AFS Best Practices Leadership Council Webinar Series Presents...Oct 31, 2019 · Commercial Loan Market Overview: September 2019. Source: AFS Pricing Dashboard – September 2019

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October 31, 2019

Pricing FundamentalsA Review of the Third Quarter Commercial Lending Landscape

Is Manufacturing Heading Towards a Recession?

AFS Best Practices Leadership Council Webinar Series Presents:

Special Feature:

©2019 Automated Financial Systems, Inc. All Rights Reserved. Confidential & Proprietary.2October 31, 2019

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AFS Pricing Dashboard by the Numbers

$1.2 TrillionThe Pricing Dashboard database already totals over $1.2 trillion in committed exposure, with broad coverage and depth across C&I and Commercial Real Estate product categories.

80,000 20+The database is seeded with over 80,000 new or renewed loans per quarter, creating a robust set of historical performance metrics to model and analyze.

The Pricing Dashboard contains a robust offering of measures and dimensions, allowing banks to tailor the analysis to their unique specifications and create balanced scorecards of growth, pricing, and credit risk performance.

Do you want to know…How your portfolio compares to peers?What geographies have tailwinds for loan growth?What sectors have the most pricing volatility?What are spread and fee levels for comparable credit?

The Pricing Dashboard gives you the tools and information you need to stay ahead of the curve.



Agenda

Balance GrowthThe pace of total balance growth continued to slow in 3Q19.The Manufacturing sector was a drag on loan growth this quarter, as weakness in industrial

production tempered loan demand.

New/Renewed Vol.

Spread Pricing

Fee Pricing

Special Topic

Aggregate new/renewed volume year to date in September was up when compared to the same period a year ago.

Spread pricing for new/renewed loans in both the bilateral and syndicated segments of the market was down in September from the prior month, mirroring declines in broader index and reference rates.

Trends in Upfront fee incidence and levels were mixed in September.From a geographic standpoint, the West region displayed the highest average Upfront fee level

in September.

This month, we examine how the recent contraction in U.S. Manufacturing output is impacting loan growth and risk-return trends in the sector.



Markets Are Giving Mixed Signals

Real GDP Source: Bureau of Economic Analysis (BEA)U.S. Unemployment Rate Source: Bureau of Labor Statistics (BLS)Yield Curve Source: Federal Reserve Bank of St. LouisInterest rate and LIBOR-Equivalent Spread Source: AFS Pricing Dashboard

0.0

2.0

4.0

6.0

8.0

10.0

12.0

U.S.

Nat

'l Un

empl

oym

ent

%

... and unemployment remains at historic lows.

-2.0-1.00.01.02.03.04.05.0

10-Y

r Min

us 3

-Mth

Tre

asur

y

The yield curve remained inverted in September...

0.0

1.0

2.0

3.0

4.0

5.0

%

Fed Funds Interest RateNew Loans

LIBOR-Equ. SpreadNew Loans

...and spreads remained flat.

-3.0-2.0-1.00.01.02.03.04.05.0

Chan

ge in

Rea

l GDP

%

Real GDP growth slowed slightly in the third quarter...



For mid-sized bilateral loans (<$5M), spreads on both LIBOR- and Prime-rate deals were down year over year in 3Q19.

Spreads Narrow Year over Year

Source: AFS Pricing Dashboard – September 2019

434 456 465 455 420

550 570 589 577 552

0

100

200

300

400

500

600

3Q18 4Q18 1Q19 2Q19 3Q19

Basis

Poi

nts

Weighted Average Interest RateNew & Renewed Bilateral Loans <$5M Loan Size

LIBOR Prime

221 221 216 211 204

46 40 42 30 300

50

100

150

200

250

3Q18 4Q18 1Q19 2Q19 3Q19

Basis

Poi

nts

Spread Over IndexNew & Renewed Bilateral Loans <$5M Loan Size

LIBOR Prime



Consistent with the prior year, the risk curve for commercial loans sloped upward in 3Q19.(left chart). Conversely, the term curve for commercial loans flattened significantly over the last year, with rates falling substantially for loans with longerdurations (right chart).

The Term Curve Flattens for Commercial Loans


275

300

325

350

375

400

425

450

475

500

02 03 04 05 06

Basis

Poi

nts

Risk Rating (RMA 10-Pt. Scale)

Weighted Average Interest RateNew & Renewed Bilateral Loans

3Q18

3Q19

275

300

325

350

375

400

425

450

475

500

<= 1 Yr > 1 <= 5Yrs

> 5 <= 10Yrs

> 10 <= 20Yrs

> 20 Yrs

Basis

Poi

nts

Term Length

Weighted Average Interest RateNew & Renewed Bilateral Loans

3Q18

3Q19



While the U.S. economy remains on generally solid footing, total C&I loan growth is converging to its long-run trend of 4.8%.

