By Mark Heschmeyer

June 3, 2009

The amount of troubled loans on income-producing commercial real estate property is rising rapidly at the nation’s bank and thrift institutions. The total is now more than double what it was a year ago with the bulk of the increase occuring in the first quarter of this year.

The nation’s FDIC-insured banks reported carrying $22.3 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $4.3 billion in multifamily loans. That is up from $15.7 billion and $3 billion respectively reported three months ago – increases of more than 40% in both cases.

The nation’s FDIC-insured thrifts reported carrying $2 billion in nonperforming office, industrial and retail property loans on their books at the end of the first quarter and another $842 million in multifamily loans. That is up from $1.5 billion and $591 million respectively from three months ago – increases of more than 33% and 42% respectively.

In addition to those nonperforming assets, U.S. banks were carrying $3.3 billion in foreclosed office, industrial and retail properties on their books and $1.3 billion in foreclosed apartment properties. Thrifts carried $327 million and $142 million respectively.

The FDIC (Federal Deposit Insurance Corp.) also noted that other asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion of a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.

“Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry’s performance,” said FDIC Chairman Sheila C. Bair. “Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and noninterest revenue is up at larger banks, particularly trading revenues. Realized gains on securities and other assets improved, too. But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment.”

The commercial real estate numbers blighted what otherwise was a positive quarter for commercial banks and savings institutions that rebounded from losing money in the fourth quarter of last year. Banks and thrifts reported net income of $7.6 billion in the first quarter of 2009, a decline of $11.7 billion (60.8%) from the $19.3 billion that the industry earned in the first quarter of 2008.

Higher loan-loss provisions, increased goodwill write-downs, and reduced income from securitization activities all contributed to the year-over-year earnings decline. Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.

In fact, the FDIC’s list of problem institutions continued to grow during the quarter from 252 to 305 institutions, and the total assets of problem institutions increased from $159 billion to $220 billion.

The number of problem thrifts was 31, up from 26 in the previous quarter.

The number of FDIC-insured commercial banks and savings institutions reporting financial results declined from 8,305 to 8,246 in the first quarter. Mergers absorbed 50 institutions, while 21 insured institutions failed.

This is the largest number of failed institutions in a quarter since the fourth quarter of 1992. Thirteen new charters were added in the first quarter, the fewest since the first quarter of 1994.

“The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern,” Chairman Bair noted. “Banks are making good efforts to deal with the challenges they’re facing, but today’s report says that we’re not out of the woods yet.”

“As I see it, we’re now in the cleanup phase for the banking industry,” Bair added. “It will take some more time. But in the end, we’ll have a stronger banking industry that’s better able to meet the demand for credit as the economy recovers.”

Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, an increase of $23.7 billion (63.6%) over the first quarter of 2008.

The U.S. thrift industry rebounded too in the first quarter of 2009, but still reported losses of $47 million. That is still their best performance since September 2007, the Office of Thrift Supervision (OTS) reported.

“We are seeing encouraging signs in the performance of the thrift industry,” said Acting Director John E. Bowman. “Although it’s too early to say we’ve hit bottom or that the industry’s troubles are behind us, fundamentals such as solid capital, strong levels of loan loss reserves and improving operating income give the industry a solid platform for the future.”

During the quarter, 74% of thrifts were profitable, up from 65% in the fourth quarter of 2008. The improved profitability reflected lower loan-loss provisions of $5.8 billion in the quarter, down from $9.3 billion in the previous quarter. Although loan loss provisions declined, they remained elevated and were the fifth highest on record.

May 11, 2009, 3:26 p.m. EST

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking information about the Company and its subsidiaries, which statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. The Company assumes no obligation to update such forward-looking statements.

Table of Contents

Overview

We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our subsidiary bank, Pacific Western Bank, which we refer to as Pacific Western or the Bank.

