Commercial Banking Performance 1st Quarter 2017 Lackluster results with continued weak loan and deposit growth as well as a small decline in ROA Overall 1Q17 Results: Commercial earnings rose by 1. versus prior quarter. ROA fell 1bp to 1.2 and NIM gained just a bp (to 2.51%), while banks failed to translate a 15bp increase in LIBOR to NIM. Versus the prior year, the gap between loan growth and deposit growth narrowed further (7.1% vs. 6.). A lower provision helped offset what would have otherwise been a decline in income. Loan growth has been disappointing and we re not seeing results from the Trump Effect there are a number of contributing factors, mostly on the demand side: Clients are waiting for tangible changes before committing to growth. Weaker demand for C&I loans mainly due to decreases in customers investment in plant or equipment, and decreases in customers' M&A financing needs 1 Trend of Oil & Gas clients closing their revolvers and returning to capital markets (See p.2 Debt Landscape) Approvals on leases falling to 7 level from 8 in Sep 2015, relating to net charge-offs rising Tightened standards on CRE loans due to less favorable or more uncertain outlook for CRE property prices, capitalization rates, and vacancy rates 1 Banks have also been resolute in keeping deposit rates steady, largely not changing standard rates as FF rose. Looking Ahead: There are positive indicators for C&I loan growth. 6 of S&P 500 companies have beat 1Q analyst revenue estimates and in aggregate, reporting revenue is 1% above expectations, with 5.3% growth expected for 2017 according to FactSet. Since the end of 1Q17, C&I loans have already grown by 1.. However, uncertainty around legislation will remain in the market which will thwart investing. Outlook on RE is also slowing, with banks tightening CRE lending standards further, as well as experiencing slightly slower demand for loans. On the flipside, as the recent rate hike flows through the book we should see an increase in NIM and ROA. Short-term performance differentiators will be core deposit growth, loan spreads and fees. Top of Mind: Corporate cash is growing but commercial deposit growth continues to lag (though YoY growth is strong). 11 of the 15 banks we track experienced a decline in commercial deposits QoQ. We have not yet seen a move of corporate deposits into MMFs, but that may soon begin to play out. Securing core deposits will continue to be top of mind, as both LCR and NSFR continue placing a premium on operating deposits and devaluing other deposits. This increases the value of deposit analytics, relationship pricing and bundling, as well as building up TM and other fee revenues. 1Q17 Details: Strong YoY Earnings Growth: Net income up 35.9% YoY on higher NIM and lower provision; 1Q ROA at 128bp Provision Declined: Provision dropped by almost 7 QoQ, with several banks lowering reserves (, Wells) Loan Growth Slowed Again: Loan growth continued to fall from 9. to 7.1% YoY Deposit Growth Still Lagging: YoY deposit growth increased to 6. (-1.1% QoQ), just below loan growth Revenue Up: Revenue growth up 7.7% YoY (1. QoQ), with most of the growth coming from non-interest revenue NIM Rising Slowly: NIM rose to 255 bp, up only 1 bp QoQ despite a 3-mo LIBOR increase of 15 bp Expense Up YoY: Expense is up 7.3% YoY (up 4. QoQ), wiping out most of the gain in fees and lower provision FIGURE 1: Change in Pre-Tax Income FIGURE 2: Return on Assets $11 bil $10 0.2 0.1 0.5 0.4 10.3 10.4 1.8 1.6 Average $9 $8 1.4 $7 $6 4Q16 Pre-Tax Income Spread revenue up 0.6% Net Interest Income Fee revenue up 2.6% Non-Interest Revenue Non-interest expense up 4. Loan loss provision down 69% Pre-tax income up 1 Expense Provision 1Q17 Pre-Tax Income 1.2 1.0 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 EARNINGS Pre-Tax Income Up: Net income grew 1. QoQ largely from a decrease in provision and an uptick in fee revenue, almost entirely offset by higher expense. 1 April 2017 Senior Loan Officer Opinion Survey PROFITABILITY ROA Mostly Flat: ROA fell 1bp to 128 bp, but remains well above low in 1Q16. With stable provisions and benefits from rising rates, we can look forward to a rising ROA. JUNE 2017 1
