March 2017 The RMA Journal 43

CREDIT RISK BENCHMARKS

3RD QUARTER 2016

WE ARE PLEASED to provide third-quarter 2016 metrics for this Journal feature, which provides an up-to-date view of C&I and Com-mercial Real Estate credit quality and trends. Comparing portfolio composition and per-formance 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. 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 in-cludes 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 ad-ditional 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.

The RMA Journal March 2017 44

C&I LOAN QUALITY

Percentage of C&I Loans Outstanding

The ratios of loans rated classified and criticized to total C&I outstandings declined modestly in the third quarter from the prior quarter. However, problem loan levels were above the averages reported in the same period a year ago.

Note: Classified loans are loans rated Substandard, Doubtful, or Loss. Criticized loans are classified loans plus loans rated Special Mention.

WEIGHTED-AVERAGE PROBABILITY OF DEFAULT TREND All Loans vs. Nondefaulted Loans

The C&I weighted-average probability of default ticked up during the third quarter of 2016, while the nondefaulted average displayed a comparatively modest increase.

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.

CLASSIFIED

5.5%

4.5%

3.5%

2.5%

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

1Q

152Q

153Q

154Q

151Q

162Q

163Q

16

20%

15%

10%

5%

0%

On P

revi

Ous

Pag

e: s

hutt

erst

Ock

.cO

m

WAPD - ALL LOANS

ND_WAPD - ACCRUING LOANS ONLY

3.81%

7.29%

PERC

ENTA

GE

OF

OUT

STAN

DIN

GS

CRITICIZED

2.8

1.9

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

March 2017 The RMA Journal 45

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

PERCENTAGE OF UNSECURED LOANS OUTSTANDING

CRE: PERCENT NONACCRUAL BY PROPERTY TYPE

PERC

ENTA

GE

OF

OUT

STAN

DIN

GS

PERC

ENT

NO

NAC

CRUI

NG

The percentage of CRE loans on nonaccrual continued to decline in the third quarter, marking the 20th straight quarter of improvement. Mirroring the CRE average, nonaccruing loans declined broadly across the five largest property types for CRE balances. Office and industrial exhibited the largest quarter-over-quarter improvements.

ALL RETAIL

RESIDENTIAL (1-4 FAMILY)

ALL PROPERTY TYPES

MULTIFAMILY

OFFICE

INDUSTRIAL

16.1%

3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

PERCENT UNSECURED

The percentage of unsecured loans to total outstanding balances continued to decline in the third quarter, falling to a ratio of 16.1%. The availability of unsecured credit continues to vary widely across the C&I industry spectrum, with sectors such as hospitals and telecommunications exhibiting high levels of unsecured loan balances compared with the C&I average.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0.59%

0.53%

0.48%

0.42%

0.28%0.24%

The RMA Journal March 2017 46

EXPECTED LOSS BY INDUSTRIES

The industry makeup 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.

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 segment 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 LoansCommercial Real Estate

Business Banking

Middle Market

Large Corporate

Percentage 30–89 Days Past Due 0.44% 0.15% 0.27% 0.33%

Percentage on Nonaccrual 1.01% 1.81% 0.88% 0.59%

Percentage Noncurrent(90 Days + Nonaccrual)

1.15% 1.82% 0.88% 0.61%

Weighted-Average Risk Rating (10 pt RMA Scale)

5.16 4.68 4.29 5.12

Weighted-Average PD 3.45% 3.48% 2.37% 3.20%

Weighted-Average PD: Nondefaulted Portfolio

2.67% 2.49% 1.73% 2.83%

Percentage Classified 5.55% 4.42% 1.49% 6.06%

Percentage Criticized 9.93% 7.20% 5.60% 8.89%

LOC Utilization Rate 54.51% 47.65% 49.16% 65.34%

PERCENTAGE OF TOTAL EXPECTED LOSS

PERCENTAGE OF EXPOSURE

Agric

ultu

re, F

ores

try,

Fish

ing

& Hu

ntin

g

Min

ing

Utili

ties

Man

ufac

turin

g(F

ood,

Bev

erag

e, A

ppar

el)

Man

ufac

turin

g(W

ood,

Pap

er, P

last

ic)

Man

ufac

turin

g(M

etal

s, M

achi

nery

, Ele

ctric

)

Reta

il Tr

ade

(Mot

or, E

lect

ric, B

uild

ing)

Reta

il Tr

ade

(Hob

by, G

ener

al, M

isc.