Reversion to the Mean

Source: Federal Reserve. Commercial & industrial loan balances from the H.8 data series: assets and liabilities of all commercial banks in the United States.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Grow

th v

s. Lo

ng-T

erm

Ave

rage

C&I Loan Growth Relative to Long-Term Average

Year-over-Year C&I Loan Growth Minus '01-'19 avg. of 4.8%

Stress in the Energy Sector

Great Recession

C&I Loan Growth Stalls

Peak Levels Post Recession



“After the Federal Reserve’s latest interest rate cut, net interest margins will be front and center when banks start reporting third-quarter results.

Banks have struggled to lower deposit pricing fast enough to keep up with changes to adjustable-rate loans, industry experts said.

Loan volumes will also bear watching as banks look to offset pressure from lower yields. That being said, the Fed’s shift, a global economic slowdown and a handful of credit warnings will spur more questions about loan performance.

A flatter yield curve can tempt lenders to cut loan rates and loosen other terms to win business.”

—American Banker, September 30, 2019

High Anxiety Over Narrowing Margins



100

150

200

250

300

350New Renewed 10-Year Treasuries

LIBOR-Equivalent Spread (in BPS) TrendAll Loan Types

$0$5

$10$15$20$25$30$35$40

New Renewed

New and Renewed Loans Trend ($ Billions)All Loan Types

Commercial Loan Market Overview: September 2019


Sep 20120.36%

Sep 20131.30%

Sep 20141.73%

Sep 20151.46%

Sep 20160.10%

Sep 20170.02%

Sep 20180.83%

Sep 20190.16%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Perc

ent G

row

th

Growth in Outstandings - Quarterly Trend(Quarter-over-Quarter Growth Rates)

0

5

10

15

20

25

30

35

2018* 2019*

Total Fees Upfront Fees

Total Fees Paid (in BPS) - Bilateral LoansYear-over-Year Comparison

* Based on Comparative Jan-Sep Periods



Large Bilateral Loans Continue to Drive Total Balance Growth


-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%

Perc

ent G

row

th

Bilateral Loans Participations

Growth in Outstandings - Quarterly Trend(Quarter-over-Quarter Growth Rates)

-2.96%

-0.79%

1.82%

6.10%4.47%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

< $1M $1M to< $5M

$5M to< $25M

>= $25M CRE

Perc

ent G

row

th

Growth in Outstandings - Dec 2018 vs. Sep 2019Bilateral Loans

C&I Bilateral Loans

-3.39%

-1.70%

2.28% 1.68%0.70%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

< $1M $1M to< $5M

$5M to< $25M

>= $25M CRE

Perc

ent G

row

th

Growth in Outstandings - Dec 2018 vs. Sep 2019Participations

C&I Participations



Key Tactics for Leveraging Market Data

Fortify the Foundations for Loan Growth

Optimize the Commercial Portfolio

Maintain Strong Credit Discipline



Texas Leads Bilateral and Participated Loan Growth

Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Outstandings of at least $3 billion in the base period is required. Source: AFS Pricing Dashboard – September 2019

7.4%

3.9%3.6%3.5%

1.4%2.0%

-2.1%-3.0%

-4.3%-6.0%

-6.3%

Texas

Florida

California

IllinoisNew York

New Jersey

GeorgiaOhioKentuckyIndiana

Growth in Outstandings - Dec 2018 vs. Sep 2019All Loan Types

Nat'l Avg

7.3%6.7%

5.3%3.9%

2.8%2.8%

-1.8%-2.4%

-3.7%-3.9%

-4.6%

Texas

CaliforniaFlorida

New YorkNorth Carolina

Virginia

Pennsylvania

OhioMinnesota

Indiana


Nat'l Avg

7.5%5.0%

4.3%2.7%2.6%

-0.0%-3.6%

-6.0%-6.2%

-10.3%-14.5%

Texas

PennsylvaniaIllinois

ColoradoVirginia

New YorkOhioCaliforniaNew Jersey

Georgia


Nat'l Avg



Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Source: AFS Pricing Dashboard – September 2019

Bilateral Loans Up Year to Date Across the Majority of States

Top 5 States1. California2. New York3. Florida4. Texas5. North Carolina

Bottom 5 States1. Ohio2. Pennsylvania3. Minnesota4. Virginia5. Indiana

ALARAZ

CA CO

CT

DCDE

FL

GA

IA

ID

IL INKS KY

LA

MA

MD

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NJ

NM

NV

NY

OH

OK

OR

PARI

SC

SD

TN

TX

UTVA

VTWA

WI

WV

WY

Growth in OutstandingsDec 2018 vs. Sep 2019

Bilateral Loans

Negative Growth$0 to $100M$100M to $250M $250M to $500M Greater-than $500MInsufficient Data



Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Source: AFS Pricing Dashboard – September 2019

Participations Continue to Play a Significant Role in Banks Across the Country

Top 5 States1. Texas2. Utah3. Oklahoma4. Pennsylvania5. Wisconsin

Bottom 5 States1. California2. Georgia3. New York4. New Jersey5. Ohio

ALARAZ

CA CO

CT

DCDE

FL

GA

IA

ID

IL INKS KY

LA

MA

MD

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NJ

NM

NV

NY

OH

OK

OR

PARI

SC

SD

TN

TX

UTVA

VTWA

WI

WV

WY

Growth in OutstandingsDec 2018 vs. Sep 2019

Participations

Negative Growth$0 to $100M$100M to $250M $250M to $500M Greater-than $500MInsufficient Data



Total commercial loan growth in 3Q19 was predominantly concentrated with the Top 10 CBSAs* in terms of U.S. real GDP.