FIGURE 3: Balance Sheet Growth (YoY) 1 12. 2 11. 1 11.1% 10.6% 2 1 9.1% 7.1% 6. 1 6% 4.6% 4.1% 3. 0. 0. - 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Loan Growth Deposit Growth Loan Growth Deposit Growth FIGURE 4: Industry C&I and CRE Loan Growth (1Q07 1Q17) 2 C&I CRE 2 1 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 - -1 - -2-2 BALANCE SHEET Loan Growth Slowed Again: YoY loan growth slowed down again, now down to 7%, with the gap between loan and deposit growth narrowing further. Despite good indicators for growth, growth has been disappointing, but ticking back up since 1Q17. Deposits Up Versus Year Ago: Commercial deposits grew by 6. (YoY), with continued high level of variation in growth rates across bank commercial units. However, deposits are down 1% QoQ. LOAN MIX Growth Slowing: Both C&I and CRE YoY growth fell this quarter, while CRE continues to lead loan growth. Again the Owner-Occupied RE loan type experienced the lowest growth suggesting banks aren t getting much in deposits from the rise in CRE. Loan Type YoY Growth 1Q17 Bal ($B) C&I 2.6% 1,960 CRE 8.9% 2,056 OORE 3.9% 518 MF 1 390 C&D 1 319 1 827 Source: FDIC, regulatory filings via SNL Notes: OORE = Owner-occupied RE, MF = Multifamily FIGURE 5: C&I and Bond Growth (4Q14 4Q16) QoQ FIGURE 6: Bond Issuance 2 C&I Corporate bonds 120 Energy 2 100 80 1 60 40-4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 20 0 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 DEBT LANDSCAPE O&G Companies Returning to Capital Markets: C&I growth is down in recent quarters this is likely in part due to the return of O&G companies relying on capital markets vs. bank debt. 4Q15 and 1Q16 saw a near freeze of O&G bond issuances, while around the same time, bank C&I experienced its peak growth since 2014. The increase in C&I loans during those quarters would have been likely caused by tightening capital markets conditions that forced majority of firms in the energy sector to tap bank revolvers, pushing up loan growth. Now that capital markets are opening up again, with peak issuances in 4Q16 and 1Q17, O&G companies are beginning to pay down these credit lines causing loan growth to fall. Source: Thompson, SNL, Novantas analysis JUNE 2017 2
FIGURE 7: Leasing Credit Approvals as % of all Decisions 81% Leasing Credit Approvals as % of all decisions 8 79% 7 77% 76% 7 LEASING Lease Credit Approvals Falling: As leasing charge-off rates have risen to 40bp level (versus 20bp in 2015), the percent of credit approvals is falling. Origination volume in 1Q17 is down 2 QoQ and up YoY. This decline is contributing in part to the decline in commercial loan growth. Source: ELFA March 2017 7 73% 7 71% Feb -15 Mar -15 Apr-15 May -15 Jun-15 Jul-15 Aug -15 Sep -15 Oct -15 Nov -15 Dec -15 Jan-16 Feb -16 Mar -16 Apr-16 May -16 Jun-16 Jul-16 Aug -16 Sep -16 Oct -16 Nov -16 Dec -16 Jan-17 Feb -17 Mar -17 FIGURE 8: Total Loan, C&I, and CRE Growth LOB Loan Growth (YoY) Bank C&I Growth (YoY) Bank CRE Growth (YoY) * 36% 2 9 13% 2 1 11% 1 - -1% 9% 7% 13% 1 2 Banks with the highest loan growths usually driven by CRE 6% 1% 6% 9% 6% 9% 1% 1% A few banks cut CRE growth, driving loan growth down 1% 9% -1% - 7% - - -3% 11% 1 LOAN GROWTH DISPERSION Loan Growth Mixed: Loan growth wasn t weak across the board, with several banks still achieving double digit growth with the highest loan growth banks did tend to have was outsized CRE growth. banks (e.g.,,, ) cut CRE growth at the expense of total loan growth likely the result of raising credit standards as the Senior Loan Officer Opinion Survey suggests many banks did. Key increased its mix in CRE with the First Niagara acquisition this increased mix may negatively impact future CRE growth. Standalone commercial banks like ServisFirst, Silicon Valley, and Texas Capital have outperformed traditional banks with strong YoY C&I growth. Notes: Not adjusted for mergers/acquisitions. Texas Capital loan growth negatively impacted by a decrease in other loans. JUNE 2017 3