Pacific Western is a full-service community bank offering a broad range of banking products and services including: accepting time and demand deposits; originating loans, including commercial, real estate construction, SBA-guaranteed, consumer, and international loans; and providing other business-oriented products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium-sized businesses and the owners and employees of those businesses in our marketplace. Through our asset-based lending operation we also operate in Arizona, Northern California, the Pacific Northwest, and Texas. At March 31, 2009, our assets totaled $4.5 billion, of which gross loans totaled $3.9 billion. At this date approximately 21% were commercial loans, 57% were commercial real estate loans, 9% were commercial real estate construction loans, 6% were residential real estate construction loans, 6% were residential real estate loans, and 1% were consumer and other loans. These percentages include some foreign loans, primarily to individuals or entities with business in Mexico, representing 1% of total loans. Our portfolio’s value and credit quality is affected in large part by real estate trends in Southern California, which have been negative over the last 18 months.

Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth and loan yield, deposit cost, and net interest margin, as net interest income, on a year-to-date basis, accounts for 89% of our net revenues (net interest income plus noninterest income).

Key Performance Indicators

Among other factors, our operating results depend generally on the following:

The Level of Our Net Interest Income

Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. The decline in market interest rates over the last 18 months and fierce competition for deposits has compressed our net interest margin. Based on our balance sheet structure the yield on our earning assets decreased more rapidly and significantly than the cost of our funding sources during 2008 and into 2009. A sustained low interest rate environment combined with tight marketplace liquidity and low loan growth may further reduce both our net interest income and net interest margin going forward.

Our primary interest-earning asset is loans. Our primary interest-bearing liabilities include deposits, borrowings, and subordinated debentures. We attempt to increase our net interest income by maintaining a high loan-to-deposit ratio and a high level of noninterest-bearing deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield. At March 31, 2009, approximately 36% of our total deposits were noninterest-bearing deposits.

The recent disruptions in the financial credit and liquidity markets have resulted in increased competition from financial institutions seeking to maintain liquidity and this has impacted deposit flows and the rates paid on certain deposit accounts. In addition to deposits, we have borrowing capacity under various credit lines which we use for liquidity needs such as funding loan demand, managing deposit flows and interim acquisition financing. This borrowing capacity is relatively flexible and has

Table of Contents

become one of the least expensive sources of funds. However, our borrowing lines are considered a secondary source of liquidity as we serve our local markets and customers with our deposit products.

Loan Growth

We generally seek new lending opportunities in the $500,000 to $10 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. We have continued to reduce our exposure to residential construction and foreign loans, including limiting the amount of new loans in these categories. Our ability to make new loans is dependent on economic factors in our market area, borrower qualifications, competition, and liquidity, among other items. We expect loan growth for 2009 to be negatively affected by the current state of the economy in Southern California and the competition among banks for liquidity. Although loans, net of unearned income, declined $63.6 million during the first quarter of 2009, new loans and advances on loan commitments totaled $237 million.

The Magnitude of Credit Losses

We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs and allowance for credit losses. Our allowance for credit losses is the sum of our allowance for loan losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans which are deemed uncollectible are charged off and deducted from the allowance for loan losses. Recoveries on loans previously charged off are added to the allowance for loan losses. During the three months ended March 31, 2009, we made a provision for credit losses totaling $14.0 million based upon our reserve methodology. We considered, among other factors, the level of net charge-offs, the level and trends of classified, criticized, and nonaccrual loans, usage trends of unfunded loan commitments, general market conditions, and portfolio concentrations.

We continually review our loans to determine whether there has been any deterioration in credit quality stemming from economic conditions or other factors which may affect collectibility of our loans. Changes in economic conditions, such as inflation, unemployment, consumer spending, increases in the general level of interest rates and negative conditions in borrowers’ businesses could negatively impact our customers and cause us to adversely classify loans and increase portfolio loss factors. An increase in classified loans generally results in increased provisions for credit losses. Any deterioration in the real estate market may lead to increased provisions for credit losses because of our concentration in real estate loans.

http://www.marketwatch.com

May 1 (Bloomberg) — The Federal Reserve authorized longer- term loans for investors buying securities backed by commercial mortgages in a $1 trillion emergency credit program, taking a step the industry said was needed to avert defaults.

