Second Quarter 2017: Community Banking Trends

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The Analysis This analysis is presented to highlight the trends in community banking compared to the entire banking industry. Analysis Covers Three Bank Cohorts: Total Industry (Blue) Community Banks Banks Under $25B in assets (Green) Community Banks below $1B in total assets (Gold) Past five quarters are presented. All rate changes are quarter over quarter. Source: FDIC Call Report Data as of Jun, 2017.

General Trends Summary For 2Q 2017, the industry s ROE increased from 7.61% to 8.32%. However, community bank ROE went from a 8.52% to 8.86%. Community bank ROE increased mainly due to: Improved efficiency Lower delinquencies/ Less loan loss reserves Higher net interest margin (NIM) Higher non interest income

10 Things You Should Know Here are some other community bank trends of note about this past quarter: 1. ROE: ROE increased for the industry from 9.1% to 9.5% QoQ to reach a current cycle high. This was mainly due to improved efficiency, lower delinquencies, less loan loss reserves, higher net interest margin (NIM), greater non fee income and adding riskier asset classes. 2. Cost of Funds: Most banks moved CD rates up again for the 3 rd quarter in a row, increasing the industry s cost of funds by three basis points to 0.43%. More banks than ever this cycle reported a slowing of deposit growth. 3. Deposits: Like the backend of past cycles, deposit growth is slowing while loans growth is robust. Deposits grew at a scant 0.4% for the industry and 1.3% for community banks. This brings project growth at 4%, vs. the 5% that was projected at the start of the year (down from 8% the previous year). With slowing deposits comes greater interest rate sensitivity. 4. Credit Quality: Net charge offs hit a 10 year low. We went from a peak of 3.14% in 4Q 2009 to 0.47% today. Banking does not get any easier than it is today. ALLL dropped from 1.22% to 1.19% for community banks. Delinquencies fell in every category. 5. Yield on Earning Assets: Rising rates helped asset yields as they rose from 3.54% to 3.59% for the industry and from 4.16% to 4.21% for community banks. 6. Net Interest Margin: Due to higher rates, yield on loans rose more than the cost of funds resulting in a 2 bps increase in NIM to 3.17% for the industry and 3.75% for community banks. 7. Efficiency: Banks of all sizes were able to recognize some scale as a result of growth. The efficiency ratio for the industry increased across the board and stands at 57.8% for the industry down from 69.1% for 1Q. Community banks dropped from 61.6% to 60.6%. 8. Loan Pricing: Due to better credit quality and more competition (despite greater demand) loan pricing decreased. Hospitality, retail and specialty CRE lines widen the most causing CRE to become wider than C&I. The Midwest and Northeast remain the most competitive in banking while the Southwest is the least. 9. Loan Growth: About 25% of banks are seeing weaker demand for commercial loans with 13% reporting stronger demand according to the latest Fed Sr. Loan Officer Survey. 10. Other: With the exception of Tier1 weighted assets, other capital ratios (total equity to assets and core) improved. Loans to deposits increased for all sizes of banks and went from 83% to 85% for community banks. FTEs increased while salaries remained steady. Average deposit per branches continued to climb and now stands at an average of $64.8mm per branch. After dropping last quarter, marketing expenses increased.

Commercial Loan Pricing Trends Commentary Due to competition and better credit quality than Q1, commercial loan pricing tightened. Banks in the Southwest enjoyed the widest spreads (average of 2.85%), while banks in the upper Midwest ( 1.80% average spread) had some of the lowest followed by banks in the Northeast (2.28% average spread). CA saw the greatest tightening by some 12 bps. Certain segments of CRE (hospitality, retail, and specialty) saw material widening by an average of 20 bps in 2Q.

Growth Trends Commentary Community banks grew faster than national banks in terms of assets, loans and deposits. Loans grew more than twice as fast as deposits. Deposit growth has markedly slowed.

Loan Class Performance: Loan delinquencies by sector: Commentary Bank credit quality improved quarter over quarter Multifamily continued to have the lowest delinquencies followed by consumer lending line Credit cards and construction are the most improved for the quarter but every major category improved After jumping up, both CRE and Ag delinquencies improved C&I is now close to a record low Credit cards, followed by residential are the most improved classes on a YTD basis

Heat Map - ROE:

Avg. ROE Ranked By State:

Heat Map Yield on Earning Assets:

Heat Map Cost of Funds:

Heat Map Net Interest Margin:

Heat Map Loans To Deposits:

Heat Map Credit Quality:

Heat Map - Delinquencies:

Heat Map County Level Expected PDs:

Heat Map Capital:

Return on Equity:

Return on Assets:

Net Interest Margin:

Yield On Earnings Assets:

Cost of Funds:

Loans To Deposits:

Loans-to-Deposits (Annual): 25

Dividends To Net Income:

Non-Interest Income:

Fee Income:

Efficiency:

Deposits Per Branch:

Capital:

Credit Quality ALLL To Loans:

Credit Quality:

Total Asset Growth:

Loan Growth:

Deposit Growth:

Investment Portfolios:

Loan Mix:

Disclaimer: This presentation is for general strategic information only and should not be relied upon as a substitute for independent research before making a material management decision. This presentation does not take into account any particular bank s performance objectives, financial situation or needs. All banks should obtain advice based on their unique situation before making any decision based upon this presentation or any information contained within. In addition, any implied projections or views of the bank market provided by the authors may not prove to be accurate. While all the information contained herein is believed to be accurate as of the date of source or publication, the information is subject to change and constant revision.