GDP and Loan Growth: Is there a Correlation?

* Top 10 Core Based Statistical Areas (CBSAs) based on contribution to total U.S. Real GDP. Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Source: AFS Pricing Dashboard – September 2019Real GDP data sourced from the Bureau of Economic Analysis (BEA)

3.0%4.3% 4.6% 4.5% 4.4% 5.1% 5.5%

6.4%7.9%

9.8%11.3%

14.3%16.3%

17.6%18.3%

1.1%1.9% 1.4% 1.5% 1.4% 1.1%0.6% 0.4% 0.4% 1.1% 1.2%

3.1%3.9% 4.1% 3.9%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

% G

row

thGrowth in Outstandings - December 2015 Baseline

Top 10 CBSAs vs. All Other Regions

Top 10 CBSAs

All Other Regions



* Core Based Statistical Areas (CBSAs)Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan.Source: AFS Pricing Dashboard – September 2019

Drilling Down to the CBSA* Level

7.31%

23.46%

11.30%

3.12% 3.22%

-7.47%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Perc

ent G

row

th

Growth in Outstandings - BilateralTexas

Dec 2018 to Sep 2019



The Manufacturing Sector Was a Drag on Loan Growth

Note: Industry categories based on North American Industry Classification System (NAICS). Outstandings of at least $3 billion in the base period is required.Source: AFS Pricing Dashboard – September 2019

16.3%11.0%

8.5%7.8%

3.1%2.0%

-1.1%-2.4%-2.4%

-3.3%-10.1%

Management

Mining, Oil & Gas

Transportation (Air, Water, Truck) Finance & Insurance

Other Services

Health Care & Social Assistance

Wholesale Trade Manufacturing (Machinery, Elec)

Educational Services Agriculture

Growth in Outstandings - Dec 2018 vs. Sep 2019All Loan Types

All Industries Avg

14.1%10.4%

7.7%4.0%

2.0%2.8%

-0.9%-1.3%

-3.1%-3.4%

-10.6%

Information Transportation (Air, Water, Truck)

Finance & Insurance

Other Services

Accommodation & Food Services

Retail Trade (Motor, Elec, Bldg) Health Care & Social Assistance Public Administration

Educational Services Agriculture


All Industries Avg

13.1%12.4%

8.7%8.0%

6.8%-0.0%

-5.2%-5.3%

-7.7%-8.8%-9.1%

Arts, Entertainment, & Recreation Mining, Oil & Gas

Retail Trade (Motor, Elec, Bldg)

Finance & Insurance Transportation (Air, Water, Truck)

Manufacturing (Machinery, Elec) Wholesale Trade

Utilities

Admin, Support, Waste Mgmt Information


All Industries Avg



Balance Growth by State and Industry: Bilateral Loans

*Based on grouping of similar 2-digit NAICS codes. “Other” includes Agriculture, Utilities, Information, Professional Services, Educational Services, Admin & Waste Mgmt, Public Admin, and Other Services. Excludes CRE loans.Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Industry categories based on North American Industry Classification System (NAICS). Source: AFS Pricing Dashboard – September 2019

ALARAZ

CA CO

CT

DCDE

FL

GA

IA

ID

IL INKS KY

LA

MA

MD

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NJ

NM

NV

NY

OH

OK

OR

PARI

SC

SD

TN

TX

UTVA

VTWA

WI

WV

WY

Growth in Outstandings - Predominant C&I Industries*Dec 2018 vs. Sep 2019

Bilateral Loans

Retail & Wholesale TradeHealth CareFinance & Management of CompaniesManufacturingMining and TransportationAccommodation, Entertainment, & FoodOther



Balance Growth by State and Industry: Participations

*Based on grouping of similar 2-digit NAICS codes. “Other” includes Agriculture, Utilities, Information, Professional Services, Educational Services, Admin & Waste Mgmt, Public Admin, and Other Services. Excludes CRE loans.Note: Geographic data refers to the location of the borrower, not necessarily the bank booking the loan. Industry categories based on North American Industry Classification System (NAICS). Source: AFS Pricing Dashboard – September 2019