Beginning in June, the Fed will offer five-year loans at higher interest rates than the three-year loans previously approved for the Term Asset-Backed Securities Loan Facility, the central bank said today in a statement from Washington. The Fed will also accept securities backed by loans designed to help small businesses buy insurance.

While policy makers had been wary of financing longer-term loans out of concern it would be harder to raise interest rates when the economy recovers, leaving TALF unchanged may have resulted in tighter credit. Sales of commercial mortgage-backed securities slumped to $12.2 billion last year from a record $237 billion in 2007, according to JPMorgan Chase & Co. estimates.

Adding CMBS to the TALF “will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans and facilitate the sale of distressed properties,” the Fed said today.

$100 Billion

The Fed set an initial limit on the total amount of five- year TALF loans at $100 billion and “will continue to evaluate that limit.” Terms apply to CMBS issued in 2009, backed by loans originated since July 1, 2008, and carrying the highest credit rating. The Fed is separately still developing terms of a so-called legacy TALF to finance purchases of older securities.

Yield premiums on commercial-mortgage bonds compared with benchmark securities rose after the announcement, as some investors were expecting the Fed to also detail plans for older securities, according to Lisa Pendergast, an analyst at RBS Securities Inc. in Greenwich, Connecticut.

“There’s no one on the Street doing new loans,” limiting the impact of the Fed’s initiative until the legacy assets are addressed, she said.

The extra yield over benchmark rates on the most-senior class of a 2007 Goldman Sachs Group Inc. commercial-mortgage bond climbed about 1 percentage point to about 8.5 percentage points today, according to RBS. The yield gap had fallen from 12.6 percentage points when regulators in late March detailed plans to finance purchases of older, distressed assets.

‘Step at a Time’

“While it’s a great step in the right direction, it doesn’t have the impact on older securities that we would like,” said Christopher Hoeffel, president of the Commercial Mortgage Securities Association, a trade group, in New York. “They have not shut the door on a five-year term for legacy assets, but they are taking this one step at a time.”

New loans for CMBS will be more expensive based on today’s interest rates. If the Fed set TALF rates today, an investor could borrow for five years at 3.63 percent or three years at 2.97 percent, according to calculations by Bloomberg.

Five-year loans will be available for purchases of CMBS as well as securities backed by education and small-business debt, the Fed said. Investors haven’t requested loans for those securities through the TALF yet.

“Three-year funding wasn’t long enough” to aid the market, said John Ryding, chief economist at RDQ Economics LLC in New York, who formerly worked at the Fed. “It’s another piece of the Fed’s balance sheet that’s going to be locked in place for a really long time,” he also said.

TALF loans are backed by Treasury Department funds from the Troubled Asset Relief Program, helping protect the Fed against the first 10 percent of losses.

Bigger ‘Haircuts’

Investors, such as hedge funds, will need to put up $15 of their own capital for every $100 in CMBS that will be posted as collateral to the Fed. That’s one of the steepest “haircuts” in the TALF, indicating Fed officials see CMBS among the riskiest assets. For subprime credit-card ABS with a five-year “average life,” investors put up $10 for every $100 in securities.

The first investor subscription date for CMBS loans through the TALF will be in late June, followed by the “latter part of each month,” the Fed said. The subscription date for other assets, such as auto-loan and credit-card securities, will remain at the beginning of each month. The Fed authorized the TALF through December.

May 5 is the deadline for the third monthly round of applications for other TALF loans. General Electric Co., Harley- Davidson Inc., Volkswagen AG and Honda Motor Co. lead companies selling debt for next week’s round, according to people familiar with the sales.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

By Mark Heschmeyer

May 13, 2009

If the current economic malaise brings down any of the largest banks in the country, commercial real estate likely WON’T be the culprit. Office, industrial and retail properties specifically are even less likely to bring down the nation’s top banks.

