September 2017| Copyright 2017 by RMA The RMA Journal 35

CREDIT RISK BENCHMARKS

1ST QUARTER 2017

WE ARE PLEASED to provide first-quarter 2017 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 perfor-mance 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 includes analytical capabilities for portfolio segmenta-tion 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 seg-mentations 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 September 2017 36

C&I LOAN QUALITY

Percentage of C&I Loans Outstanding

The percentage of criticized C&I loans varied little in the first quarter of 2017 compared to the prior quarter, while the percentage of classified C&I loans declined. Shaded area indicates length of recession.

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

Following a significant decline in the prior quarter, the nondefaulted weighted- average probability of default ticked up in the first quarter of 2017. The weighted-average probability of default for all C&I loans (accruing and nonaccruing) was down slightly compared to the prior quarter. Shaded area indicates length of recession.

Note: 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

164Q

161Q

17

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

3.62%

7.04%

PERC

ENTA

GE

OF

OUT

STAN

DIN

GS

CRITICIZED

2.71%

1.94%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

September 2017| Copyright 2017 by RMA The RMA Journal 37

TOTAL LOAN GROWTH BY INDUSTRY SUBSECTOR

PERCENT NONACCRUAL BY INDUSTRY SUBSECTOR

GROWTH IN OUTSTANDINGS: DEC. 2016 TO MARCH 2017ALL LOAN TYPES

1.94%

This chart ranks the 20 largest three-digit NAICS industry subsectors in descending order according to their 1Q17 quarter-over-quarter C&I loan growth rates. Industries shaded blue represent the top quartile of this group.

Note: The 20 subsectors in this chart represent the largest concentrations of loan outstanding balances in the RAS database.

