BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2011

The 5th Annual Current State of the Capital MarketsBreakfast Forum

September 8, 2011

www.boyarmiller.com

Equity and thePublic MarketsAndrew D. Kanaly – Kanaly TrustChairman & CEO

Copyright 2009 Kanaly Trust. All rights reserved.

Market Performance

Index Performance as of August 31, 2011

EQUITIES 3 Month YTD 12 Months S&P 500 (8.9) (1.8) 18.5 DJIA (7.0) 2.1 19.0 Nasdaq (8.8) (2.2) 23.3 Russell 2000 (14.0) (6.5) 22.2 MSCI EAFE (11.6) (5.7) 10.5 MSCI Emerging Mkts (10.6) (8.3) 9.4

FIXED INCOME BarCap US Treasury Interm 3.1 5.5 3.9 BarCap Inv. Grade Credit 1.7 5.8 4.9 ML US High Yield (2.9) 2.7 7.9 BarCap 1-10yr Muni 2.2 5.1 3.0

ALTERNATIVES HFRI Global Hedge Fund (5.1) (5.6) (0.9) DJ Wilshire REIT (7.0) 6.8 19.8 DJ UBS Commodity (1.3) 1.3 25.8 Gold 18.9 28.5 46.4 Crude Oil (13.5) (2.8) 23.5




Credit Market Stress Is Building


European Sovereign Debt Crisis


U.S. Manufacturing in a Soft Patch


New Jobless Claims Need to Move Below 400K


Employment Recovery Far From Normal

(E0028D)

Monthly Data 6/30/2007 - 6/30/2012

*Dates of expansions designated by the National Bureau of Economic Research. Expansion starting dates used: November 1970, March 1975, July 1980, November 1982, March 1991, and November 2001.

Recession ended in June 2009.

Current Expansion ( )

Average of Last Six Post World War II Expansions*

( )

58.258.358.458.558.658.758.858.959.059.159.259.359.459.559.659.759.859.960.060.160.260.360.460.560.660.760.860.961.061.161.261.361.461.561.661.761.861.962.062.162.262.362.462.562.662.762.862.963.0

58.258.358.458.558.658.758.858.959.059.159.259.359.459.559.659.759.859.960.060.160.260.360.460.560.660.760.860.961.061.161.261.361.461.561.661.761.861.962.062.162.262.362.462.562.662.762.862.963.0

S D 2008

M J S D 2009

M J S D 2010

M J S D 2011

M J S D 2012

M J

Employment-Population Ratio vs Average of Last Six Expansions

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at


Household Balance Sheets Much Improved


S&P 500


Commodities


Too Much Debt is the Long-term Problem


Balancing the Budget Requires Substantial Reform

Source: Office of Management and Budget, Fiscal 2011 Requested Budget


Lack of Credit Prevents Robust Recovery

• Credit is the lifeblood of economic growth• The largest banks have reduced lending by over 25%


Investment Strategy

Portfolios should be geared more toward capital preservation to manage significant downside risks:

• Pursue ultra-diversification, utilizing traditional asset classes as well as alternative investment strategies (stocks & bonds are not the only choices)

• Actively manage the asset mix, and look for opportunities to hedge

• Equity exposure should focus on high quality global businesses trading at attractive valuations (bias to large caps, emerging markets)

• Be highly selective with fixed income: avoid high yield debt, and invest in only the most creditworthy municipal issuers

• Add to inflation protection when it is cheap


Current Allocations

Traditional 30% Equity60% Equity 30% Fixed

ASSET CLASS 40% Fixed 40% AltsLarge Cap Equity 30.00% 8.50% Small Cap Equity 15.00% 6.25% Micro Cap Equity 3.25% International Equity 10.00% 8.00% Emerging Markets 5.00% 4.00% Fixed Income 40.00% 30.00% Liquid Alternatives 11.00% Hedged Equity 6.00% Commodities 5.00% MLPs 5.00% REITs 3.00% Managed Futures 10.00% Expected Return 7.60% 8.60%Standard Deviation 10.74% 8.16%Sharpe Ratio 0.34% 0.56%