The 19 largest U.S. banks, which account for 70% of the bank holdings of this country, were the focus of the U.S. Federal Reserve ‘stress tests’ results released this past week. Under the worst case scenarios envisioned for the current recession, commercial real estate losses would cost those banks $53 billion in losses this year and next.

While that is a lot of money, it still pales in comparison with residential loan losses, which still would make up the bulk of the projected losses, $185.5 billion. In fact, exposure to commercial real estate loans falls way down the line in terms of producing projected losses for banks. Trading and counterparty investments would lose $99 billion; consumer loans $83.7 billion; credit card loans $82.4 billion; business loans, $60.1 billion; only then comes commercial real estate.

The two-year loss estimates totaled about $600 billion in the more adverse scenario for the 19 bank holding companies.

Estimated losses on residential mortgages are substantial over the two-year scenario, consistent with the sharp drop in residential house prices in the past two years and their projected continued steep fall in the more adverse scenario. The effects of reduced home prices on household wealth and the indirect effects through reduced economic activity, also push up estimated losses on consumer credit, including losses on credit cards and on other consumer loans. Together, residential mortgages and consumer loans (including credit card and other consumer loans) account for $322 billion, or 70% of the loan losses projected under the more adverse scenario.

Even in terms of percentages of losses, commercial real estate loans hold up better on the banks’ books than its other assets and investments. About 22.5% each of residential real estate loans and credit card loans would go bad but only 8.5% of commercial real estate loans would go bad.

To cover those potential losses, the Federal Reserve has asked the 19 banks to raise $75 billion in additional common equity by next November.

“This was a carefully designed, credible test,” said U.S. Treasury Secretary Tim Geithner. “Banks supervisors applied a historically high set of loss estimates on securities and loans, as well as a conservative view towards potential earnings that could act as a buffer against those losses.”

“These are estimate of potential losses and earnings that could occur in the event of a more severe recession. They are not a prediction of where the economy is headed,” Geithner added. “The results are less acute than some had expected, in part because concern about the risk of a more severe recession have diminished, market have improved, and banks, in anticipation of the release of the stress test, have acted in the last few months to increased capital.”

The stress test process involved the projection of losses on loans and investment assets, as well as the firms’ capacity to absorb losses. To analyze commercial real estate loans, the bank holding companies were asked to submit detailed portfolio information on property type, loan to value (LTV) ratios, debt service coverage ratios (DSCR), geography, and loan maturities.

Loss rates on commercial real estate loans reflected realized and projected substantial declines in real estate values. However, federal supervisors analyzed loans for construction (both residential and construction) and land development, multifamily property, and non-farm non-residential projects separately. And the bulk of the projected losses in the commercial real estate come from the construction and land development loans. Income producing properties fared much better.

The stress tests projected a baseline loss of 9% to 12% for construction loans and a worse case scenario of 15% to 18%; multifamily losses had a projected baseline loss of 3.5% to 6.5% and a worse case loss of 10% to 11%; office, industrial and retail properties had a projected baseline loss of 4% to 5% and worse case loss of 7% to 9%.

The results of the stress tests “were good news and were generally received as such, although it is important not to take excessive comfort from what remains essentially a highly educated guess as to the future of the banks in a very uncertain environment,” concluded Douglas J. Elliott , a fellow in economic studies at The Brookings Institution. “The test appears to be somewhat tougher than the base case of the International Monetary Fund, but not nearly as harsh as the most pessimistic analyses.”

“This implies that while we may well have turned the corner, we can be far from certain that the solvency crisis in banking is over,” Elliott wrote in a paper this week. “Even if it is, the stubborn credit crunch will last for considerably longer. The banks will be in a better position to lend more freely as a result of the modest influx of new capital and the greater benefit of the confidence boost from passing the tests. However, the depth of this recession and the shattering of the securitization market will keep credit tight for some time.”

