Subject: 3 Year Loan Growth Review From: Date: 2/27/2014 9:16 AM To:

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1 Subject: 3 Year Loan Growth Review From: <bill@bankregdata.com> Date: 2/27/2014 9:16 AM To: <bill@bankregdata.com> This week BankRegData.com reviews loan portfolio growth. All data is pulled from Call Reports through 2013 Q4. Please note that the numbers on the website may fluctuate slightly from the figures in this as Call Report adjustments are updated. Banks are currently sitting at $7.89 Trillion in loans which is up 1.16% Q on Q. While banks have added $643B in net new loans in the last 3 years we are below the peak $8.006 Trillion set in 2008 Q2. The next chart reviews the aggregate Net Loans to Total Assets ratio and shows that we're at 52.7%. While slightly off the recent lows we trail the 58.3% from a decade ago. The chart below details aggregate Loans to Deposits ratio. The current 69.3% is an at least 11 year low. Taken together, these 3 charts show that while lending is up we're still near recent lows regarding the ability to lend. Frankly, I'm not sure this is a bad thing as I personally think we're probably close to 'peak debt' as we have saturated the American landscape in terms of lendable debt. To be sure, there are always pockets of new lending opportunities, however, the ability to "grow" as we did for the 20 years starting in the mid-80s most likely will not happen again.

2 From here on out I'm going to review 3 year loan growth from 2011 Q1 to 2013 Q4. As the table below details we've seen some pretty hefty increases in a handful of loan types and some fairly large retrenchment in others. 3 Year Growth by Loan Portfolio: Portfolio 2011 Q1 Amount 2013 Q4 Amount Growth Perc Commercial & Ind 1,201,954,396,000 1,599,050,354, ,095,958, Farm Loans 55,033,241,000 70,595,219,000 15,561,978, Ind: Auto Loans 282,597,823, ,416,196,000 70,818,373, Multifamily Res RE 212,195,203, ,736,839,000 50,541,636, Farmland Loans 67,312,378,000 78,072,528,000 10,760,150, Lease Financing Rec 99,476,986, ,729,714,000 10,252,728, Ind: Credit Cards 663,152,856, ,386,379,000 28,233,523, Commercial RE 1,065,173,779,000 1,109,481,270,000 44,307,491, Family 1st 1,695,539,591,000 1,743,263,353,000 47,723,762, Ind: Other Loans 328,069,461, ,666,492,000-19,402,969, Home Equity 623,747,975, ,821,171, ,926,804, Construction & Dev 295,343,529, ,923,622,000-85,419,907, Family Jr. 140,952,283,000 85,277,212,000-55,675,071, Banks are sitting on $1.599 Trillion in Commercial and Industrial loans which is up $397 Billion in 3 years (33.04%). We also see considerable increases in Farm & Farmland Loans as well as jumps in Auto Loans and Multifamily Residential RE. On the other continuum we see consumer lending in terms of Individual: Other Loans, Home Equity Lines and 1-4 Family Junior Liens have all declined substantially. We also see that Construction & Development loans are down 28.92% although they do appear to have found a floor and we've seen slight increases the past few quarters. The next table details C&I growth for the Top 4 banks and other banks aggregated by Asset Size band. Commercial & Industrial Loan Growth: 2011 Q1 Amount 2013 Q4 Amount Growth Perc Bank of America 162,974,480, ,244,000,000 65,269,520, JPMorgan Chase 100,846,285, ,003,619,000 29,157,334, Citigroup 107,413,128, ,873,456,000 30,460,328, Wells Fargo 122,191,000, ,867,000,000 27,676,000, Assets: 10B to 1T 474,951,513, ,952,244, ,000,731,

3 Assets: 1B to 9.9B 126,500,570, ,605,600,000 23,105,030, Assets: <1 Billion 107,077,420, ,504,435,000-2,572,985, ,201,954,396,000 1,599,050,354, ,095,958, In the past 3 years Bank of America has added $65.2 Billion in net new C&I lending. The $65.2 Billion is more in new loans than the entire C&I loan portfolios of all but 3 banks. Surely, this is a good thing - especially at the pricing on the new loans to get to an aggregate Yield below 3% on their entire C&I portfolio. While JPMorgan Chase, Citigroup and Wells Fargo have been more modest we still see 3 year growth rates in excess of 22%. Of considerable interest is the 47.16% growth from the $10B to 1T banks. Ally Bank (75.88%), HSBC Holdings (74.37%), GE Capital Bank (124.50%) and CIT Bank (384.60%) are some of the fastest growers in that asset size category. It's interesting to see that the sub-$1 billion in asset size community banks appear to be sitting out the C&I ramp. I think this represents an understanding that at current pricing it makes little sense for them to increase their C&I lending levels. I am deeply worried about the potential risk of the recent massive growth in C&I loans. Collectively, banks have added $397 Billion in net new C&I loans in the past 3 years. We have witnessed only two other instances where banks have added over $390 Billion in new loans in 3 years. Banks added $901 Billion in 1-4 Family 1st Liens from 2003 Q1 through 2005 Q4 and we're still working through the results. The other time was when banks added $422 Billion in net new C&I loans from 2004 Q4 thru 2007 Q3. The next chart reviews the C&I NPL Rate for the past 10 years with an overlay of the two periods where banks added large amounts of new C&I loans. In orange, we see the $422 Billion in new C&I loans from 2004 Q4 thru 2007 Q3. As one would expect this had a tremendous impact in driving down the NPL Percentage as the new loans contributed to the denominator yet were too "fresh" to start impacting delinquencies. That said, when the delinquencies did begin to come in you see a major ramp in the NPL rate peaking at 3.57% in 2009 Q3. Today, we sit at historic lows of 0.61% in NPL rate for C&I lending and have seen a similar benefit of the $397 Billion added in the past 3 years. This is not to say that we'll witness the extreme swing to 3.50%+ levels, but to think we'll not see increases in NPLs from C&I in the next few years is to disregard years of Vintage Curve experience. Massive amounts of new lending (regardless of type or lender) inevitably result in subsequent waves of increasing delinquencies.