Kanaly Trust Investment Performance – as of 8/31/2011

2011 YEAR TO DATE ASSET CLASS PERFORMANCEAugust 2011

Equity Only -6.2% -3.5%Fixed Income - Taxable -1.0% 1.5%ALTs - No MLPs -1.2% 1.8%ALTs - With MLPs -1.1% 2.0%

Growth & Income Portfolio - Taxable (1) -2.8% -0.5%Growth & Income Portfolio - Tax Free (1) -2.5% -0.1%Income Portfolio (2) -0.4% 6.0%

S&P 500 Index -5.4% -1.8%Barclays US Aggregate Bond Index 1.5% 5.9%BarCap 1-10Yr Muni Index 1.3% 5.1%

S&P 500 (60%) / Intermediate Taxable (40%) -2.7% 1.3%S&P 500 (60%) / Intermediate Tax Free (40%) -2.7% 1.0%

*

Footnotes

The asset allocation models above represent an approximation of how the portfolios perform; actual results may differ from the models. Returns are shown before fees and are not AIMR/GIPS compliant. The return information provided above represents past performance and is not necessarily indicative of future results. Further, specific client portfolio(s) investment returns and results may vary from figures noted above based on account-specific circumstances.

(1) The current allocation of the Growth & Income portfolio is 35% Equity, 25% Fixed Income, 33% Alternatives, and 7% Cash.(2) The current allocation of the Income Portfolio is 80% Fixed Income and 20% Dividend Paying Equities.


20

Equity and the Public MarketsSeptember 8, 2011

www.boyarmiller.com

Private Equity and Mergers & AcquisitionsDavid W. Sargent – Duff & Phelps SecuritiesManaging Director

M&A1.

M&A -- Activity Drivers

23

Cost of Debt Capital

Access to Debt Capital

Private Equity Environment

Strategic Buyers Purchasing Power

Taxes

2008 2009 20112010

Economic Outlook

M&A -- Overall U.S. M&A Activity

24

Source: William Blair & Company

U.S. Overall M&A Transactions and Deal Value

$1,609

$871

$567 $687

$992

$1,298

$1,645 $1,754

$1,086

$881

$1,085

$430

$689

$523

$689

$0

$500

$1,000

$1,500

$2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09YTD

6/30/11YTD

6/30/10YTD

6/30/11YTD

Undisclosed Middle Market > $750M Deal Value

# of

Tra

nsac

tions

Deal Value ($ in billions)

60.2% Increase In Deal Value

31.7% Increase In Deal Value

1 Year Period2 Year Period

$462

$279 $258

$291

$352 $364

$419

$465

$356

$235

$364

$101

$198

$163

$198

0

100

200

300

400

500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 6/30/09YTD

6/30/11YTD

6/30/10YTD

6/30/11YTD


# of

Tra

nsca

tion

s

< $50 $50-250M $250-750M Deal Value

M&A -- Middle-Market M&A Activity

25

Recovery in the financing markets resulted in a general upturn in M&A activity in 2010, following 2 years ofdecline.

Deal value year-to-date is up 21.5% driven primarily by an increase in larger-sized transactions, offsetting a17.9% decline in the total number of transactions.

The tone in recent months has been more cautious owing to a uncertain economic recovery.


U.S. Middle-Market M&A Transactions and Deal Value

96.0% Increase in Deal Value

21.5% IncreaseIn Deal Value

2 Year Period 1 Year Period

M&A -- Transactions by Industry Sector

26

The distribution of transactions by industry has remained largely unchanged.