One unintended side effect of the results of the stress test, Elliott said is that they will work against the government’s plan to encourage investors to buy toxic assets from the banks.

“The government’s reassurance that these banks have, or will soon have, the capital to handle even the stress scenario without selling their toxic assets makes it harder for the regulators to pressure the banks to actually sell,” Elliott concluded. “This matters because the banks generally believe that even with government incentives the private investors are looking to pay unreasonably low prices for these assets.”

The banks would generally prefer to hold onto the assets until they can get a better price, Elliott reasoned.

Generally across the board, the 19 bank holding companies put to the stress tests, said they believe the stress test assumptions were unreasonably conservative and actual losses will be far less than projected.

Regions Financial Corp. in Birmingham, AL, questioned whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario, particularly in view of the fact that Federal Reserve Chairman Ben Bernanke this past week said that he expects the economy to begin recovering during 2009.

Regions said it believes that the stress test results do not accurately reflect the loan losses that Regions is likely to experience even in the “more adverse” economic scenario. In particular, the anticipated two-year cumulative loss ratio of 13.7% projected on its commercial real estate is sharply higher than Regions’ actual annualized loss ratio on its portfolio in the first quarter and sharply higher than that projected for the other banking companies.

Bank of America Corp. in Charlotte, NC, was projected to have a 2-year loss rate on its commercial real estate loans of 7.4%, or 3.7% per year. Bank of America said its actual first quarter annualized loss rate on the equivalent portfolio was 1.68%. So, loss rates would have to more than double to 3.9% and remain there for the remaining seven quarters to reach the FRB’s projections.

Additionally, the FRB’s loss rate is well above the combined commercial and commercial real estate peak loss rate experienced by Bank of America in either the 1991 recession or the 2002 recession.

Individual CRE Stress Test Results

The national and Arizona economies are expected to begin feeling the effects of a recovery during the last quarter of 2009. But over the next year the recovery will be slow, with unemployment continuing to rise and economic growth anemic at best. Meanwhile, the state’s expenditures are rising, even as revenue continues to fall, setting the stage for future budget cuts and an expected tax increase.

That was the consensus unveiled by top economic experts from the W. P. Carey School of Business and the Arizona governor’s office at the annual Economic Outlook Luncheon on May 20. Addressing the audience of business and community leaders were Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at W. P. Carey and editor of Economy@W. P. Carey; Dennis Hoffman, director of the L. William Seidman Research Institute at W. P. Carey; and Eileen Klein, director of the Arizona Governor’s Office of Strategic Planning and Budgeting.

McPheters provided an overview of current economic conditions on the state and national level, and offered a forecast for the coming year.

The U-shaped recovery

“The economy is going to show some signs of recovery in the last part of 2009, but the way I like to look at this is that lots of our economic indicators will still be underwater, in a sense — they just won’t be as far underwater,” he said. “We’ll probably see positive growth in GDP, we will see job losses getting smaller, but there will still be job losses. There will still be people claiming unemployment insurance and, of course, unemployment rates will still be going up.

“It’s going to be a deep, sort of U-shaped recovery and 2011 will probably be a pretty good year of job growth,” McPheters added.

In the meantime, job losses will continue to mount. In March, with an over-the-year employment decline of 7.1 percent and 136,000 jobs lost, the Valley just edged out Detroit as the weakest large metro labor market in the nation. And even as the economy begins to recover, the Greater Phoenix area will still see its labor market contract by 1 percent in 2010, according to McPheters.

Nationally, McPheters stressed that while the current recession has been painful, it still is not on par with the Great Depression. The Great Depression was marked by four consecutive years of decreases in Gross Domestic Product (GDP), while the current recession is expected to result in four consecutive quarters of decrease in inflation-adjusted GDP. In fact, in the first year of the recession, the national GDP actually increased by 1.1 percent.