)

Tran

spor

tatio

n(A

ir, W

ater

, Tru

ck)

Tran

spor

tatio

n(P

osta

l, Co

urie

r)

Info

rmat

ion

Fina

nce

& In

sura

nce

Real

Est

ate

Man

agem

ent o

f Co

mpa

nies

& E

nter

pris

es

Prof

essi

onal

, Sci

entif

ic &

Te

chni

cal S

ervi

ces

Adm

in.,

Supp

ort,

Was

te

Man

agem

ent &

Rem

edia

tion

Educ

atio

nal S

ervi

ces

Heal

th C

are

& S

ocia

l Ass

ista

nce

Arts

, Ent

erta

inm

ent &

Re

crea

tion

Acco

mm

odat

ions

&

Food

Ser

vice

s

Othe

r Ser

vice

s

Publ

ic A

dmin

istra

tion

Who

lesa

le T

rade

18%17%16%15%14%13%12%11%10%9% 8%7%6%5%4%3%2%1%0%

March 2017 The RMA Journal 47

While the deterioration in credit quality for the oil and gas industry has moderated, the Southwest continues to bear high levels of classified and criticized loans in this particular sector. For the Southwest region, the percentage of criticized loans to total C&I outstandings was up 43% in the third quarter compared to the same period a year ago. Conversely, criticized loan balances decreased 8% for the West region year-over-year in September.

PROBLEM C&I LOANS BY STATE

Criticized Loans (%)

Slightly more than half of the states reported a reduction in criticized loans quarter-over-quarter in September. Criticized levels in Oklahoma and Texas remain elevated due to problem oil and gas loans. When loans in this industry are excluded from the mix, the criticized ratios for Oklahoma and Texas are close to the national C&I average.

PROBLEM C&I LOANS BY GEOGRAPHIC REGION

BETTER THAN AVG.

WORSE THAN AVG.

criticiZeD ratiO, usa = 7.29%

CLASSIFIED RATIO, USA = 3.81%

CRITICIZED RATIO, USA = 7.29%

sOuthwest

8.73%

western miDwest

4.33%

sOuth

2.67%

eastern miDwest

3.60%

nOrtheast

2.50%

miDDle atlantic

2.44%

CLASSIFIED

CRITICIZED

sOuthwest

13.23%

western miDwest

8.99%

sOuth

5.44%

eastern miDwest

8.31%

nOrtheast

6.39%

miDDle atlantic

4.95%

BETTER THAN NAT’L AVG

WORSE THAN NAT’L AVG

11.78%wa

10.43%Or

6.81%ca

10.40%iD

9.96%nv

7.02%aZ

8.32%ut

19.46%wY

11.19%nm

10.44%ks

22.07%Ok

14.22%mi

5.44%kY

3.99%tn

5.28%Fl

3.71%sc

2.03%me

0.63%ak

4.06%hi

13.06%mt

9.27%cO

15.73%tX

17.51%nD

9.79%sD

3.52%ne

9.47%mn

11.64%ia

7.47%mO

4.18%ar

11.20%la

9.31%wi

7.07%il

6.54%ms

9.49%in

11.05%al 3.86%

ga

3.68%nc

3.75%va

11.34%wv

6.14%Oh

4.81%Pa

7.37%nY

3.93%nh

3.62%vt

3.63%ma8.43%

ri6.89%

ct10.67%nJ

3.23%De

2.11%Dc5.33%

mD

west

3.96%

west

7.64%