M&A Transactions by Industry Sector


2007 2009 YTD 2011

Other 20%Electronics 17%

Construction 4%

Consumer 4%

Energy 7%

Finance 7%

Healthcare 9%Industrials 6%

Services 15%

Real Estate 5%

Retail 2%

Telecomm 4%

Other 18% Electronics 21%

Construction 2%Consumer 3%

Energy 9%

Finance 6%Healthcare 11%Industrials 6%

Services 13%

Real Estate6%

Retail 2%

Telecomm 3%

Other 17% Electronics 23%

Telecomm 4%Retail 2%

Real Estate4%

Services11%

Industrials 5%Healthcare 13%

Finance 8%

Energy 8%

Consumer2%

Construction3%

961

825

685

1,054 1,115

$142

$116

$83

$165

$152

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2007 2008 2009 2010 2011


# of

Dea

ls

# of Deals Transaction Value

M&A -- Activity in the Energy Sector

27

Energy Sector Activity as a % of Total M&A Transactions

Source: Capital IQ

The energy sector has shown a significant uptick in activity, almost doubling in number of transactions from2009 through June 2011.

Deal value in energy-related deals represented more than 20% of total M&A deal value in 2010, making energythe most active industry sector.

6.5% of Total M&A

Transactions

7.2% of Total M&A

Transactions

Peak – 21.8% of Total M&A Deal Value

M&A -- Purchase Price Multiples by Sources

28

Source: S&P LCD

Purchase Price Multiples for Middle-Market LBOs

Competition and pre-financial crisis leverage multiples are driving the increase in purchase price multiples.

Private equity sponsors continue to “over equitize” middle-market LBO transactions, contributing an average of42% equity year-to-date in 2011 compared to 32% in 2007.

Equity Contribution

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1997 1999 2001 2003 2005 2007 2009 YTD '11

Source: S&P LCD

42.0%

32.1%

7.6x 7.5x7.1x 6.9x

5.9x

6.7x7.0x 7.2x

8.5x8.1x

9.3x

8.3x

6.6x

8.4x 8.4x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

1997 1999 2001 2003 2005 2007 2009 YTD '11

Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others

Peak 45.6%

Credit Markets2.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Rate

(per

cent

)

High-Yield Investment Grade 10-yr Treasury

Credit Markets -- Interest Rates (Investment Grade, High-Yield, and Treasuries)

30

High-yield and treasuries spreads were tight from 2002 to 2007, evidence of the extremely easy credit prior tothe credit crisis. In November 2008, spread hit record high of 21.7%.

Spreads between investment grade, high-yield and treasuries approximate the early 2008 pre-crisis level.

Along with heightened volatility in the equity markets, high-yield spread has surged to 8.6% in August 2011, a15% increase from 7.5% in July.

Source: Bloomberg; Merrill Lynch US High Yield Master II Index

Historical Average Rates and Relationships

21.7%

8.6%

3.7%

2.2%

4.0x

3.6x 3.5x

3.9x4.1x

4.4x

5.0x 4.9x

5.3x

4.4x

3.4x

4.0x

4.9x

3.3x3.0x

3.3x 3.4x

2.4x

3.9x

4.4x4.8x

4.6x

3.3x3.1x

3.5x

4.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jun-11

Total Debt/EBITDA Senior Debt/EBITDA

Credit Markets -- Middle-Market Credit Statistics

31

As the economy began its recovery in 2010, leverage multiples for middle-market LBO transactions increasedfrom 2009 reflecting a trend of improvement of companies and the health of the credit market.

Source: S&P LCD

Leveraged Buyout Credit Statistics since 1999

$295

$480

$535

$153

$77

$233

$132

$289

$94

$144 $144

$69

$166

$287

$166 $176

$0

$100

$200

$300

$400

$500

$600

2005 2006 2007 2008 2009 2010 YTD 8/25/10

YTD8/25/11

$ in

bill

ions

Leveraged Loans High Yield Bonds

Credit Markets -- New Debt Issuance

32

Leveraged loan issuances have increased and 2010 volume has more than tripled 2009 volume levels. Issuancevolume through August of 2011 has already exceeded 2010 levels.

High-yield issuances continue to set records year-to-date with $176 billion issued. New issuances started toslow in August 2011.