“During 2008, the first year of the recession, you would expect that the GDP would be decreasing,” he said. “Well, one of the factors holding it up was exports. Exports continued strong in the United States through 2008.”

This year, however, exports are expected to drop by 10 percent. That’s just one example of how the national and state economies will continue to struggle as the recovery begins to take hold. Another example is the expected freefall in the commercial real estate market, especially in Arizona.

“Commercial is the next shoe to drop and we have seen this pattern before,” McPheters said. “Even as you see residential [construction] begin to pick up, I think you can expect that commercial building is going to be very, very weak all the way through 2010 and probably 2011, because what we need to see is population growth come back and job growth to come back. There’s no point in building retail space and office space if the jobs are not there and the consumer is not coming out to shop.”

And it is consumers, who account for 71 percent of GDP, who really hold the key to the economic recovery.

“The consumer is the only part of this economy that can bring us back,” McPheters said. “Consumers are not going to come back into the game until home prices stop falling, until the stock market stabilizes, until they see unemployment rates have peaked out and job losses start to get smaller and smaller. And the consumer has to have confidence to buy, and believe it or not, the consumer has to back off of their inclination to save their money.”

In March, the savings rate as a percent of disposable income was 4.2 percent, up from 2.6 percent six months earlier. While increased savings are considered a good thing in robust economic times, a pullback by consumers as an economy tanks can have devastating effects. McPheters pointed out that for each 1 percent increase in the savings rate, approximately $100 billion are being pulled out of the consumer-spending stream. 

However, McPheters expressed confidence that the very calamity that sent our state and national economies reeling will eventually add to Arizona’s attractiveness to new residents and businesses — falling home prices.

“Housing prices have now returned to the traditional level, where Arizona housing prices are now more affordable than the national average,” he said. “In 2005 and 2006, we had come to the point where we were one of the least affordable markets. That has turned around and it has turned around very quickly. Of course that has been very painful.”

How to close the gap

Hoffman agreed with McPheters, adding that he believes the state’s economic rebound will be strong.

“This of course is the big question: What kind of bounce will take place? Now, I’ll have to say that the dramatic shakeout in prices in housing, while it has been absolutely disastrous for a number of folks and put a lot of pressure in a lot of different places, it might set us up for a more robust recovery than I would have thought six to nine months ago,” he said. “The thinking is really very, very simple; an attractive attribute of Arizona has historically been great climate, affordable housing and a place to get a job. That third aspect really doesn’t exist right now, but it could exist if our economy recovers at a little faster pace.”

In the economic downturns of the past four decades, Arizona has bounced back strongly, and Hoffman is confident history will repeat itself, especially if the state and Valley can re-create the environments that people from around the country have found so attractive.

But Arizona’s current budget crunch casts a long shadow over the prospects for recovery. In fiscal year 2009, the state’s budget gap stands at $1.6 billion. In fiscal year 2010, that’s expected to almost double to $3 billion dollars. As the economy has worsened, unemployment has soared to almost 8 percent, foreclosures have skyrocketed and businesses have closed their doors. As a result, billions of dollars in revenue from income, property, sales and business taxes have evaporated. Conversely, the need for state services has exploded.

“We’re really seeing the effects of the downturn in the economy. Not only are the state revenues significantly down, but also more citizens are in need of services,” said Eileen Klein of the Arizona Governor’s Office. In the past two months alone, the Arizona Health Care Cost Containment System (AHCCCS) has enrolled 50,000 people, she said.

Hoffman pointed out that in the past, $48 to $50 out of every $1,000 of personal income had gone into the state’s general fund. Since 2006, that amount has been plummeting and is expected to hit around $33 by the end of this year.

The state is now walking a tightrope of trying to increase revenues by raising taxes, while trying to woo out-of-state residents and businesses.

