $191 SE GA 03/10/2009

16 First National Bank of Florida $392 SE FL 03/05/2009

17 Mountain Pacific Bank $123 WE WA 03/05/2009

18 Columbia Community Bank CLBC $378 WE OR 03/04/2009

19 First State Bank $41 MW SD 03/03/2009

20 Horizon Bank HRZB $1,300 WE WA 03/03/2009

21 Innovative Bank $253 WE CA 03/03/2009

22 Bank of Leeton $23 MW MO 02/27/2009

23 Midwest Community Bank $105 MW KS 02/25/2009

24 Bank of Westminster $26 SE SC 02/24/2009

25 First Regional Bank FRGB $2,184 WE CA 02/23/2009

26 Brookline Bank BRKL $2,565 NE MA 02/20/2009

27 Bank of Agriculture and Commerce $442 WE CA 02/19/2009

28 West Michigan Community Bank FETM $152 MW MI 02/19/2009

29 Desert Commercial Bank DCBC $144 WE CA 02/17/2009

30 Concord Bank $144 MW MO 02/13/2009

31 International City Bank, N.A. ILCY $214 WE CA 02/12/2009

32 University Bank UNIB $126 MW MI 02/12/2009

33 Park Avenue Bank $548 MA NY 02/11/2009

34 Peoples First Community Bank $1,795 SE FL 02/11/2009

35 Columbia River Bank CBBO $1,057 WE OR 02/09/2009

36 Bay National Bank BAYN $297 MA MD 02/06/2009

37 Woodlands Commercial Bank $3,543 SW UT 02/04/2009

38 BC National Banks $80 MW MO 02/03/2009

39 Citizens State Bank $119 SW TX 01/30/2009

40 Uniti Bank UIFC $215 WE CA 01/30/2009

41 Garden City Bank $93 MW MO 01/29/2009

42 Douglas County Bank $376 SE GA 01/27/2009



43 Golden Coast Bank $38 WE CA 01/27/2009

44 Paragon Bank $30 MW MN 01/26/2009

45 Westbridge Bank and Trust $111 MW MO 01/23/2009

46 Ripley Federal Savings Bank $90 MW OH 01/21/2009

47 Geauga Savings Bank $453 MW OH 01/12/2009

48 First Commerce Community Bank FCGA $271 SE GA 01/06/2009


1 Transportation Alliance Bank, Inc. $532 SW UT 12/23/2008

2 First State Bank of Burlingame $37 MW KS 12/22/2008

3 First Bank of Delaware FBOD $132 MA DE 12/19/2008

4 Tattnall Bank $50 SE GA 12/19/2008

5 Hometown Bank, National Association $251 MW MO 12/18/2008

6 Bank of Lenox $36 SE GA 12/12/2008

7 Town Center Bank $45 SW TX 12/02/2008

8 Alliance Banking Company $59 MW KY 12/01/2008

9 First National Bank of Valentine $103 MW NE 12/01/2008

10 AmTrust Bank AFNL $11,439 MW OH 11/19/2008

11 Community Bank of San Joaquin BKOT $132 WE CA 11/19/2008

12 First Tuskegee Bank $77 SE AL 11/19/2008

13 State Bank of Park Rapids $105 MW MN 11/19/2008

14 TomatoBank, National Association $482 WE CA 11/19/2008

15 First Security National Bank $127 SE GA 11/18/2008

16 Mountain Commerce Bank $320 SE TN 11/13/2008

17 Pacific Valley Bank PVBK $189 WE CA 11/07/2008

18 Blue Ridge Savings Bank, Inc. $231 SE NC 11/03/2008

19 EvaBank $427 SE AL 10/29/2008

20 OneUnited Bank $562 NE MA 10/27/2008

21 Polk County Bank $130 MW IA 10/27/2008

22 Generations Bank $86 MW KS 10/23/2008

23 Fort Davis State Bank $67 SW TX 10/17/2008

24 Valley Capital Bank, National Association $40 WE AZ 10/16/2008

25 Delta Bank, National Association DEBC $122 WE CA 10/14/2008

26 Bank of Harlan $132 MW KY 10/02/2008

27 Kenney Bank and Trust $39 MW IL 10/02/2008

28 Northpointe Bank $282 MW MI 10/01/2008


1 Pamrapo Savings Bank, SLA PBCI $573 MA NJ 09/26/2008

2 First Asian Bank $44 WE NV 09/25/2008

3 BankCherokee $237 MW MN 09/16/2008

4 Intercredit Bank, NA $326 SE FL 09/09/2008

5 American Bank ABKH $566 MA MD 09/04/2008