Source: Piper Jaffray & S&P LCD

New Issuance Volume

56.1% Combined Increase

Strategic Buyers Purchasing Power3.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2007 2008 2009 2010 2011

Annaul Growth (%

)$

in b

illio

ns

Strategic Buyers Purchasing Power -- Record Amounts of Cash

34

Corporate balance sheets flushed with cash, totaling $1.75 trillion in June 2011.

Although corporate profits have grown for the past nine quarters, the growth is moderating.

Source: Capital IQ

S&P 500 Cash and Equivalents

67.2% Increase SinceQ1 2009

Record low interest rates for corporate debt issuers:

IBM – 1.00% (3 years)Google – 1.25% (3 years)Johnson &Johnson – 2.15% (5 years)McDonald’s - 3.50% (10 years)Baker Hughes – 5.125% (30 years)Petrohawk Energy – 7.25% (8 years)

Private Equity Environment4.

Private Equity Environment -- Overview

36

Private equity firms establish funds by raising capital from investors such as public and private pension funds,endowments and foundations.

The funds are generally 10 years commitment with 5 years investment period. They seek investments to generate20+% rate of return by utilizing leverage.

Typically charge investors 2% management fee on committed capital and 20% carry fee on its investments.

There are approximately 4000+ private equity groups in the U.S. today, a five-fold increase from 10 years ago.

Source: Dow Jones Private Equity Analyst

U.S. Private Equity Fundraising (1996 – August 2011)

$32.4

$65.9

$101.4$112.5

$206.5

$121.1

$91.8

$58.1

$113.5

$184.5

$291.7

$355.6

$311.7

$102.2$86.3 $79.0

$0

$50

$100

$150

$200

$250

$300

$350

$400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD2011

$ in

bill

ions

Corporate Finance Mezzanine Venture Capital Others

Private Equity Environment – Fundraising and Commitments by States

37

Fundraising struggled to regain footing in 2010. $86.3 billion raised – lowest amount since 2003.

$79 billion raised to-date through August 2011, a 39% increase from same period last year. Total for the year isexpected to surpass 2010 level.

A significant amount of the capital was raised by firms located outside of Texas.

Source: Dow Jones Private Equity Analyst

U.S. Fundraising ($ in billions)

Dropped 15.5% from

2009

2010 Commitments by State ($ in billions)

Source: Dow Jones Private Equity Analyst; (1) includes Oklahoma and Colorado

Type of Fund # of Funds $ Amount # of Funds $ Amount

LBO/Corporate Finance 138 $53.3 117 $56.6

Fund of Funds 41 6.4 40 6.5

Mezzanine 27 6.2 20 3.3

Other PE 11 8.8 12 3.6

VC 119 11.6 69 9.1

Total 336 $86.3 258 $79.0

FY 2010 YTD August 2011

Other States 29%

International 0.1%

New York 37%

California 20%Massachusetts 8%

Texas 4%

Other Southwest(1)

2%

$43 $77

$150

$198 $230 $222 $232

$263

$292 $237

$378

$475

$396 $386

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD Q22011

$ in

bil

lions

Cumulative Overhang Equity Raised Equity Invested

Private Equity Environment -- Equity Raised & Cumulative Overhang

38

The proliferation of institutional private investment funds has created a significant buildup of un-invested capital(“overhang”).

In the near term, reduced fundraising, combined with an accelerated investing environment and higher equitycontributions, will diminish the build up of private equity overhang.

Source: Pitchbook, Inc.

Private Equity Raised & Cumulative Overhang

18.7% Decline

8.4

4.3

3.32.7

1.9

0.7

3.0

11.0

3.0 3.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 Annualized2011

Year

s to

Inv

est D

ry P

owde

r at

Ann

ual R

ates

Private Equity Environment -- Dry Powder Investment Years

39

The chart below depicts the number of years to invest dry powder, computed by dividing cumulative overhangby annual private equity capital investment

Source: Pitchbook, Inc.