4.5%

2.6% 2.6%

1.3% 0.9% 0.7% 0.4% 0.2% 0.1%

-0.2% -0.2% -0.8% -1.0% -1.2%

-2.2% -2.3% -2.5%

-3.6%

-9.3%

-10.9%

525

Fund

s, T

rust

s

& F

inan

cial

Veh

icle

s

424

Mer

chan

t W

hole

sale

rs, N

ondu

rabl

e

721

Acc

omm

odat

ion

622

Hos

pita

ls

623

Nur

sing

C

are

Faci

litie

s

522

Cre

dit

Inte

rmed

iatio

n

441

Mot

or V

ehic

le

& P

arts

Dea

lers

561

Adm

inis

trat

ive

&

Sup

port

Ser

vice

s

722

Food

Ser

vice

s

& D

rinki

ng P

lace

s

523

Secu

ritie

s &

C

omm

odity

Con

trac

ts

423

Mer

chan

t W

hole

sale

rs, D

urab

le

813

Rel

igio

us &

C

ivic

Org

aniz

atio

ns

531

Rea

l Est

ate

621

Am

bula

tory

H

ealth

Car

e Se

rvic

es

221

Util

ities

541

Prof

essi

onal

, Sc

ient

ific

& T

ech

611

Educ

atio

nal

Serv

ices

532

Ren

tal &

Le

asin

g Se

rvic

es

211

Oil

& G

as E

xtra

ctio

n

334

Com

pute

r &

Elec

tron

ic M

anuf

actu

ring

525

Fund

s, T

rust

s &

Fina

ncia

l Veh

icle

s

424

Mer

chan

t Who

lesa

lers

, Non

dura

ble

721

Acco

mm

odat

ion

622

Hosp

itals

623

Nur

sing

Car

e Fa

cilit

ies

522

Cred

it In

term

edia

tion

441

Mot

or V

ehic

le &

Par

ts D

eale

rs

561

Adm

inis

trat

ive

& Su

ppor

t Ser

vice

s

722

Food

Ser

vice

s &

Drin

king

Pla

ces

523

Secu

ritie

s &

Com

mod

ity C

ontr

acts

423

Mer

chan

t Who

lesa

lers

, Dur

able

813

Relig

ious

& C

ivic

Org

aniz

atio

ns

531

Real

Est

ate

621

Ambu

lato

ry H

ealth

Car

e Se

rvic

es

221

Utilit

ies

541

Prof

essi

onal

, Sci

entifi

c &

Tech

611

Educ

atio

nal S

ervi

ces

532

Rent

al &

Lea

sing

Ser

vice

s

211

Oil

& G

as E

xtra

ctio

n

334

Com

pute

r &

Elec

troni

c M

anuf

actu

ring

4.5%

2.6% 2.6%1.3% 0.9% 0.7% 0.4% 0.2% 0.1%

-0.2% -0.2% -0.8% -1.0% -1.2%-2.2% -3.2% -2.5%

-3.6%

-9.3%

-10.9%

PERCENT NONACCRUAL: FIRST QUARTER 2017ALL LOAN TYPES

525

Fund

s, T

rust

s

& F

inan

cial

Veh

icle

s

424

Mer

chan

t W

hole

sale

rs,

Non

dura

ble

721

Acc

omm

odat

ion

622

Hos

pita

ls

623

Nur

sing

C

are

Faci

litie

s

522

Cre

dit

Inte

rmed

iatio

n

441

Mot

or V

ehic

le

& P

arts

Dea

lers

561

Adm

inis

trat

ive

&

Sup

port

Ser

vice

s

722

Food

Ser

vice

s

& D

rinki

ng P

lace

s

523

Secu

ritie

s &

C

omm

odity

Con

trac

ts

423

Mer

chan

t W

hole

sale

rs, D

urab

le

813

Rel

igio

us &

C

ivic

Org

aniz

atio

ns

531

Rea

l Est

ate

621

Am

bula

tory

H

ealth

Car

e Se

rvic

es

221

Util

ities

541

Prof

essi

onal

, Sc

ient

ific

& T

ech

611

Educ

atio

nal

Serv

ices

532

Ren

tal &

Le

asin

g Se

rvic

es

211

Oil

& G

as E

xtra

ctio

n

334

Com

pute

r &

Elec

tron

ic

Man

ufac

turin

g

This chart presents the 1Q17 nonaccrual rates for the same industry subsectors listed on the total loan growth chart above. In general, the subsectors with the highest rates of total loan growth, represented by the blue and green bars, display lower nonaccrual rates compared with the average C&I industry.

Note: The 20 subsectors in this chart represent the largest concentrations of loan outstanding balances in the RAS database.

525

Fund

s, T

rust

s &

Fina

ncia

l Veh

icle

s

424

Mer

chan

t Who

lesa

lers

, Non

dura

ble

721

Acco

mm

odat

ion

622

Hosp

itals

623

Nur

sing

Car

e Fa

cilit

ies

522

Cred

it In

term

edia

tion

441

Mot

or V

ehic

le &

Par

ts D

eale

rs

561

Adm

inis

trat

ive

& Su

ppor

t Ser

vice

s

722

Food

Ser

vice

s &

Drin

king

Pla

ces

523

Secu

ritie

s &

Com

mod

ity C

ontr

acts

423

Mer

chan

t Who

lesa

lers

, Dur

able

813

Relig

ious

& C

ivic

Org

aniz

atio

ns

531

Real

Est

ate

621

Ambu

lato

ry H

ealth

Car

e Se

rvic

es

221

Utilit

ies

541

Prof

essi

onal

, Sci

entifi

c &

Tech

611

Educ

atio

nal S

ervi

ces

532

Rent

al &

Lea

sing

Ser

vice

s

211

Oil

& G

as E

xtra

ctio

n

334

Com

pute

r &

Elec

troni

c M

anuf

actu

ring

0.2%

0.6%

0.2% 0.3%

0.5%

0.1%0.2%

0.8%

0.5%

0.2%

1.5%

0.8%

1.0% 1.0%

1.4%

0.8% 0.8%

0.2%

19.1%

0.2%

The RMA Journal September 2017 38

CRE: PERCENT NONACCRUAL BY PROPERTY TYPE

CREDIT QUALITY COMPARISON BY MARKET SEGMENT

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.

PERCENTAGE OF TOTAL EXPECTED LOSS

PERCENTAGE OF EXPOSURE

Agric

ultur

e, Fo

restry

, Fis

hing &

Hunti

ng

Minin

g, Oil

& Ga

s

Utilit

ies

Manu

factur

ing(Fo

od, B

evera

ge, A

ppare

l)Ma

nufac

turing

(Woo

d, Pa

per,

Plasti

c)Ma

nufac

turing

(Meta

ls, M

achin

ery, E

lectri

c)

Retai

l Trad

e(M

otor,

Electr

ic, Bu

ilding

)

Retai

l Trad

e(H

obby

, Gen

eral, M

isc.)

