Sacramento Business Review

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Famous Forecasts

We do not expect significant spillovers from the subprime market to the rest of the

economy or to the financial system.”Ben Bernanke – Federal Reserve Chairman, May 17, 2007. Market

collapses, economy tanks, financial system explodes. Later Mr.

Bernanke cuts discount rate from 5.25% to 0% to avoid global meltdown.

Famous Forecasts

“The steady improvement in [home] sales will support price

appreciation…..[despite]…..all the wild

projections by academics, Wall Street analysts, and others in the media.”

David Lereah, Chief Economist,

National Association of Realtors, Jan 10, 2007.

Housing Market continues to sink.

Sacramento Regional Economy and Labor Market

2011 Outlook

• 160 billion

• One third government now

shrinking

• 30 employers that are “large”

• Lower per capita income, leads

employment cycle

• Population surges coincide with

cheaper real estate

• Sacramento MSA is roughly $160 billion

• Larger than Iowa – Venezuela (GDP #39 at $148 billion) Kansas – Malaysia (GDP #40 at $132 billion)

• Arkansas – Pakistan (GDP #41 at $124 billion) Oregon – Israel (GDP #42 at

$122 billion)

• South Carolina – Singapore (GDP #43 at $121 billion) Nebraska – Czech

Republic (GDP #44 at $119 billion)

• New Mexico – Hungary (GDP #45 at $113 billion) Mississippi – Chile (GDP

#48 at $100 billion)

• DC – New Zealand (#49 at $99 billion GDP) Oklahoma – Philippines

(GDP #50 at $98 billion)

• West Virginia – Algeria (GDP #51 at $92 billion) Hawaii – Nigeria (GDP #53 at $83 billion)

• Idaho – Ukraine (GDP #54 at $81 billion) Delaware – Romania (#55

at $79 billion GDP)

• Utah – Peru (GDP #56 at $76 billion) New Hampshire –

Bangladesh (GDP #57 at $69 billion)

• Maine – Morocco (GDP #59 at $57 billion) Rhode Island – Vietnam

(GDP #61 at $48 billion)

• South Dakota – Croatia (GDP #66 at $37 billion) Montana – Tunisia (GDP

#69 at $33 billion)

• North Dakota – Ecuador (GDP #70 at $32 billion) Alaska – Belarus (GDP #73 at $29 billion)

• Vermont – Dominican Republic (GDP #81 at $20 billion) Wyoming

Sacramento Unemployment13.5% by 1Q 2011; elevated at 12.5 - 13.5% through

2011

US unemployment rate = 9.6%

Data Source: The Employment Development Department, California

The “Real” Unemployment Rate

(US Underemployment Index, U6)

6

8

10

12

14

16

18

US

Un

de

rem

plo

yme

nt

Ind

ex US Current: 17.3%

Data Source:

Bureau of

Labor Statistics

Sacramento

Rate 20%

% Change in Construction Jobs since July 2007

-35% -30% -25% -20% -15% -10% -5% 0%

US

California

LA Area

SF Bay Area

San Diego Area

Sacramento Area

Data Source: The Employment Development Department, California

Data Source: The Employment Development Department, California

% Change in Financial Jobs since July 2007

-20% -15% -10% -5% 0%

US

California

LA Area

SF Bay Area

San Diego Area

Sacramento Area

Nonfarm Payrolls in California Economic Downturns Since 1970

Including Current Recession

# months since peak employment

Em

plo

ym

ent

peak =

100

Current recession…

Source: Employment Development Department of California; Bureau of Labor Statistics

93

94

95

96

97

98

99

100

101

1970

1974-75

1980

1981-82

1991-92

2001

Current

Severe Job Loss in Sacramento 100,000 Jobs Lost to date from pre-

recession peak… and counting

Last time the region created that many

jobs, it took 3.5 years!... during the real

estate boom

Won’t return to peak job levels until 2013or later => prolonged “U-Shaped

Recovery”

Headwinds for the Recovery in 2011

1. Moderate GDP and revenue growth expected

2. Credit to remain tight through 2011

3. Excess capacity and uncertainty to delay hiring

4. Firms will show caution in rebuilding

permanent workforce

Projected California General Fund Operating Shortfalls

($ Billions)

-$25

-$20

-$15

-$10

-$5

$0

2010-11 2011-12 2012-13 2013-14 2014-15

Carry-In Deficit from 2009-10

Annual Operating Shortfall

Source: Legislative Analyst’s Office

The Consumer Will Shift the Tides 70% of the economy

Other legs of economy will be drags to growth

Household net worth slowly rebuilding

But consumers are worried about:

JOBS

INCOME

CREDIT

The Good News

Corporate profitability and cash flow are up

Firms hiring temp workers

Job Openings in October sharply UP

These are classic early signs of a recovery

Real Estate in Sacramento Region

2011 Outlook

Fewest residential starts in decades

Median Home Price – 55% off the 2005 Peak

Highest Industrial vacancy since 1986

Office vacancy exceeded 20% for the first time

Retail Rents fell 30%-50% across the board

Investment transactional volumes down 80% from 2008

2010 Summary

Residential Market

Forecast: Residential market will not see a rebound until income and employment

levels stabilize.