FIGURE 9: Commercial LOB Deposit Growth vs. Cash 2 2 1 Commercial Deposits Corporate Cash MMFs 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 - -1 DEPOSIT GROWTH Growth on the Rise: Commercial deposits grew by 6% in the last twelve months, coming in stronger than the prior year growth. But commercial deposits have lagged behind corporate cash in recent quarters, with corporate cash growth reaching 9% YoY growth as of 4Q16, despite growth in MMFs being low. The gap may be due to smaller banks eating up the growth in corporate cash, as and others shaved off non-operating deposits in 2016. Looking Forward: Deposits will remain a top priority for Commercial in 2017, with banks setting a growth goal of almost 7% on average. But banks will need more than rate to win deposits little link has been drawn between banks that offer higher rates on deposits and higher deposit growth rates (Source: Novantas Commercial Deposit Study). Banks will have to rely on more targeted cross-sell strategies and advanced analytics in commercial deposit management and decision-making. Notes: Commercial Deposits is based on the banks that report on the Commercial LOB while Corporate cash includes (across all Non-Financial Businesses) Checkable Deposits & Currency, Time & Savings Deposits, Money Market Fund Shares, and Repos. FIGURE 10: Total MMF Assets by Fund Type (1Q15 to 1Q17) 3,000 2,500 2,000 1,500 1,000 500 0 1/1/15 3/1/15 5/1/15 7/1/15 9/1/15 11/1/15 1/1/16 3/1/16 Variable NAV Implementation 5/1/16 7/1/16 9/1/16 11/1/16 Rate Increase 1/1/17 3/1/17 MMF FLOWS Exit from Prime and Tax Exempt Funds: Since January 2015, about $1.2 trillion has exited Prime and Tax Exempt money funds, which had to convert from a constant to variable NAV in October 2016. Over half of this flow occurred in the three months leading up to implementation. Continued Decline in MMFs Since Rate Increase: While prime fund balances increased by 7% since the 2016 rate hike, total MMF balances on net fell by, with the largest part of that coming from government, which fell by. Given the uptick in recent commercial deposit growth, one can assume that these funds ended up in bank deposits. Source: cromedata.com Tax Exempt Government Treasury Prime JUNE 2017 4
FIGURE 11: Historical Commercial Loan/Deposit Ratio 4Q11-1Q17 FIGURE 12: Loan Growth (LTM) vs. Loan/Deposit Ratio (1Q16) 14 Big 3 Large Regional Regional 4 13 3 12 3 1 10 9 8 7 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 Loan Growth 2 2 1-5 10 15 20 Loan/Deposit LOAN/DEPOSIT RATIO Loan/Deposit Ratio Up: Commercial Loan/Deposit ratio crept up last quarter across all bank segments as loan growth outpaced deposit growth. As rates rise, deposits will continue to be a concern for Commercial LOBs. Commercial LOBs with Lower Loan/Deposit Ratios Achieved Highest Loan Growth Rates. Most commercial LOBs are concentrated in between 10 and 15 Loan/Deposit. Outliers such as Silicon Valley Bank have most of their assets outside of loans and achieved top quartile growth. Notes: Large Regional =,,, ; Regional =,,,,,, and Not adjusted for mergers/acquisitions FIGURE 13: Commercial LOB Deposit Mix 100 0 69 % of Deposits ($) 16 9 2 3 DDA MMDA Sweeps TD s 4Q16 71% DDA SWEEPS 1Q17 9% 69% DEPOSIT MIX 69% of Deposits in DDA: The current mix is a large increase from pre-crisis portfolios where DDA represented 3 of deposits, but a slight decrease versus 71% a quarter ago this could be related to a flow of funds from MMFs into interest-bearing deposits. While this is an attractive mix of deposits in the short-term, DDA balances are likely inflated from the low-rate environment and pose a disintermediation risk as rates rise: The more differentiated deposit product rates become, the more we will see businesses switching into interest-bearing products As rates increase, corporates will allocate less and less cash to ECR DDA to offset fees When rates get high enough, the return on sweeps will increasingly justify the account fee Corporates now have more visibility and less friction to invest, which could accelerate the shift Could begin to see the creation of new products (e.g., parameterized portfolios via online brokerages or product that could disintermediate deposits) Notes: Data from Novantas Commercial Deposit Study JUNE 2017 5