Trans

porta

tion

(Air,

Water

, Tru

ck)

Trans

porta

tion

(Pos

tal, C

ourie

r)

Inform

ation

Finan

ce &

Insu

rance

Real

Estat

e

Mana

geme

nt of

Comp

anies

& En

terpri

ses

Profe

ssion

al, Sc

ientif

ic &

Tech

nical

Servi

ces

Admi

n., Su

pport

, Was

te Ma

nage

ment

& Re

media

tion

Educ

ation

al Se

rvice

s

Healt

h Care

& So

cial A

ssist

ance

Arts,

Enter

tainm

ent &

Re

creati

onAc

comm

odati

ons

& Fo

od Se

rvice

s

Othe

r Serv

ices

Publi

c Adm

inistr

ation

Whole

sale

Trade

12.5%

10%

7.5%

5%

2.5%

0%

The percentage of CRE loans on nonaccrual declined in the first quarter of 2017, marking the 22nd consecutive quarter of improvement in the CRE nonaccrual rate. From a property type perspective, the decrease in CRE nonaccruals was driven predominantly by the residential segment.

ALL RETAIL

RESIDENTIAL (1-4 FAMILY)

ALL PROPERTY TYPES

MULTIFAMILY

OFFICE

INDUSTRIAL

Note: The five property types in this chart represent the largest segments in terms of total CRE outstanding balances in the RAS database.

PERC

ENT

NO

NAC

CRUI

NG

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

0.56%

0.53%

0.46%

0.35%

0.26%

0.21%

September 2017| Copyright 2017 by RMA The RMA Journal 39

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 0.45% 0.18% 0.18% 0.42%

Percentage on Nonaccrual 1.08% 1.46% 0.60% 0.53%

Percentage Noncurrent(90 Days + Nonaccrual)

1.15% 1.47% 0.75% 0.55%

Weighted-Average Risk Rating (10 pt RMA Scale)

5.12 4.64 4.11 5.05

Weighted-Average PD 3.05% 2.79% 1.88% 3.25%

Weighted-Average PD: Nondefaulted Portfolio

2.29% 1.92% 1.48% 2.91%

Percentage Classified 5.13% 3.45% 0.93% 5.26%

Percentage Criticized 9.27% 5.99% 4.86% 7.42%

LOC Utilization Rate 53.49% 47.80% 48.64% 66.45%

PROBLEM C&I LOANS BY STATE

Criticized Loans (%)

All geography-based data in the Risk Analysis Service is based on the ZIP Code of the borrower (for C&I loans) or the property (for Commercial Real Estate).

The reduction in criticized loan balances in the first quarter of 2017 was driven by a relatively small number of states, with California displaying a large quarter-over-quarter decline in criticized loans. For C&I loans, credit quality profiles vary both across and within states. For example, within Pennsylvania, the criticized loan ratio for Philadelphia was better than the national average, whereas Pittsburgh, Allentown, Lancaster, and York all reported criticized loan rates well above the national average.

CRE: PERCENT NONACCRUAL BY PROPERTY TYPE

BETTER THAN AVG.

WORSE THAN AVG.

criticiZeD ratiO, usa = 7.04%

9.55%Wa

10.40%Or

6.03%ca

10.04%iD

9.85%nv

5.58%aZ

10.16%ut

40.90%WY

15.10%nm

11.90%ks

14.21%Ok

9.38%mi

6.69%kY

4.31%tn

4.84%FL

4.99%sc

1.51%me

1.02%ak

8.25%hi

8.12%mt

7.36%cO

13.06%tX

13.55%nD

9.45%sD

5.73%ne

8.95%mn

11.24%ia

6.14%mO

7.25%ar

10.06%La

11.92%Wi

8.75%iL

5.61%ms

9.26%in

6.64%aL 3.81%

ga

4.20%nc

2.16%va

16.23%Wv

9.11%Oh

7.99%Pa

6.21%nY

3.52%nh

3.09%vt

4.81%ma9.03%

ri6.27%

ct10.87%nJ

5.60%De

3.08%Dc4.87%

mD