4TH QUARTER 2014 CREDIT RISK BENCHMARKS WE ARE PLEASED to provide fourth-quarter 2014 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. June 2015 The RMA Journal 41
WEIGHTED-AVERAGE PROBABILITY OF DEFAULT TREND All Loans vs. Nondefaulted Loans The non-defaulted weighted average probability of default (WAPD) of the C&I portfolio continues to decrease. 5.5% 4.5% 3.5% 2.5% 2.02 1.73 2.18 1.67 WAPD - ALL LOANS ND_WAPD - ACCRUING LOANS ONLY 1.5% 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 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 Problem loan ratios have reached the lowest levels since the Risk Analysis Service started collecting data in September 2003. PERCENTAGE OF OUTSTANDINGS 2 15% 1 5% 5.84% CRITICIZED CLASSIFIED 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Note: Classified loans are loans rated Substandard, Doubtful, or Loss. Criticized loans are classified loans plus loans rated Special Mention. 2.76% On Previous Page: Shutterstock, Inc. 42 The RMA Journal June 2015
NONCURRENT TREND FOR SELECTED C&I INDUSTRIES PERCENTAGE OF OUTSTANDINGS 4% 3% 2% 1% C&I loan performance as measured by the percentage of noncurrent loans continues to improve across the selected industries, although noncurrent levels for Agriculture, Forestry, Fishing, & Hunting as well as the (Metals, Machinery, Elec) sector remain above the C&I average. ALL INDUSTRIES 11 AGRICULTURE, FORESTRY, FISHING & HUNTING 33 MANUFACTURING 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Noncurrent loans represent the sum of loans past due 90 days and over and still accruing interest, plus nonaccrual loans. 42 WHOLESALE TRADE 44 RETAIL TRADE 62 HEALTH CARE & SOCIAL ASSISTANCE WEIGHTED AVERAGE EXPOSURE TO VALUE (WAETV) BY PROPERTY TYPE WAETV 7 65% 6 55% Exposure to Value (ETV) is a new measure now available in the RAS CRE database. Exposure to Value (ETV) is defined as total borrower exposure (including outstanding loans and unfunded commitments) divided by the current market value of all associated collateral. In general ETV has been trending down, reflecting continued increases in commercial real estate values. ALL PROPERTY TYPES 5 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 MULTIFAMILY OFFICE INDUSTRIAL RETAIL RESIDENTIAL (1-4 FAMILY) June 2015 The RMA Journal 43
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% 1 9% 8% 7% 6% 5% 4% 3% 2% 1% PERCENTAGE OF TOTAL EXPECTED LOSS PERCENTAGE OF EXPOSURE 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 0.48% 0.17% 0.34% 0.45% Percentage on Nonaccrual 1.09% 0.67% 0.12% 1.22% Percentage Noncurrent (90 Days and over Past Due + Nonaccrual) Weighted-Average Risk Rating (10 Pt RMA Scale) 1.22% 0.67% 0.23% 1.27% 5.20 4.59 4.12 5.25 Weighted-Average PD 2.86% 2.17% 1.47% 2.36% Weighted-Average PD: Nondefaulted Portfolio 1.94% 1.7 1.34% 1.56% Percentage Classified 5.28% 2.57% 0.62% 9.07% Percentage Criticized 9.92% 5.32% 2.93% 12.54% LOC Utilization Rate 54.88% 45.99% 48.11% 62.6 44 The RMA Journal June 2015
PROBLEM C&I LOANS BY GEOGRAPHIC REGION West 3.97% Southwest 2.65% CLASSIFIED Western Midwest 3.17% Eastern Midwest 3.89% South 2.68% Northeast 2.14% Middle Atlantic 1.75% BETTER THAN NAT L AVG CRITICIZED WORSE THAN NAT L AVG Northeast 5.16% With regards to criticized loans, all seven regions improved quarter-overquarter, while every region except the Eastern Midwest displayed lower levels of classified loans over this same period. While the West region has the highest level of criticized loans, credit quality improvement continues. In the West, classified loan levels improved another 9% quarterover-quarter, and criticized loan levels fell 11% from the prior quarter. West 7.67% Western Midwest 6.74% Eastern Midwest 7.75% Middle Atlantic 4.46% Southwest 5.73% South 5.27% CLASSIFIED RATIO, USA = 2.76% CRITICIZED RATIO, USA = 5.84% PROBLEM C&I LOANS BY STATE Criticized Loans 6.86% CA 10.71% WA 8.33% OR 13.75% NV 1.28% AK 10.27% ID 8.67% AZ 8.15% UT 7.35% MT 9.48% WY 13.66% NM 5.95% CO 2.15% ND 3.27% SD 3.22% NE 10.97% KS 4.76% TX 6.15% OK 5.95% MN 8.5 IA 7.08% MO 4.06% AR 4.44% LA 7.31% WI 5.48% IL 5.89% MS 15.69% MI 8.65% IN 6.35% KY 4.58% TN 5.87% OH 7.25% AL 4.26% GA 4.04% SC 6.26% FL 3.4 PA 10.96% 3.09% WV VA 2.75% NC 3.87% NH 11.59% VT 5.88% NY 4.77% ME 3.22% MA 7.11% RI 4.65% CT 9.56% NJ 8.02% DE 4.21% 5.1 DC MD In the West, California is faring much better than its neighboring states of Nevada and Oregon. Criticized loan levels fell another 1 in California in the fourth quarter which brings California to the lowest ratio of criticized assets in the West. Washington State has improved substantially in the quarter and is down approximately 21% from September 2014. However, two states, Michigan and Indiana, saw significant increases in problems loans. CRITICIZED RATIO, USA = 5.84% BETTER THAN AVG WORSE THAN AVG 8.09% HI June 2015 The RMA Journal 45