ALARAZ

CA CO

CT

DCDE

FL

GA

IA

ID

IL INKS KY

LA

MA

MD

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NJ

NM

NV

NY

OH

OK

OR

PARI

SC

SD

TN

TX

UTVA

VTWA

WI

WV

WY

Growth in Outstandings - Predominant C&I Industries*Dec 2018 vs. Sep 2019

Participations

Retail & Wholesale TradeHealth CareFinance & Management of CompaniesManufacturingMining and TransportationAccommodation, Entertainment, & FoodOther



Note: Industry categories based on North American Industry Classification System (NAICS).Source: AFS Pricing Dashboard – September 2019

Drilling Down to the 6-Digit NAICS Level

19.33%

40.27%

-2.42%-10.46%

-24.20%-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

33Manufacturing

334Computer &

Electronic ProductManufacturing

334111Electronic Computer

Manufacturing

334413Semiconductor &

Related DeviceManufacturing

334511Search, Detection,

Navigation,Guidance,

Aeronautical

Perc

ent

Gro

wth

Growth in OutstandingsManufacturing (Machinery, Elec)

Dec 2018 to Sep 2019



Total New/Renewed Bilateral Volume Falls in September…While Spreads Narrowed Month Over Month


100

150

200

250

300

350


LIBOR-Equivalent Spreads (in BPS) TrendBilateral Loans

$0

$5

$10

$15

$20

$25New Renewed

New and Renewed Loan Volume ($ Billions)Bilateral Loans



Two of the strongest determinants of commercial loan pricing are borrower risk rating (left chart) and loan size (right chart). Across all risk and size brackets, spread pricing displayed an overall downward trend when viewed over the last several years.

Spread Pricing Down Significantly Over the Long Term

Note: Risk ratings based on the RMA 10-point obligor risk rating scale. Source: AFS Pricing Dashboard – September 2019

100

150

200

250

300

350

400

2012 2013 2014 2015 2016 2017 2018 2019

All Risk Ratings High Pass

Moderate Pass Low Pass

Weighted Average LIBOR-Equivalent Spread (in BPS)New & Renewed Bilateral Loans

100

150

200

250

300

350

400

2012 2013 2014 2015 2016 2017 2018 2019

All Loan Sizes < $1M $1M < $5M

$5M < $25M >= $25M

Weighted Average LIBOR-Equivalent Spread (in BPS)New & Renewed Bilateral Loans



New/Renewed Participation Volume Down this Month…While Spreads on Participations Tighten


100

150

200

250

300

350


LIBOR-Equivalent Spreads (in BPS) TrendParticipations

$0

$5

$10

$15

$20

$25New Renewed

New and Renewed Loan Volume ($ Billions)Participations



0

10

20

30

40

50

60

Fee

Leve

l (in

BPS

)

New Renewed

Upfront Fee Level (in BPS) TrendNew and Renewed Bilateral Loans

10%15%20%25%30%35%40%45%

% F

ee In

cide

nce

New Renewed

Upfront Fee Incidence TrendNew and Renewed Bilateral Loans

Fees Remain an Unrealized Revenue Opportunity for Many Banks

Upfront Fee Incidence represents the number of obligations with Upfront fees as a percentage of all obligations.Upfront Fee Level (in BPS) represents the amount of Upfront fees assessed as a percentage of the original/last renewed amount for only those deals with Upfront fees.Source: AFS Pricing Dashboard – September 2019

0%

10%

20%

30%

40%

50%

East

ern

Mid

wes

t

Mid

dle

Atl

antic

Nor

thea

st

Sout

h

Sout

hwes

t

Wes

t

Wes

tern

Mid

wes

t

% F

ee In

cide

nce

Sep 2018 Sep 2019

Upfront Fee Incidence by RegionNew and Renewed Bilateral Loans

0102030405060

East

ern

Mid

wes

t

Mid

dle

Atl

antic

Nor

thea

st

Sout

h

Sout

hwes

t

Wes

t

Wes

tern

Mid

wes

t

Fee

Leve

l (in

BPS

) Sep 2018 Sep 2019

Upfront Fee Level (in BPS) by RegionNew and Renewed Bilateral Loans

afsvision.com

Special TopicIs Manufacturing Heading

Towards a Recession?



“Loans to manufacturing companies could be the next stumbling block for banks. While that sector has been relatively benign for lenders in recent years, there are indicators that credit issues are looming.

Cases of financial hardship — including severe revenue declines, reduced liquidity and increased leverage — among manufacturers rose in the third quarter.

The stress is especially pronounced in manufacturing-heavy states with vulnerability in areas such as automobiles, plastics and machinery that historically derive substantial revenue from exports.

The trade war is also taking a toll on the agricultural sector, which in turn is pinching companies that make farm equipment.”