Investment Market

$0

$1

$2

$3

$4

$5

2002 2003 2004 2005 2006 2007 2008 2009

(Bill

ions

)

Market Volume ($ bill)Through November 2009

(all property types)Sacramento MSA

Source: Real Capital Analytics

2011 Outlook

Residential – Prices will continue to fall except for the low-end of the market.

There will be NO recovery till later in year.

Commercial – Will lag the residential

market by several months. Distress driven opportunities will become more available.

Case-Shiller 100 Year Chart

United States Versus Japan

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Jan

uar

y 19

87

Sep

tem

ber

198

7

May

198

8

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uar

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89

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0

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uar

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91

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95

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97

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0

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01

Sep

tem

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200

1

May

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uar

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tem

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uar

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200

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May

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uar

y 20

09

CA-San Diego SDXR

CA-San Francisco SFXR

2011 SacramentoBanking Industry Forecast

Key Points

Despite attractive interest-rate environment, loan growth remains tepid.

Lackluster loan demand

Lending standards still relatively tight

Bank balance sheets constrained by problem real-estate loans

Locally based banks are in better financial condition relative to six months ago.

Major loss provisions and chargeoffs in 4Q 2010

Strength of economic recovery highly dependent on private sector credit growth.

Who has the largest share of deposits in the Sacramento

region?

A) JP Morgan Chase

B) Bank of America

C) Bank of Sacramento

D) Wells Fargo

E) Bank of China

F) None of the Above

Share of Deposits in the Sacramento Region

1) Citibank 33.1%

2) Wells Fargo / Wachovia 17.6%

3) Bank of America 14.4%

5) JP Morgan Chase 5.0%

13) Bank of Sacramento 0.7%

Adjusted Share of Deposits in the Sacramento Region

1) Wells Fargo / Wachovia 25.7%

2) Bank of America 21.0%

3) U.S. Bank 12.8%

4) JP Morgan Chase 7.3%

10) Citibank 2.2%

-50

0

50

100

150

200

250

300

Dec

-05

Feb

-06

Apr-

06

Jun-0

6

Aug-0

6

Oct

-06

Dec

-06

Feb

-07

Apr-

07

Jun-0

7

Aug-0

7

Oct

-07

Dec

-07

Feb

-08

Apr-

08

Jun-0

8

Aug-0

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Oct

-08

Dec

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Feb

-09

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Aug-0

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Oct

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Jun-1

0

10yr

- 2yr

US

T R

ate

s (i

n b

ps)

LONG-TERM RATES BELOW SHORT-TERM RATES:

WORSE FOR NET INTEREST MARGINS

LONG-TERM RATES ABOVE SHORT-TERM RATES:

BETTER FOR NET INTEREST MARGINS

Source: United States Treasury Department

Differential Between 10-Year and 2-Year U.S. Treasuries: 2006 – July 2010

Source: FDIC

FDIC-Insured Banks: Loans Outstanding and Treasury Holdings

7,000

7,200

7,400

7,600

7,800

8,000

Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110

To

tal L

oa

ns

& L

ease

s

0

20

40

60

80

100

120

140

160

180

US

Tre

asu

ry H

old

ing

s

Problem Loans Still an Issue

Residential

24% of loans outstanding (on average)

Construction & Commercial Real Estate

46% of loans outstanding (on average)

2011 Capital Markets

United States

Developed International

Emerging Markets

Equity Markets: Outlook for 2011

Employment Weighted

Constituents and Local Impact

Performance Drivers

SBR Index

What keeps

people awake at

night?

• California ranked as most business unfriendly

state

• High cost of living (housing, gas, taxes, utilities)

• Rapidly growing population

• Fiscal deficit at state, county, local levels

• High unemployment

• High foreclosure and mortgage problems (non recourse state)

• Uncertainty in politics and policy changes

affecting business – reluctant to act or create

jobs

• So what could be right in 2011?

– Economic cycles do reverse

– California population is growing

– California is resilient

– California is a leader in innovation, industry diversification, and venture capital

– Government is a growth industry – job growth for Sacramento

Growth in population – 24%

Growth in per capita Gross State Product – 91%

Growth in California State

Budget spending – 129%

• California 1990 – 2010