FIGURE 14: Income Statement Growth (YoY) FIGURE 15: Efficiency and Provision Ratios Revenue Growth Expense Growth Net Income Growth 35.9% 5 Efficiency Ratio (left axis) Provision Ratio (right axis) 1 5 1 3. 2. 5.6% 6.1% 16.3% 12. 8. 10.1% 10. 7.9% 7.7% 6.9% 4.3% 7.9% 7.3% 4 4 6% - 5. - 11. 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 3 3 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 - INCOME STATEMENT Revenue Up: Revenue is up almost YoY mostly due to NIM growth (though there was little NIM growth in 1Q17). Expense Up Too: 7.3% expense growth vs. 1Q16 largely due to increasing growth in the banking sector. Net Income Up 36%: Earnings were up 36% from a year ago, largely due to a high decline in provision (-93%) now that we ve mostly passed the O&G crisis. EXPENSE AND PROVISION OVER TIME Provision Drops: Loan loss provisions are down by 93% YoY and further down vs. prior quarter, causing the provision ratio to fall to 0. as percent of revenue. This is largely due to diversification of loan portfolios from oil and gas, which called for more reserves in previous quarters. Several banks even decreased their reserve this quarter. Efficiency Ratio Rose: Efficiency ratio rose this quarter but is still wavering between 4 and 5, continually rising and falling every consecutive quarter since 2013, with negligible change between 1Q16 and 1Q17. With revenue rising, banks aren t seeing scale benefits. FIGURE 16: NIM and Fee Revenue FIGURE 17: Treasury Services Revenue Growth (YoY) 3.5 NIM NonIR/Rev 5 2 3.2 5 3.0 4 4 1 2.7 3 1Q14 3Q14 1Q15 2Q15 1Q16 3Q16 1Q17 2.5 3 - -1 2.2 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 2 - BALANCE SHEET INCOME NIM Up, Fees Down Versus Year Ago: While NIM is flat QoQ it enjoyed a steady increase as rates rose over the last year while shares of revenue in fees maintain a level not seen since 2011, partially offsetting NIM improvement. With rising rates and growing spread revenue, this trend will continue. TREASURY SERVICES REVENUE Revenue Up 9% Versus Year Ago: Treasury services revenue increased 9% YoY across the above 4 banks, but has been fairly volatile across quarters. Novantas estimates that market TM fees (excl. card and merchant) grew approximately 4. YoY, rising slowly despite rising rates, largely due to price increases. Notes: Based on treasury services line items as reported in earnings releases. In chart above, only includes the Commercial subset of Global Transaction Services revenue and excludes deposit spread revenue, commercial card interchange, and merchant processing revenue. JUNE 2017 6
FIGURE 18: Commercial Deposit Beta (4Q16-1Q17) Standard -1 Average Portfolio -16% -16% Typical Exception 16% 4 Premium Exception -2 ECR (DDA) MMDA IB DDA DEPOSIT BETA Deposit Rates Mostly Flat: Through recent rate increases, commercial LOBs have been resolute in keeping rates steady, though betas are starting to move up. As the Fed Funds rate increased from 25bp to 100bp, banks have largely not changed standard rates. The market has however seen higher occurrence and magnitude of exception rates. Managing Rate Betas: Commercial LOBs are managing rate betas by rationalizing current portfolio pricing to offer higher rates on new deals (lower dollar weighted average rate paid). They are stepping down premium MMDA rates over time; and, for ECR, letting rates catch up. The challenge banks face is that at some point the volume of exception requests will be overwhelming and the benefits of lagging standard rates will be outweighed by the costs of