—American Banker, October 15, 2019

Banks’ Next Headache? Loans to Manufacturers



Mixed Signals in the Manufacturing Sector

Sources:Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/INDPRO.Board of Governors of the Federal Reserve System (US), Capacity Utilization: Total Industry [TCU], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/TCU.U.S. Bureau of Labor Statistics, All Employees: Manufacturing [MANEMP], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MANEMP.Institute for Supply Management (ISM), U.S. ISM Purchasing Managers Index (PMI), retrieved from https://www.instituteforsupplymanagement.org.

40

45

50

55

60

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

Purchasing Managers Index (PMI)

12.0

12.2

12.4

12.6

12.8

13.0

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

U.S. Manufacturing Employment (Mil.)

-4%

-2%

0%

2%

4%

6%

8%

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

Industrial Production Index Quarter-over-Quarter Change (Annualized)

75%

76%

77%

78%

79%

80%

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

Capacity Utilization



Manufacturing activity as a share of total U.S. GDP has trended downwards since 2005. Manufacturing’s contribution to total C&I outstanding balances has also fallen over the last decade, although Manufacturing remains the largest industry concentration of total C&I deal volume.

Manufacturing is the Largest Industry Concentration of C&I Loan Volume

29

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Source: AFS Pricing Dashboard and RMA/AFS Risk Analysis Service – September 2019GDP data sourced from the Bureau of Economic Analysis (BEA)

14.61%

11.3%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Perc

ent o

f All

Indu

strie

sManufacturing Sector

% of Total C&I Outstandings

% of Total U.S. GDP



For the Market as a whole, the Manufacturing sector represents approximately 15 percent of total C&I loan balances, rendering Manufacturing the largest industry concentration of C&I loans.

Manufacturing is a Significant Industry Exposure for Most Banks

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Sample of participating banks in AFS benchmarking programs. Source: AFS Pricing Dashboard – September 2019

0%

5%

10%

15%

20%

25%Pe

rcen

t of T

otal

C&

I Out

stan

ding

sManufacturing Sector

Percent of Total C&I Outstandings - Sep 2019

% Bilateral Loans

% Participations/Syndications



Manufacturing Lending by Subsector

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Source: AFS Pricing Dashboard – September 2019

334 Computer & Electronic

Manufacturing10.7%

325 Chemical Manufacturing

10.4%

311 Food Manufacturing

10.2%

333 Machinery Manufacturing

9.5%332 Fabricated

Metal Manufacturing

9.0%

336 Transportation Equipment

Manufacturing8.8%

All Other Subsectors

41.5%

Manufacturing Sector

Distribution of Outstanding Balances by SubsectorSep 2019



For the Manufacturing sector, the pace of year-over-year commercial loan growth slowed markedly in 2019. The downward trend in loan growth for Manufacturing correlates with the sector’s recent weakness in industrial production and capacity utilization.

Loan Growth has Slowed for the Manufacturing Sector


2.81%

3.58%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%Pe

rcen

t Gro

wth

Growth in OutstandingsYear-over-Year Growth Rates

Manufacturing

All C&I Industries



The Industrial Production Index correlates strongly with loan growth for the Manufacturing sector as well as for the C&I loan market as a whole.

Macroeconomic Correlations

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/INDPRO.Loan growth data sourced from the AFS Pricing Dashboard – September 2019.

100

101

102

103

104

105

106

107

108

109

110

111

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Indu

stria

l Pro

duct

ion

Inde

x

Loan

Gro

wth

(Yea

r-ov

er-Y

ear)

Manufacturing Loan Growth (Year-over-Year) Industrial Production Index



For the Manufacturing industry, loan growth trends vary significantly at the subsector level. Loan balances were down year over year across the Manufacturing subsectors focused on Computers/Electronics, Fabricated Metal, and Food.

Manufacturing Loan Growth by Subsector


14.9%

9.7%

15.9%

-3.1%-2.2%

-3.8%-5%

0%

5%

10%

15%

20%

311Food

Manufacturing

325Chemical

Manufacturing

332Fabricated

MetalManufacturing

333Machinery

Manufacturing

334Computer &

ElectronicManufacturing

336Transportation

EquipmentManufacturing

Perc

ent G

row

thGrowth in Outstandings

Sep 2019 Year-over-YearManufacturing Avg



Average pricing for Manufacturing loans was beneath C&I averages for nearly every month over the last two years (left chart).The weighted average risk rating for Manufacturing loans spiked at the end of the third quarter (right chart).

Risk-Return Trends

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Weighted Average Risk Rating (WARR) based on the RMA 10-point obligor risk rating scale.Source: AFS Pricing Dashboard – September 2019

3.66%

3.94%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Wtd

Avg

Inte

rest

Rat

e

Wtd Avg Interest RateNew & Renewed Loans

Manufacturing All C&I Industries

4.86

4.68

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Wtd

Avg

Risk

Rat

ing

Wtd Avg Risk Rating (RMA 10-Pt. Scale)New & Renewed Loans




Spreads on LIBOR-rate Manufacturing loans widened year over year, whereas the average LIBOR spread for All C&I Industries narrowed slightly over the same period (middle chart).

