2ND Quarter 2015 Credit Risk Benchmarks We are pleased to provide second-quarter 2015 metrics for this Journal feature, which provides an up-to-date view of C&I and Commercial Real Estate credit quality and trends. Comparing portfolio composition and performance to industry benchmarks is a key aspect of effective credit risk management. The graphs presented on the following pages are based on data reported in the RMA/AFS Risk Analysis Service, global banking s only comprehensive credit risk benchmark. RAS is currently offered in U.S. Commercial and Industrial and U.S. Commercial Real Estate versions of the service. The service is an industry-led credit-data consortium benchmarking key credit risk metrics including risk ratings (PD and LGD), expected loss, delinquencies, nonaccruals, charge-offs, and line utilization rates. The RMA/AFS Risk Analysis Service includes analytical capabilities for portfolio segmentation and in-depth analysis by line of business, vintage, industry, location, deal size, collateral, and product type. The specialized Commercial Real Estate module includes additional segmentations such as property type, location, value, and debt service coverage. For more information, please contact Stacy Germano at RMA at +1 215-446-4089 or Doug Skinner at AFS at +1 484-875-1562, or visit rmahq.org or afsvision.com. December 2015 - January 2016 The RMA Journal 43
Weighted-Average Probability of Default Trend All Loans vs. Nondefaulted Loans The weighted average probability of default (WAPD) on the nondefaulted portfolio increased for the second consecutive quarter yet remained on par with pre-recession levels. 5.5% 4.5% 3.5% 2.5% 2.02 2.23 1.73 1.75 WAPD - All Loans ND_WAPD - accruing LOANS Only 1.5% Probability of default (PD) reflects the bank s estimate of the likelihood that the borrower will default on the loan, over a one-year time horizon. C&I Loan Quality Percentage of C&I Loans Outstanding Percentages of both criticized and classified C&I loans increased for the second consecutive quarter. Recent increases in criticized loan levels have been predominantly driven by ratings downgrades for mining, oil & gas credits, which have seen problem loan levels triple in the last year. percentage of outstandings 20% 15% 10% 5% 6.63% 3.25% Criticized Classified 0% 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Note: Classified loans are loans rated Substandard, Doubtful, or Loss. Criticized loans are classified loans plus loans rated Special Mention. On Previous Page: Shutterstock, Inc. 44 The RMA Journal December 2015 - January 2016
percentage of unsecured loans outstanding percentage of outstandings 25.0% 20.0% 15.0% 10.0% 15.7% The percentage of unsecured deals to total loans outstanding increased modestly over the last three years. However, the ratio of unsecured deals was beneath the high level seen right before the start of the recession. 5.0% 0.0% 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 percent unsecured cre: percent non-accrual by property type percent non-accruing 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% CRE non-accrual levels for most major property types continued to improve in the second quarter of 2015. While Multifamily non-accruals remained flat, the level of non-accruing CRE loans for Industrial, Office, Residential and Retail properties dropped again this quarter and are at all-time lows. 0.25% 0.00% 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 All property types Multifamily Office industrial Retail Residential (1-4 family) December 2015 - January 2016 The RMA Journal 45
Expected Loss by Industries The industry make-up of the RAS database is represented by the blue bars. The horizontal line graph represents the expected loss estimates. Thus, for the industries where the line graph is greater than the blue bars, the expected loss for that sector is greater than the relative contribution of the sector in terms of exposure. The industries depicted by the red markers are currently bearing a disproportionate amount of expected losses. 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Percentage OF TOTAL EXPECTED LOSS Percentage OF EXPOSURE 0% Agriculture, Forestry, Fishing & Hunting Mining Utilities (Food, Beverage, Apparel) (Wood, Paper, Plastic) (Metals, Machinery, Electric) Wholesale Trade Retail Trade (Motor, Electric, Building) Retail Trade (Hobby, General, Misc.) Transportation (Air, Water, Truck) Transportation (Postal, Courier) Information Finance & Insurance Real Estate Professional, Scientific & Technical Services Management of Companies & Enterprises Admin., Support, Waste Management & Remediation Educational Services Health Care & Social Assistance Arts, Entertainment & Recreation Accommodations & Food Services Other Services Public Administration Credit Quality Comparison by Market Segment Within the Risk Analysis Service, the business banking segment represents loans to companies with annual sales of less than $20 million, the middle market represents companies with annual sales of between $20 million and $200 million, and the large corporate segment represents companies with annual sales greater than $200 million. Commercial Real Estate (CRE) loans represent investor CRE, including land acquisition, development, and construction, multifamily, nonfarm nonresidential, etc. Commercial & Industrial Loans Business Banking Middle Market Large Corporate Commercial Real Estate Percentage 30 89 Days Past Due 0.41% 0.13% 0.43% 0.54% Percentage on Nonaccrual 1.07% 0.72% 0.09% 0.95% Percentage Noncurrent (90 Days + Nonaccrual) Weighted Average Risk Rating (10 pt RMA Scale) 1.20% 0.74% 0.34% 1.00% 5.16 4.54 4.14 5.16 Weighted Average PD 2.78% 2.29% 1.51% 2.16% Weighted Average PD: Non-defaulted Portfolio 1.92% 1.81% 1.41% 1.56% Percentage Classified 5.25% 3.13% 1.24% 8.42% Percentage Criticized 9.77% 5.95% 4.89% 11.42% LOC Utilization Rate 54.78% 47.18% 49.38% 63.65% 46 The RMA Journal December 2015 - January 2016
Problem C&I Loans by Geographic Region West 4.49% CLASSIFIED Western Midwest 2.94% Eastern Midwest 3.85% Northeast 3.07% Middle Atlantic 2.00% Better than Nat l Avg Worse than Nat l Avg The percentage of loans adversely rated classified or criticized increased in the second quarter of 2015 for the Southwest region, reflecting this market s growing levels of problem loans in the mining, oil & gas sector. Southwest 4.07% South 2.98% CRITICIZED Northeast 6.43% CLASSIFIED RATIO, USA = 3.25% CRITICIZED RATIO, USA = 6.63% West 8.23% Western Midwest 6.49% Eastern Midwest 8.11% Middle Atlantic 5.15% Southwest 8.17% South 5.56% Problem C&I Loans by State Criticized Loans (in %) 7.69% CA 11.93% WA 8.50% OR 12.59% NV 1.46% AK 8.80% ID 8.66% AZ 8.54% UT 5.01% MT 9.75% WY 12.00% NM 7.19% CO 5.76% ND 4.37% SD 3.99% NE 8.84% KS 7.67% TX 14.86% OK 7.92% MN 8.26% IA 5.10% MO 5.11% AR 5.90% LA 8.37% WI 8.15% IL 4.48% MS 13.68% MI 5.30% IN 6.39% KY 4.20% TN 6.01% OH 9.78% WV 6.19% AL 4.03% GA 4.24% SC 7.56% FL 5.41% PA 4.07% VA 3.42% NC 4.67% NH 9.12% VT 7.73% NY 1.97% ME 3.89% MA 7.99% RI 5.13% CT 10.60% NJ 9.49% DE 3.07% 4.41% DC MD Criticized levels deteriorated in the second quarter of 2015 for Texas, with this state now bearing a worsethan-average-criticized ratio. While criticized loan levels are still much higher than average in Michigan, this state posted an improvement quarter over quarter. CRITICIZED RATIO, USA = 6.63% BETTER THAN AVG WORSE THAN AVG 5.71% HI December 2015 - January 2016 The RMA Journal 47