employing and managing exception pricing. Source: Novantas Commercial Deposit Study FIGURE 19: Commercial LOB NIM vs. 3-month LIBOR and Credit Spread 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3Q13 2Q14 3Q15 3Q16 Commercial LOB NIM 3-mo LIBOR Credit Spread NIM CHANGE NIM Mostly Flat: As 3-mo LIBOR rose ~15bps during the last quarter, we ve only seen a 1bp rise in Commercial NIM, while credit spreads remained mostly flat during the period. Given the currently low beta on commercial deposits due to concentration in DDA, this is a lower rise in NIM than expected (mid-to-high single digits), though there was a lot of variance across banks (see right). Bank OTHER NIM Δ 4Q-1Q 32bp 13bp 12bp 8bp 8bp 7bp 7bp 5bp 3bp 2bp -9bp -11bp -15bp -20bp -21bp Notes: Credit Spread based on 5Y High Quality Corporate bond rates less 5Y Treasury JUNE 2017 7
FIGURE 20: Loan, Deposit, Revenue, Net Interest Income, and Non-Interested Revenue Growth, and ROA for 1Q17 Loan Growth (YoY) Deposit Growth (YoY) Revenue Growth (YoY) * 14.6% 14.6% 12. 11.1% 9.7% 8. 8. 5.6% 36.1% * 2 17. 16.7% 16. 8.9% 7. 7.1% 5. * 14.9% 12. 12.7% 12. 11.9% 20.3% 18.7% 26.1% 35.9% 5.6% 11.9% 5.3% 4.3% 2. 11. 10. - 0.6% - 2.1% - 3.1% 4. 2. -3. 2.1% 1.9% 1. 0. - 4. - 6.9% 1.1% 9. 6. Net Interest Income Growth (YoY) Non-Interest Revenue Growth (YoY) ROA (1Q17) * 39. 47% 1.86% 17.7% 41% 1.66% 15.3% 3 1.6 13. 3 1.57% 13. 3 1.49% 12.6% * 3 1.46% 11. 2 1.43% 10.7% 21% 1.36% 10.7% 10. 21% 2 1.36% 1.36% 10. 17% 1.29% 9. 1 1.27% 5. 11% 1.0 5. 1.01% -5.7% 2.7% -9% 7% 0.8 0.8-8.3% -1 0.5 * Known M&A transaction; growth rates not adjusted for any M&A or LOB reporting changes JUNE 2017 8
FIGURE 20: Provision/Revenue, Provision/Assets, NIM, and 1Q17 Loans/Deposits Provision/Revenue Provision/Assets NIM -1.83% -0.07% 3.49% -0.61% -0.2-0.0-0.01% 3.3 3.31% 0.3 0.0 3.27% 0.9 1.83% 2.1 0.0 0.0 0.06% 3.21% 3.1 3.03% 2.9 0.06% 2.9 2.9 0.06% 2.9 3.0 0.07% 2.9 3.16% 0.0 2.87% 3.96% 0.0 2.7 4.3 0.11% 2.66% 5.2 0.1 2.53% 6.9 0.1 2.43% 7.17% 8.67% 0. 0. 2.3 2.0 1Q17 Loans/Deposits 196% 166% 15 147% 126% 12 12 12 117% 117% 113% 113% 10 10 8 87% 4 * Known M&A transaction; growth rates not adjusted for any M&A or LOB reporting changes JUNE 2017 9
COMMERCIAL LOBS (1Q17, $ BIL) BANK LOB LOANS DEPOSITS REVENUE Wells Fargo Wholesale Banking 466 466 7 Bank of America Global Banking 342 304 4.9 organ Commercial Banking 191 177 2 Financial Corporate & Institutional 127 83 1.3 Banking US Bank Wholesale Banking & CRE 94 107 0.8 SunTrust Wholesale Banking 72 57 0.9 Capital One Commercial Banking 67 34 0.7 Fifth Third Commercial Banking 54 36 0.6 1 Whole Bank 49 39 0.6 CIFI Citizens Commercial Banking 48 29 0.48 KeyCorp Corporate Bank 38 21 0.57 - Comerica Business Bank 36 29 0.47 Silicon Valley Whole Bank 18 40 0.4 Texas Capital Whole Bank 16 14 0.18 ServisFirst Bank Whole Bank 5 5 0.05 ABOUT COMMERCIAL LOBS & DATA Novantas compiles and comments on the commercial line of business results of public banks large enough to disclose relatively complete commercial segment results in their earnings releases or standalone commercial banks with little to no retail. Numbers are as reported, and are not adjusted for any M&A or LOB reporting changes. For the standalone commercial banks, regulatory data is used to exclude consumer loans and deposits, as well as brokered deposits from the total. Ratios are calculated (vs. stated) based on disclosed balance sheet and income statement data. 1 includes: Pacific Western Bank, Mizuho Bank, and Signature Bank Commercial Banking Solutions at Novantas provides analytics and technology to help commercial bankers in a range of critical issues, including: pricing optimization for deposits, TM, lending and relationships; sales force deployment and negotiation effectiveness; product development and capabilities enhancement; and operating model transformation of origination, onboarding and service. For more information, contact one of our commercial banking experts, or visit www.novantas.com. JUNE 2017 10