“I would argue that the state needs to be much more business friendly in terms of its tax structure, the quality of its work force, its job training programs. You can be business friendly in a number of ways. Having a lucrative market to sell into is probably the friendliest thing you can do for businesses,” Hoffman said. “Businesses look to where they can locate to make money, where they can produce at a reasonable cost, and sell and make profits. We need a more lucrative market here, we need higher incomes, we need higher income people residing here in the state of Arizona, [and] we need a friendly tax code for business.”

Hoffman detailed what the state should and should not do as it attempts to plug the budget gap:

•The state should not impose taxes that distort the economy and create disincentives for business creation and expansion.

•Undue burden should not be placed on businesses, especially export-based businesses that are mobile.

•The state should focus on broad-based taxes with modest rates (compared with competitor states) that create the least distortion.

“If we had the income tax rates that we had in 1993, there wouldn’t be a $3 billion hole; that’d fix it right there,” Hoffman said.

For now, Arizona Governor Jan Brewer has called for a temporary tax increase to bridge the budget shortfall. However, she has yet to say exactly where the tax increase will take place.

“There has been a lot of conversation over which tax would be best. We are certainly looking for the tax that will have the least negative effect on the economy while still providing the additional revenue needed to sustain us through the downturn,” Klein said.

To underscore just how hard the recession has hit Arizona, McPheters pointed out that the state is now ranked last in job creation — and climbing back to the top won’t be easy.

“Can we come back from 50 to one? It can happen. We’ll be a leader post-recession,” he said. “Every recession, the Arizona economy rebounds much stronger than the nation as a whole. You have 50 years of evidence of that. Unfortunately, getting there will not be pretty; we have two ugly years ahead.”

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·   Analysis by: Robert Canter

·   Analysis of: Opus South Files Chapter 11

·   Published at: www.globest.com

Implications

The fact that a well respected usually conservative developer has filed for Chapter 11 protection under the Bankruptcy Code is another chilling example of just how far and deep this economic downturn has affected every corner of the commercial real estate sector.  

Analysis

 What is surprising about Opus South’s filing for bankruptcy isn’t so much that a commercial developer has gone under, it’s the fact that a Company such as Opus has fallen victim to this particular downturn. What this Opus entity did was surprising given their usually conservative business practices.  

What got Opus South in trouble, as pointed out in the subject article, was get involved in residential development in FLORIDA. Why any developer would ever touch the Florida residential market has always been a mystery to this writer. Florida residential development has always been a high risk venture. There is always some new development coming onto the market which offers more or updated amenities. It’s no secret that markets such as Florida, California, Arizona, and Nevada are retirement havens as well as attractions due to the great weather these States offer. There has certainly been large amounts of migration to these areas. That being said, Florida for example has for the past 35-40 years been a boom or bust market for developers.  

One of the main culprits of this particular housing market disaster were the vast number of speculators buying to flip properties. Savvy developers should have known this fact, as should have the Federal Reserve and most lenders.  

The reason speculators caused such a problem is they helped create a false sense of buyer demand. If a good one-third of the new housing stock was being bought by speculators, the demand side or supply side will appear one-third stronger than reality. Adding to Opus South’s troubles is they can not obtain re-financing on existing commercial projects.  

How a predominately commercial developer such as Opus South allowed themselves to get caught up in this mess says more about the weakness of Companies to resist the temptation of short term profits than looking at their long term health.  

This writer would bet this is just the beginning of a trend within the commercial sector, as loans mature, and property values decline, and cash flows decrease, its inevitable that some of the largest and most prominent commercial real estate names will be going under for the very same reasons Opus South has.  

Some people are still holding out hope that the economy is starting to wake up. That may be, but as anyone involved in commercial real estate will tell you, this sector of the economy is just now beginning to crumble, and there will be a wave of failures, bankruptcies, foreclosures and so forth to come. Adding to the misery is the constant downward spiral of unemployment numbers. This portends further bad news for almost every commercial sector. This includes office properties, as corporations shed their overhead, vacancy rates will be going much higher. Retail some think has reached close to bottom. This writer disagrees, as the state of consumerism is going through a new paradigm shift. Buying habits will be changed for the long run, even if the economy makes a come back of sorts.  