4 Auto Loan Growth: 2011 Q1 Amount 2013 Q4 Amount Growth Perc Wells Fargo 41,105,000,000 48,899,000,000 7,794,000, JPMorgan Chase 39,994,000,000 41,517,000,000 1,523,000, Bank of America 30,868,393,000 29,891,000, ,393, Citigroup 1,476,000, ,000, ,000, Assets: 10B to 1T 126,729,590, ,853,913,000 63,124,323, Assets: 1B to 9.9B 24,639,502,000 28,055,864,000 3,416,362, Assets: <1 Billion 17,785,338,000 14,711,419,000-3,073,919, ,597,823, ,416,196,000 70,818,373, For Auto Loans we see that Wells Fargo has been the most aggressive of the big 4 (18.96% growth rate) while, once again, the $10B to 1 Trillion asset size banks are dramatically growing their lending levels (49.81% in 3 years). From the $10B to 1T group we see large growth rates from Capital One (88.73%), Toronto-Dominion Bank (329.97%) and PNC Bank (239.14%). Collectively, WFC, COF, TD and PNC account for $42.6 Billion (60.18%) of the $70.81 Billion new Auto Loans added in the past 3 years. Once again, the smallest Community Banks appear to be taking a different strategy from their bigger brethren. We earlier noted that while lending is up, we're still seeing historically low lending levels looking at the Loans to Assets ratio and the Loans to Deposits Ratio. The next chart details the Loans to Deposits Ratio by Asset Size category for the year end quarter going back to Yes, fairly fascinating. The largest banks (> $100B in assets) are collectively sitting at 63.1% which is down from the ridiculous 95.7% from 2003 Q4. The $5-99 Billion banks are at 83.9% which is up 4% from 2012 year end. We also see the $500M-4.9B and <$500 Million banks showing higher lending levels relative to deposits. Are the largest banks (>$100 Billion in assets) not lending as aggressively as all the other asset size classes? Possibly, however, as the following table details it looks to be more an issue of increasing deposits faster than incresing loans. Loans to Deposits data for $100+ Billion asset banks:

5 The Loan to Deposits ratio for banks >$100 Billion in assets has fallen from 95.71% to 63.13%, however, Net Loans and Leases has actually increased. The issue is that Total Deposits for the largest banks have grown far faster. Total Deposits have almost tripled from $2.5 Trillion to $7.1 Trillion. Are depositors leaving smaller banks thus reducing their denominator and increasing their "lending" ratios? Sadly, this does offer some explanation as the sub-$500 Million category has 2.43% fewer deposits year over year and the $5-99 Billion group is down 4.98% (the $500 Million to 4.9 Billion group is essentially flat). I think it also illustrates a concern that the larger banks either do not see as many lending opportunities and/or are not as focused on traditional lending as a means to grow assets. They are awash in deposits. Optional Time-Wasting Personal Experience Rant: While I worry about this in all industries, I think it's foolish to have so much concentration in such a small number of players. Our focus should be on increasing competition not eliminating it. As a personal anecdote, four years ago I set up both personal and business checking accounts at a local community bank. The banker asked me about my needs and was knowledgeable about presenting options. All in, it took 1 hour and 15 minutes to set up the new accounts. We moved a number of years ago and it's time consuming to continue driving the 10 mile round-trip to my community bank. Last week I went to a Wells Fargo branch 3 blocks away to set up personal and business accounts. It took 2 hours and 40 minutes to do this. Almost 3 hours even though I already had an inactive personal account as a former Wells employee 15 years ago (see photo id, update address, select product, done?). The banker was obsessed with encouraging me to take fee heavy accounts that served little value relative to what I already had with my community bank. After stewing on it a few days I closed the Wells Fargo accounts and found another community bank within a 2 mile round-trip drive where it once again took less than 80 minutes to set up the accounts. While anecdotal and possibly an outlier (doubtful) it really comes as no surpise given that Wells has more than enough deposits and is much more interested in fee generation than adding new depositors. If you have any questions or suggestions feel free to contact me. Regards, Bill Moreland