Spread Pricing by Index


7.5% 11.4% 7.2% 7.6%

75.3% 74.1%72.9% 74.2%

9.4% 15.2% 14.9%7.8% 8.5%

Sep 2018YTD

Sep 2019YTD

Sep 2018YTD

Sep 2019YTD


Fixed LIBOR Prime Other

Pricing Index DistributionNew & Renewed Volume

1.7%

1.9%1.8% 1.8%

0.0%

0.5%

1.0%

1.5%

2.0%


Sep 2018 YTD Sep 2019 YTD

Spreads on LIBOR-Rate LoansNew & Renewed Volume

1.0%

0.3%

0.8%

0.1%0.0%

0.5%

1.0%

1.5%

2.0%


Sep 2018 YTD Sep 2019 YTD

Spreads on Prime-Rate LoansNew & Renewed Volume



Manufacturing’s commercial loan risk-return profile is worse than average.

Risk-Return Industry Matrix

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Weighted Average Risk Rating (WARR) based on the RMA 10-point obligor risk rating scale.Source: AFS Pricing Dashboard – September 2019

Agriculture

Mining, Oil & Gas

Utilities

Wholesale Trade

Retail Trade

Finance & Insurance

Health Care

Manufacturing

3.50%

3.75%

4.00%

4.25%

4.50%

4.75%

5.00%

5.25%

4.00 4.25 4.50 4.75 5.00 5.25 5.50

Wtd

Avg

Inte

rest

Rat

e

Wtd Avg Risk Rating (RMA 10-Pt. Scale)

New & Renewed C&I LoansSep 2019 YTD

Axes Represent Averages for All C&I Industries



The percentage of Manufacturing loans on nonaccrual was down quarter over quarter and year over year (left chart). The greater-than 30 day delinquency rate for Manufacturing was on par with the C&I average in the latest quarter (right chart).

Problem Loan Levels Remain Low for the Overall Manufacturing Sector…

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Source: RMA/AFS Risk Analysis Service – June 2019

0.60%

0.76%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Perc

ent o

f Out

stan

ding

s

Percent Nonaccruing


0.37%

0.32%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

Perc

ent o

f Out

stan

ding

s

Percent Past Due 30 Days or More




Delinquency rates increased sharply year over year for several Manufacturing subsectors, including the Computers/Electronics segment (right chart).

…Although Nonperforming Loans Increased for Some Manufacturing Subsectors

Manufacturing Sector defined as NAICS 31 Manufacturing (Food, Beverage, Apparel), NAICS 32 Manufacturing (Wood, Paper, Chemical), and NAICS 33 Manufacturing (Metals, Machinery, Elec).Source: RMA/AFS Risk Analysis Service – June 2019

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%31

1 Fo

odM

anuf

actu

ring

325

Chem

ical

Man

ufac

turin

g

332

Fabr

icat

edM

etal

Man

ufac

turi

ng

333

Mac

hine

ryM

anuf

actu

ring

334

Com

pute

r &El

ectr

onic

Man

ufac

turin

g

336

Tran

spor

tatio

nEq

uipm

ent

Man

ufac

turin

g

Perc

ent o

f Out

stan

ding

s

Percent Nonaccruing

2Q18 2Q19

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

311

Food

Man

ufac

turin

g

325

Chem

ical

Man

ufac

turin

g

332

Fabr

icat

edM

etal

Man

ufac

turi

ng

333

Mac

hine

ryM

anuf

actu

ring

334

Com

pute

r &El

ectr

onic

Man

ufac

turin

g

336

Tran

spor

tatio

nEq

uipm

ent

Man

ufac

turin

g

Perc

ent o

f Out

stan

ding

s

Percent Past Due 30 Days or More

2Q18 2Q19



For the Manufacturing sector, weakness in industrial production and capacity utilization correlated with a slowdown in lending for this important industry segment.

Within Manufacturing, the largest outstanding balance decreases were seen for the subsectors focused on Computers/Electronics, Fabricated Metals, and Food.

Manufacturing’s contribution to total U.S. economic activity has declined substantially over the last several decades, although Manufacturing remains the largest industry concentration of C&I deal volume.

Compared with C&I averages, the Manufacturing sector displayed lower pricing and higher credit risk.

As of the most recent quarter, nonperforming loan levels (nonaccruals and delinquencies) remained low for the overall Manufacturing sector.

Manufacturing: Summary of Findings

40



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Appendix



How Do We Define “Best”?

Balance GrowthPercent change in outstandings. Is there positive growth momentum in the industry or region? Are banks getting

their fair share of wallet?

The three criteria listed below are used to evaluate industry and regional performance in the database. Segments in the top quartile for all three categories represent sustainable growth opportunities for banks.

Spread and Fee PricingIs spread and fee pricing above average for the industry or region, or rather is the segment showing

signs of pricing compression?