6 First National Bank and Trust Company GBCI $281 WE WY 09/03/2008

7 Select Bank $107 MW MI 08/28/2008

8 Lake Community Bank $153 MW MN 08/27/2008

9 Ideal Federal Savings Bank $6 MA MD 08/22/2008

10 Chestatee State Bank CBNR $291 SE GA 08/21/2008

11 Sallie Mae Bank SLM $7,936 SW UT 08/19/2008

12 Libertad Bank SSB $45 SW TX 08/15/2008

13 Bank Reale BKRL $36 WE WA 08/14/2008

14 Home Savings and Loan Company UCFC $2,465 MW OH 08/12/2008

15 First National Bank of Kansas FINN $860 MW KS 08/08/2008

16 Parkway Bank $117 SE AR 08/05/2008

17 McClave State Bank $20 SW CO 08/01/2008

18 Bank of the Bluegrass & Trust Company $230 MW KY 07/18/2008



19 T Bank, National Association TBNC $142 SW TX 07/09/2008


1 Hastings State Bank $151 MW NE 06/24/2008

2 Clarkston State Bank CKFC $117 MW MI 06/16/2008

3 BankHaven $23 MW KS 06/11/2008

4 Northland National Bank $64 MW MO 06/06/2008

5 Earthstar Bank $124 MA PA 05/28/2008

6 Ocean Bank $4,198 SE FL 05/18/2008

7 Oxford Bank OXBC $348 MW MI 05/15/2008

8 Family Bank & Trust Company $79 MW IL 05/09/2008


1 Towne Bank of Arizona TWNE $127 WE AZ 03/28/2008

2 First Lowndes Bank $143 SE AL 03/07/2008

3 Wallis State Bank $311 SW TX 02/26/2008

4 1st American State Bank of Minnesota $18 MW MN 02/25/2008

5 Quality Bank $25 MW ND 02/07/2008

6 Nevada Bank & Trust Company $94 WE NV 01/24/2008


1 Columbia Savings Bank $58 MW OH 11/13/2007

2 Citizens Bank $148 SE TN 10/10/2007

3 Dearborn Savings Bank DSFN $123 MW IN 10/09/2007


1 Bramble Savings Bank $48 MW OH 09/28/2007

2 Sunnyside Federal S&L Association of Irvington $108 MA NY 09/14/2007

3 American Founders Bank, Inc. $436 MW KY 09/06/2007

4 First Independent Bank $149 MW MN 08/29/2007


1 Alliant Bank $15 MW KS 06/28/2007

2 New Buffalo Savings Bank, A Federal Savings Bank $104 MW MI 06/26/2007

3 Golden First Bank $25 MA NY 05/24/2007

4 First State Bank $28 SE VA 04/10/2007


1 Citizens State Bank of Lankin $37 MW ND 03/05/2007

Note: Regions defined as follows: MW=Midwest, MA=Mid-Atlantic, SE=Southeast, WE=West, SW=Southwest,

NE=New England



IMPORTANT INFORMATION

FBR Capital Markets (FBRCM) is the global brand for FBR Capital Markets Corporation and its subsidiaries.

This report has been prepared by FBR Capital Markets & Co. (FBRC) and/or its affiliate Friedman, Billings, Ramsey International, Ltd. (FBRIL), both ofwhich are subsidiaries of FBR Capital Markets.

FBRC is a broker-dealer registered with the SEC and member of FINRA, the Nasdaq Stock Market and the Securities Investor Protection Corporation(SIPC). FBRIL is Authorised and regulated by the Financial Services Authority and registered under Firm Reference Number 184881 on the FSARegister(http://www.fsa.gov.uk/register/home.do), and is a member of the London Stock Exchange and NYSE Euronext. The address for FBRC is 1001Nineteenth Street North, Arlington, VA 22209.

FBRIL is registered in England & Wales at Companies House (http://www.companieshouse.gov.uk) under company number 03210633 and its registeredoffice is 8th Floor, Berkeley Square House, Berkeley Square, London, W1J 6DB. Telephone: +44 (0) 20 7409 5300. Facsimile: +44 (0) 20 7409 5301

All references to FBR Capital Markets (FBRCM) mean FBR Capital Markets Corporation and its subsidiaries including FBRC and/or its affiliate FBRIL.