What I don’t think analysts take into account, is the psychology of human nature. In addition, Americans are more concerned with debt reduction than buying a new anything, unless absolutely necessary. Add to this that many people’s credit limits have been reduced which will help suppress buying.  

As we have been shown by numerous data providers, the gains of the last 4 years have been given back and then some. So I trust the lessons learned once again will not be revisited…but that is not Human Nature.

Wednesday, April 29, 2009, 11:05am MST 

The city of Phoenix and the Persian Gulf emirate of Dubai are signing a trade, transport and solar energy pact Wednesday.

The agreement has been in the works since last year and includes promise to promote trade, develop solar energy sources in both places and to try to bring direct commercial flights between Dubai and Phoenix.

Phoenix Mayor Phil Gordon will sign the pact with Dubai officials Wednesday in downtown Phoenix. Gordon has led the Dubai effort, including visiting their with business executives. Cash-rich Dubai is part of the United Arab Emirates. It is a financial center in the Middle East and tends to have very Western business practices.

There is also hope the Dubai will invest in the Valley economy including real estate, energy and businesses. Arizona State University president Michael Crow has also been part of Phoenix’s Dubai efforts and the pact includes provisions for university research and resources exchanges.

Edward Gately, May 5, 2009 – 6:00PM

Commercial real estate brokers, developers and others believe the commercial real estate downturn is severe enough to warrant federal assistance.

For some time now, commercial real estate defaults have been one of the other shoes waiting to drop on the economy, and that day may be closer at hand. Real Capital Analytics has reported that delinquent commercial real estate loans grew by 43 percent by the end of the first quarter of 2009 to $65.9 billion, compared with $46 billion at the end of last year.

That hardly means that investment activity is going to grind to a halt, though. Indeed, one owner’s serious misfortune is another’s opportunity. A large (even trophy) example of that would be last week’s sale of Boston’s John Hancock Tower, which was snapped up at auction by Normandy Real Estate Partners and Five Mile Capital Partners L.L.C. for $661 million. Broadway Partners paid a princely $1.3 billion for the structure back in the hard-to-remember days of 2006, but more recently defaulted on the loan.

Both Bloomberg and Reuters, citing unnamed sources, are reporting that casino owner MGM Mirage, which has been vexed recently by the reduced amounts people are willing to spend these days on gambling and other casino entertainments, is talking to private equity firm Colony Capital L.L.C. about refinancing some debts–provided Colony gets a lien on one or more of MGM’s properties. But fresh investment in CityCenter, the unfinished mega-project on the Strip, may not be in the offing. Currently the lending waivers for CityCenter expire on April 13.

An old joke goes like this: You could line up all the world’s economists end-to-end and they still wouldn’t reach a conclusion. The same might apply for noted analysts. In a note to investors on Monday, Calyon analyst Mike Mayo downgraded the bank sector, citing continuing risks posed by credit card and commercial real estate loans. He thinks that in 2010, banks are going to lose on their loans, proportionally speaking, more than they did during a bad year of the Great Depression — 3.5 percent, compared with 3.4 percent in 1934.

On the other hand, Rochdale Research analyst Dick Bove, also in a note on Monday to investors, noted that “my belief is that the economy has turned.” Losses for the banking sector, he asserted, have already peaked.

Who to believe? Wall Street wasn’t quite sure on that point, with the major indices gyrating on Monday. Ultimately, bank stocks–major gainers in recent weeks–took a hit, leading to an overall decline. The Dow Jones Industrial Average was down 41.74 points, or 0.52 percent. The S&P 500 lost 0.83 percent and the Nasdaq was down 0.93 percent.