Dry Powder Investment Years

Private Equity Environment -- Use of Leverage in Recapitalization (Example)

40

2x AdditionalLeverage

100% IncreaseIn EnterpriseValue

($ in thousands)2.0x 3.0x 4.0x

Valuation:TTM EBITDA $10,000 $10,000 $10,000Valuation Multiple 3.3x 5.0x 6.7xEnterprise Value $33,203 $49,835 $66,535

Sources & Uses:Debt $20,000 $30,000 $40,000Equity 13,203 19,835 26,535Total Capitalization $33,203 $49,835 $66,535

Equity Returns with 7.5% Annual Growth 25.0% 25.0% 25.0%

Equity Returns at $67MM Valuation with Less Debt 12.8% 17.8% 25.0%

Required Annual Growth to Satisfy Min 25% Equity Returns 21.7% 15.3% 7.5%

Total Leverage

Private Equity Environment – Case Study (American Central Gas Technologies, Inc.)

41

Range of Indications of Interests

11.1x 10.9x10.3x 10.2x

8.9x 8.6x7.9x

7.4x 7.4x 7.4x6.9x 6.8x

6.2x 5.9x

4.6x

$225.0 $220.8 $210.0 $207.5

$180.0 $175.0 $160.0

$151.0 $150.0 $150.0 $140.0 $137.5

$125.0 $120.0

$94.0

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

A B C D E F G H I J K L M N O

EBITDA M

ultipleEn

terp

rise

Val

ue ($

in m

illi

ons)

Financial Buyer Strategic Buyer

Private Equity Environment -- Case Studies

42

Minority Recapitalization

Pinnergy, Ltd. has completed a minority recapitalization led by The Stephens Group, LLC.

GCP acted as exclusive advisor to Pinnergy, Ltd.

Management Buyout

VLS Recovery Services, LLC has completed a management buyout led by Prudential Capital Group.

GCP served as exclusive financial advisor to VLS Recovery Services

Recapitalization

Spitzer Industries, Inc. has executed a recapitalization with The Stephens Group, LLC.

GCP acted as exclusive advisor to Spitzer Industries, Inc.

Taxes5.

Taxes -- Long Term Capital Gains Tax Rates

44

Long Term Capital Gains Tax Rate % (1954-2012)

Source: taxpolicycenter.org

In December 2010, the reduced capital gains tax law was extended through the end of 2012.

The extension relieved some of the urgency to sell, but may contribute to increased M&A activity over the next15 months.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

25%

37%40%

28%

20%

28%

20%

15%2 Year

Extension?

Conclusions6.

Conclusions

Deleveraging process by consumers and the government may take years and will restrict/prevent normal U.S. GDP growth

Demographics/aging workforce

Healthcare costs, “reregulation” and potentially higher taxes add additional head winds

Emerging markets so far propping up the U.S. economy

While overhang of private equity is shrinking, the uninvested capital is high by historical standard

Strategic buyers (with record amounts of cash) will need acquisitions to offset slower organic revenue growth

Record low cost of debt capital

Demographics (baby boomers selling businesses)

46

Exit window can open and close anytime

Easier to slow process down than speed process up

React quicker to strategic or private equity inquiry

Audits, management, ownership transfers

U.S. economy goes from slow/no growth to a downturn -would be difficult for fix with rates already at record lows and deficits at record highs

o Deteriorating U.S. economy could create additional pressure on large U.S. banks with mortgage loan exposure

o Fannie Mae and Freddie Mac challenges

European sovereign debt and bank crises gets worse. How does Euro issue get resolved?