Company Specific Disclosures

FBRCM has received compensation for non-investment banking securities related services from this issuer as a client in the past 12 months.:HCBKAs a client of FBRCM, the issuer receives non-investment banking, securities related services.:BRKL, HCBK, NAL, NYB and WFSLAs of 10-31-09, FBRCM and/or an affiliate(s) owns 1% or more of the company's common stock.:NARAFBRCM acts as a market maker or liquidity provider for the company's securities.:BRKL, CATY, FCNCA, FITB, HCBK, NARA, PACW, PBCT, RF andWFSL

For up-to-date company disclosures including price charts, please click on the following link or paste URL in a web browser:www.fbrcapitalmarkets.com/disclosures.asp

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The primary analyst(s) covering the issuer(s), Paul J. Miller, Jr., CFA, Bob Ramsey, CFA, David Rochester and Scott Valentin certifies (certify) that theviews expressed herein accurately reflect the analyst's personal views as to the subject securities and issuers, and further certifies that no part of suchanalyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in the report.The analyst(s) responsible for this research report has received and is eligible to receive compensation, including bonus compensation, based on FBRCM’soverall operating revenues, including revenues generated by its investment banking activities.

Any primary analyst labelled as "(FBRIL)" is an approved person employed by Friedman, Billings, Ramsey International, Ltd., Authorised and regulated bythe Financial Services Authority. Unless otherwise noted, any FBRIL analyst(s) on this report are not registered /qualified under FINRA rules, may not beassociated persons of FBRC, and are not directly subject to FINRA Rule 2711 restrictions on communications with covered companies, publicappearances, and trading securities held by a research analyst account.

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In the normal course of its business, FBRCM seeks to perform investment banking and other services for various companies and to receive compensationin connection with such services. As such, investors should assume that FBRCM intends to seek investment banking or other business relationships withthe companies.

Information about our recommendations, holdings and investment decisions:

The information and rating included in this report represents the long term view as described more fully below. The analyst may have different viewsregarding short term trading strategies. Our brokers and analysts may make recommendations to their clients, and our affiliates may make investmentdecisions that are contrary to the recommendations contained in this research report. Such recommendations or investment decisions are based on theparticular investment strategies, risk tolerances, and other investment factors of that particular client or affiliate. From time to time, FBRCM, its affiliatedentities, and their respective directors, officers, employees, or members of their immediate families may have a long or short position in the securitiesmentioned in this report.

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FBRCM instituted the following three-tiered rating system on October 11, 2002 for securities it covers:

• Outperform (OP) —FBRCM expects that the subject company will outperform similar companies within its industry over the next 12 to 18 months. Werecommend that investors buy the securities at the current valuation.

• Market Perform (MP)— FBRCM expects that the subject company will perform in line with similar companies within its industry. We recommend thatinvestors maintain their current positions and add on weakness as the valuation or fundamentals become more favorable.

• Underperform (UP) — FBRCM expects that the subject company will underperform similar companies within its industry. We recommend thatinvestors reduce their positions until the valuation or fundamentals become more compelling.

A description of the five-tiered rating system used prior to October 11, 2002, can be found at http://www.fbrcapitalmarkets.com/disclosurespre10702.asp.


www.fbrcapitalmarkets.com/disclosures.asp

Rating FBRCM Research Distribution1 FBRCM Banking Services in the past 12 months1

BUY [Outperform] 43.5% 8.9%HOLD [Market Perform] 49.8% 7.8%SELL [Underperform] 6.8% 3.6%

(1)As of midnight on the business day immediately prior to the date of this publication.

General Information about FBRCM Research:

Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe tobe reliable, but is not guaranteed as to accuracy and does not purport to be complete. Opinion is as of the date of the report unless labeled otherwise, andis subject to change without notice. Updates may be provided based on developments and events and as otherwise appropriate. Updates may be restrictedbased on regulatory requirements or other considerations. Consequently there should be no assumption that updates will be made. FBRCM and itsaffiliates disclaim any warranty of any kind, whether express or implied, as to any matter whatsoever relating to this research report. This research report isprovided on an "as is" basis for use at your own risk, and neither FBRCM, nor its affiliates are liable for any damages or injury resulting from use of thisinformation. This report should not be construed as advice designed to meet the particular investment needs of any investor, nor as an offer or solicitationto buy or sell the securities mentioned herein, and any opinions expressed herein are subject to change.

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Copyright 2009 FBR Capital Markets Corporation


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