Credit RiskAre risk levels and default projections trending downward for the segment?

$



Pricing Dashboard Regional Breakout

All regional geographic reporting in today’s presentation is broken down into seven geographic regions, as illustrated below.



Industry Classification: Major Sector Groupings

Industry Sector NAICSAccommodation, Entertainment, & Food 71 Arts, Entertainment, & RecreationAccommodation, Entertainment, & Food 72 Accommodation & Food ServicesFinance & Management of Companies 52 Finance & InsuranceFinance & Management of Companies 55 Management of Companies & EnterprisesHealth Care 62 Health Care & Social AssistanceManufacturing 31 ManufacturingManufacturing 32 ManufacturingManufacturing 33 ManufacturingMining and Transportation 21 Mining, Quarrying, & Oil & Gas ExtractionMining and Transportation 48 Transportation & WarehousingMining and Transportation 49 Transportation & WarehousingOther 11 Agriculture, Forestry, Fishing & HuntingOther 22 UtilitiesOther 51 InformationOther 54 Professional, Scientific, & Technical ServicesOther 56 Administrative & Support & Waste Management & RemediationOther 61 Educational ServicesOther 81 Other Services (except Public Administration)Other 92 Public AdministrationRetail & Wholesale Trade 42 Wholesale TradeRetail & Wholesale Trade 44 Retail TradeRetail & Wholesale Trade 45 Retail Trade



RMA 10-Point Obligor Risk Rating Scale

Risk Key

Risk Rating

Risk Rating Category Definition and Criteria

1 Substantially Risk-Free

High Pass Borrowers of unquestioned credit standing at the pinnacle of credit quality. Basically, governments and central banks of major industrialized countries, a few major world-class banks, and a few multinational corporations.

2 Minimal Risk

High Pass Borrowers of the highest quality, presently and prospectively. Virtually no risk in lending to this class. Cash flows over at least five years demonstrate exceptionally large and/or stable margins of protection. Balance sheets are very conservative and strong with liquid assets. Projected cash flows, including anticipated credit extensions, exhibit strong trends in margins of protection, liquidity, and debt service coverage. Excellent asset quality and management. Access to world capital Markets under any conditions. Typically, large national companies with a significant share of a major, stable industry.

3 Modest Risk

High Pass Borrowers in the lower end of the high-quality range but with excellent prospects. Very good asset quality and liquidity; consistently strong debt capacity and coverage; very good management. The credit extension is considered definitely sound; however, elements may be present that suggest the borrower may not be free from temporary impairments some-time in the future. May have limited access to national capital Markets. Typically major regional companies in relatively stable industries.

4 Better than Average Risk

Moderate Pass

Borrowers in the high end of the medium range between borrowers who are definitely sound and those with minor risk characteristics. The margin of protection is good. Elements of strength are present in such areas as liquidity, stability of margins and cash flows, diversity of assets, and lack of dependence on one type of business. Reasonable access to capital Markets or bank financing is present; can always borrow at favorable rates and terms. Well-established regional and excellent local companies operating in a reasonably stable industry that may be moderately affected by the business cycle and moderately open to changes. Management and owners have unquestioned character, as demonstrated by repeated performance.

5 Average Risk

Moderate Pass

Borrowers with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality and liquidity; good debt capacity and coverage; and good management in critical positions. These companies have good margins of protection and will definitely qualify as attractive borrowers. These borrowers will be able to obtain similar financing from other financial institutions and can generally borrow at attractive rates and terms. A loss year or a somewhat declining earnings trend may occur, but borrowers have sufficient strength and financial flexibility to offset these issues. These are typically solid companies often operating in cyclical industries thatare somewhat vulnerable to change. Management and owners have unquestioned character. Depth of management may become an issue in a growing firm.




Risk Key

Risk Rating


6 Acceptable Risk

Low Pass Borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening Market fundamentals that indicate above-average risk. These borrowers generally have limited additional debt capacity and modest coverage and average or below average asset quality, margins, and Market share. Some management weakness exists. These borrowers should be able to obtain similar financing with comparable terms or somewhat worse, from other banks, but that ability may diminish in difficult economic times. Also, borrowers who are currently performing as agreed but could be adversely affected by such developing factors as deteriorating industry conditions, operating problems, pending litigation of a significant nature, or declining collateral quality/adequacy, and so forth. Companies with average or smaller Market shares operating in a cyclical or declining industry. Management and owners have good character, with no basis for questions.

7 Special Mention (Potential Weakness)

Criticized –Classified

Borrowers who exhibit potential credit weaknesses or downward trends deserving bank management’s close attention. If not checked or corrected, these trends will weaken the bank’s asset and position. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification. Included in special mention assets could be turnaround situations, as well as those borrowers previously rated 4–6 who have shown deterioration, for whatever reason, indicating a downgrading from the better categories. Typically companies in start-up or deteriorating industries or with a poor and declining Market share in an average industry. An element of asset quality, financial flexibility, or management is below average. Management and owners may have limited depth and backup. Borrowers who have been or would normally be categorized special mention by regulatory authorities.