Slowdown in emerging markets

Stock market downturn

One or more of the above and/or continued uncertainty would put acquiring entities (both strategics and private equity groups) either on hold or reduce terms and valuation

U.S. Economic Challenges areStructural, Not Cyclical

M&A Activities (assuming no major economic shock) will Accelerate

What Could Go Wrong Be Prepared

Strategic Alternatives OverviewConclusions -- Duff & Phelps Services Overview

47

Service Lines Industry Coverage

United StatesAtlanta, Austin, Boston, Chicago, Cincinnati, Dallas, Denver, Detroit, Morris Town, Houston, Los Angeles, New-York, Philadelphia, Plano, San Francisco, Seattle, Silicon Valley

EuropeAmsterdam, London, Munich, Paris

AsiaShanghai, Tokyo

Cross Border Engagements



Atlanta, Austin, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles, Morristown, New York, Philadelphia, Plano, San Francisco, Santa Monica, Seattle, Silicon Valley, Toronto, Washington

AsiaEurope

North America

MERGERS & ACQUISITIONS

Exclusive Sale Transactions Distressed Asset Sales Corporate Divestitures

Leveraged Buyouts Buy-Side Acquisition Advisory Review of Strategic Alternatives

PRIVATE PLACEMENTS & CAPITAL RAISING

Senior Debt Arranging Mezzanine Debt Placements Equity Placements

Leveraged Recapitalizations Private Investments in Equity ESOP Corporate Finance

FINANCIAL RESTRUCTURINGS & RECAPITALIZATIONS

Plans of Reorganization Lender & Creditor Negotiations DIP and Exit Financings

Exchange/Tender Offers Rights Offerings Business Plan/Debt Analysis

TRANSACTION OPINIONS & FINANCIAL ADVISORY

Fairness Opinions Commercially Reasonable Ops. Corporate Financing Consulting

Solvency Opinions Business & Security Valuation Dispute Analysis & Litigation

Ranked #2 restructuring firm in the U.S.

Ranked #4 provider of fairness opinions

Aerospace and Defense Business Services

Energy and Mining Engineering/Construction

Food and Agribusiness Healthcare

Industrial Products Technology and Media

Global Footprint

www.boyarmiller.com

Real Estate FinanceThomas O. Fish – Jones Lang LaSalleExecutive Managing DirectorCo-Head Real Estate Investment Banking

Current Environment - Debt Markets• Europe’s sovereign debt crisis continues to rattle global markets.

• The S&P 500 plunged 18% from a 3-year high on April 29 through August 8 in large part over concern that Europe will fail to contain its debt crisis.

• The 2-year swap spread – considered a gauge of fear in the debt markets – rose to a one-year high on August 23. Risk aversion has sent investors back to the Treasuries, driving down yields.

• Spreads have widened across all credit sectors, including commercial real estate. • CMBS spreads are now approximately 300 basis points, 100 b.p. increase over last 2 months.• Mostly offset by decrease in Treasury yields. 10-year T-bill = 2.15%, vs.3.18% in July. • 5 year T-bill = 1%!!! Downgrade = Price Increase?!?• CMBS which still offers attractive yields on a risk-adjusted basis compared to other fixed-income

instruments. • US commercial property sales increased to $97 billion year-to-date through July, compared to $49

billion for the same period in 2010, an increase of 98%. • Banks have arranged over $21B in CMBS this year, led by retail and office properties, compared with

$11B in all of 2011. Won’t make $35-40B forecast.• Portfolio lenders continue to grow their books. Insurance companies have raised their production

goals for 2011 and are able to tackle larger loans that securitized lenders are wary of warehousing. • Lenders are aggressively quoting 5-10 year deals in the 4-6% range at LTVs up to 75%

Source: Bloomberg, Jones Lang LaSalle

Current Global Government YieldsConcern remains over The “PIIGS”

Global 10-Year Government Yields

1.03%2.22% 2.22%

5.04% 5.14%

8.62%

10.38%

17.81%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Japan Germany US Spain Italy Ireland Portugal Greece

Source: ACLI, Federal Reserve, Wells Fargo, Jones Lang LaSalle

Commercial RE Debt Maturities by LenderBank maturities dominate landscape and will be most challenged

• $900 billion of debt maturing through 2013, $682 billion of which is bank debt• Many loans - no option other than foreclosure or restructuring/modification • GOOD NEWS: There is still a lot of relatively inexpensive debt/equity available with LTVs up to 75%

Source: JPMorgan, Jones Lang LaSalle

CMBS Troubled Loan UpdateSpecial servicers have $76 billion of volume to work through