8 Substandard (Definite Weakness – Loss Unlikely)


Borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Management skills are questionable with readily identifiable voids. Borrowers that have been or would normally be classified substandard by regulatory authorities.




Risk Key

Risk Rating


9 Doubtful (Partial Loss Probable)


Borrowers classified doubtful have the weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses are deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Reserves are generally established to provide for these uncertainties. Management has a demonstrated history of failing to live up to agreements, unethical or dishonest business practices, bankruptcy, and/or conviction on criminal charges.

10 Loss (Definite Loss)


Borrowers deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. This classification does not mean that the loans have absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be effected in the future.

Additional FeaturesDelivering Market Data



AFS will work with the bank to define the appropriate segmentation criteria and level of granularity. This can be used for integration into other systems at the bank.

Delivering Market Data: Simple Pricing Grid

Min/Median/Max/Avg of Banks in MarketSegmentation Criteria

Sample data for illustration purposes only.

Region Collateral Pricing Index Product

New & Renewed

FlagTerm Deal Size EL Number of

Observations

Bank Minimum

LIBOR Equivalent

Spread

Bank Median LIBOR

Equivalent Spread

Bank Maximum

LIBOR Equivalent

Spread

Market Average

LIBOR Equivalent

Spread

South Secured Re Prime Line of Credit New <= 1 Year $100,000-$249,999 4.0% < 8.0% 42 3.58 3.70 4.01 3.70

Eastern Midwest Secured No Fixed Line of Credit New 2-5 Years $5,000,000-$24,999,999 4.0% < 8.0% 20 2.03 2.03 2.03 2.03

South Secured No Prime Line of Credit New 5-10 Years <$100,000 4.0% < 8.0% 18 5.64 5.64 5.64 5.64

Eastern Midwest Secured No Fixed Line of Credit New 1-2 Years $5,000,000-$24,999,999 4.0% < 8.0% 16 2.16 2.16 2.16 2.16

Eastern Midwest Secured No Fixed Line of Credit New 2-5 Years <$100,000 4.0% < 8.0% 15 2.09 2.09 2.09 2.09

Eastern Midwest Unsecured LIBOR Line of Credit New <= 1 Year $50,000,000+ 4.0% < 8.0% 14 2.50 2.50 2.50 2.50

South Secured No Fixed Term/Time Loan New 5-10 Years <$100,000 4.0% < 8.0% 14 4.25 5.90 7.55 4.30

Middle Atlantic Secured Re Prime Line of Credit New <= 1 Year $100,000-$249,999 4.0% < 8.0% 9 3.77 3.77 3.77 3.77

Eastern Midwest Secured No Fixed Line of Credit New <= 1 Year $5,000,000-$24,999,999 4.0% < 8.0% 7 2.00 2.00 2.00 2.00

South Secured No Fixed Term/Time Loan New 2-5 Years <$100,000 4.0% < 8.0% 7 4.03 4.03 4.03 4.03

South Secured No Prime Line of Credit New Unknown/ <$100,000 4.0% < 8.0% 7 5.85 5.85 5.85 5.85

Middle Atlantic Secured Re LIBOR Term/Time Loan New <= 1 Year $1,000,000-$4,999,999 4.0% < 8.0% 6 4.00 4.00 4.00 4.00

South Secured Re LIBOR Term/Time Loan New 1-2 Years $5,000,000-$24,999,999 4.0% < 8.0% 6 3.50 3.50 3.50 3.50

Middle Atlantic Secured No Prime Line of Credit New 5-10 Years <$100,000 4.0% < 8.0% 5 5.13 5.13 5.13 5.13

Western Midwest Secured Re Prime Line of Credit New <= 1 Year $250,000-$499,999 4.0% < 8.0% 5 2.93 2.93 2.93 2.93



PDB View – Includes the Upcoming Renewals Report.Business Purpose – Provides actionable data to support pricing decisions on loans coming up for renewal. Key Insights – Provides a total market equivalent price for each obligation based on shared loan characteristics. Allows the Bank to maximize

the revenue on each deal while still maintaining its competitive advantage. From an accountability perspective, shows how the pricing of each individual obligation compares to external standards.

Upcoming Renewals Report

For the borrower circled below, the Bank can reprice at more advantageous terms while still undercutting its competitors.




For enforcement of policy, reporting on all New and recently Renewed deals provides an audit of pricing exceptions.

Pricing Performance: Recent New and Renewed Deals


Documents

AFS Best Practices Leadership Council Webinar Series Presents...Oct 31, 2019 · Commercial Loan Market Overview: September 2019. Source: AFS Pricing Dashboard – September 2019