Loans in Special Servicing as % of CMBS outstanding

$34

$70

$76

4.96%

10.92%

12.77%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Jan-09

Feb-09Mar-09

Apr-09May-09

Jun-09Jul-09

Aug-09Sep-09

Oct-09Nov-09

Dec-09Jan-10

Feb-10Mar-10

Apr-10

May-10Jun-10

Jul-10Aug-10

Sep-10Oct-10

Nov-10Dec-10

Jan-11Feb-11

Mar-11Apr-11

May-11Jun-11

Jul-11

(Billi

ons)

1.50%

2.25%

3.00%

3.75%

4.50%

5.25%

6.00%

6.75%

7.50%

8.25%

9.00%

9.75%

10.50%

11.25%

12.00%

12.75%

Volume in SS As % of all CMBS

Source: FDIC, Jones Lang LaSalle

Bank Troubled Loan UpdateA Long Way to go to Reach Early-2008 Levels

Future Distressed Loans from Banks - 30+ Days Delinquent

$80$90

$104

$124

$151

$166$176 $180

$190$181 $178

$167 $164

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

(Billio

ns)

CRE Loans OREO Total

Source: Mortgage Bankers Association, Jones Lang LaSalle

CRE Delinquency by Lender TypeCMBS at 9%; Life Co’s and Agencies in Great Shape

Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $5 million

US CRE Sales Volume2011 off to a good start and could reach 2004 levels

US Sales Volume

$83$104

$127

$231

$310

$364

$513

$145

$55

$125

$49

$97

$0

$75

$150

$225

$300

$375

$450

$525

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jan - July2010

Jan - July2011

(Billi

ons)

2011 may reach 2004 level

Property Investment by Market TypePrimary markets still dominate; however, balance starting to move

Source: Real Capital Analytics, Jones Lang LaSalle; Properties of at least $2.5 million

Source: Credit Suisse, JPMorgan, Jones Lang LaSalle

CMBS IssuanceMarkets need to stabilize FAST to meet $35 - $40 billion forecast

Source: Bloomberg, Jones Lang LaSalle

CRE SpreadsSpreads widening over last two months – 75 – 100bps.

Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle

Cap Rates Versus CorporatesProperty is offering a much better risk-adjusted yield

Source: Bloomberg, Real Capital Analytics, Jones Lang LaSalle

Property Spread to US TreasuryCap rates are over 400 basis points higher than the 10-Year Treasury

Source: Real Capital Analytics, Jones Lang LaSalle

Cap Rates by Property TypeYields are back to 2004 / 2005 levels

SUMMARY

• CMBS is “taking a knee” until stability returns – hard to price

• Portfolio lenders still very much open for business

• Debt rates are still ridiculously low

• Lenders / investors still picky – looking for great product, location and sponsorship, creeping out to secondary markets.

• Equity investors are still underallocated

• Will underwriting change to reflect slower recovery? Too soon to tell.

www.boyarmiller.com

Commercial BankingJames S. D’Agostino, Jr., – Encore BankChairman of the Board & CEO

There are a lot of banks in Houston

There are a lot of banks in Houston

• Three TBTF banks have 60% of market

• Out-of-town banks control over 75% of market

• Local banks have $24B in loans

FBR Capital Markets & Co. Houston Bank Review 2nd Quarter, 2011 FDIC Deposit Market Share Report June 30, 2010

How Are Banks Doing?

• Much Better– More capital– More liquidity– Fewer problem assets

• But…

How Are Banks Doing?

• Revenues weak• Loans weak• Margins weak• Costs rising

Trouble ahead?

Regulatory Environment

Are Banks Lending?

YES! BUT

Are Banks Lending?

• Land Loans

• Construction & Development Loans

• Commercial Real Estate Loans

• Mortgage Loans

• Commercial & Industrial Loans

What’s a Borrower to do?

• Build A Relationship

• Build Good Financial Data

• Strengthen Ties Beyond Banker

• Know Your Bank

Questions & Answers