First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013...

21
1 A First Look at the Financial Performance of Banks* Headquartered within “12L” (the 12th Federal Reserve District) Based on Preliminary 3Q2013 Call & Income Report Data November 27, 2013 First Glance 12L (3Q13) Banking Recovery – Slow and Steady http://www.frbsf.org/banking-supervision/publications/ * The main section of this report addresses the performance and condition of 12 th District commercial banks. District industrial banks and savings institutions are covered separately in Section 3. This report has been prepared to provide a quick snapshot of banking conditions for use primarily by bank supervisors and bankers. Analysis and opinions are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco. Authors: Gary Palmer - [email protected] Press Inquiries: please contact Media Relations at Colin Perez - [email protected] http://www.frbsf.org/our-district/press/ Contributors: Cynthia Course, David Doyle, Martin Karpuk, Grant LaCorte, Gene Lilienthal, George Mori, Judy Plock, Marty Tunnell, Wally Young Alaska Hawaii Washington Oregon California Nevada Utah Arizona Idaho 12 th District

Transcript of First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013...

Page 1: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

1

A First Look at the Financial Performance of Banks* Headquartered within “12L”

(the 12th Federal Reserve District)

Based on Preliminary 3Q2013 Call & Income Report Data

November 27, 2013

First Glance 12L (3Q13)Banking Recovery – Slow and Steady

http://www.frbsf.org/banking-supervision/publications/

* The main section of this report addresses the performance and condition of 12th District commercial banks. District industrial banks and savings institutions are covered separately in Section 3.

This report has been prepared to provide a quick snapshot of banking conditions for use primarily by bank supervisors and bankers. Analysis and opinions are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco.

Authors: Gary Palmer - [email protected] Press Inquiries: please contact Media Relations at Colin Perez - [email protected] http://www.frbsf.org/our-district/press/

Contributors: Cynthia Course, David Doyle, Martin Karpuk, Grant LaCorte, Gene Lilienthal, George Mori, Judy Plock, Marty Tunnell, Wally Young

Alaska

Hawaii

Washington

Oregon

California

NevadaUtah

Arizona

Idaho

12th District

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First Glance 12L – Nov. 2013 2

ContentsFirst Glance 12L Summary – Banking Recovery – Slow and Steady Slides 3-4

Section 1: Economy Slides 5-9Section 2: Commercial Bank Performance

EarningsCredit QualityCapital AdequacyLiquidityLoan GrowthInterest Rate RiskRegulatory Ratings

Slides 10-4611-2122-2829-3132-3334-3940-4243-46

Section 3: Savings Institution and Industrial Bank Performance Slides 47-51

Section 4: Bank Supervisors’ Hot Topics Slides 52-56

Appendix 1: 12th District Bank Aggregate Net Charge-Off Rates Slide 58

Appendix 2: Banks Covered in this Report Slide 59

Appendix 3: Technical Information Slide 60

First Glance 12L (3Q13)

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First Glance 12L – Nov. 2013 3

First Glance 12L - Third Quarter 2013Banking Recovery – Slow and Steady

Capital & Liquidity—Peaking: District bank capital ratios and balance sheetliquidity ratios remain strong, although both appear at a turning point asbanks’ asset mix is changing more toward loans from securities andtemporary investments (Slides 29-33).

Credit Quality—Steady Recovery: The 12th District bank average noncurrentloan & lease rate continued to drop to a level nearly matching the nationalaverage while early-delinquency rates remained at 20+ year lows (Slide 22).Larger banks have lowered noncurrent rates at a faster pace than small banksoverall (Slide 23). The average net charge-off rate among District bankscontinued to trend down to 0.2% (year-to-date annualized) through 9/2013.This marks the lowest rate since 2007 (Slide 28).

Loan Growth—Accelerating: Average loan growth in the District climbed to nearly 7% YoY, double the national average, but still well under the 14% average rate experienced from 2001-2008. The strongest loan growth rates were at $1B-$10B sized banks, which grew by 12% on average (Slide 34; right). Banks in good overall condition, based on their CAMELS ratings, also had a strong pace of loan growth at 11% on average (Slide 35).

Profitability—Slow Improvement: District earnings have yet to recover to thepre-crisis levels, though year-to-date average ROAA was slightly improvedfrom a year ago (Slide 11; right). Earnings in most District states showed animprovement year-over-year as well (Slide 12). Record low loss provisionscontinued to contribute positively to earnings with roughly half of all Districtbanks taking zero or negative provisions thus far in 2013 (Slide 14). Fallingnet interest margins remained an impediment to a full earnings recovery(Slide 19). Despite a challenging environment, average overhead ratiosedged down while noninterest revenue ratios grew slightly, helping to offsetlower NIMs (Slides 17-18).

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First Glance 12L – Nov. 2013

First Glance 12L – Third Quarter 2013 CAMELS* Ratings—Rating Components Reflect Steady Recovery: Average

ratings in every CAMELS component have continued to improve with themost improvement over the past year in Asset Quality and the least inSensitivity to Market Risk (slide 45; right). The percentage of District banksin less-than-satisfactory overall condition (CAMELS Composite Ratings of 3,4, or 5) continued to fall, but at 33%, this remained well above the 18%percentage for the nation (Slide 44).

Overall—Slow and Steady Recovery: The positive trends in recent quartersfor District banks continued into the third quarter 2013, particularly in theareas of credit quality and loan growth. However, earnings remained underpressure from the low interest rate environment and relatively high overheadexpenses. Although overall trends remain positive, District banks continueto face more risks and challenges going forward (e.g., see Bank Supervisors’Hot Topics).

Hot Topics: The following are some supervisory hot topics—issues on bank supervisors’ radar screens that tend tobe a focus of attention during on-site examinations and off-site monitoring. These issues, starting on Slide 52, arenot an exhaustive list of Hot Topics and are not prioritized in any way.

Bank Supervisors’ Hot Topics

4

* CAMELS = rating system used by bank supervisors: Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Market Risk.

1. Interest Rate Risk2. Cybersecurity3. Leveraged Lending4. Underwriting Risk in Rapid Loan Growth Areas5. Managing Outsourcing Risks6. Capital Planning / Stress Testing Expectations7. Model Risk Management8. Maintaining Compliance with Laws and Regulations

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First Glance 12L – Nov. 2013 5

Section 1Economic Highlights

This section provides a high-level look at economic conditions focusing on degree of recovery from the recession. It covers state-by-state job growth

and home price changes, two key metrics that are closely related with banking conditions.

FRB-SF

Additional 12th District economic trends:http://www.frbsf.org/economic-research/files/SFFedEconomicTrends.pdf

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First Glance 12L – Nov. 2013 6

12th District JobsThe 12th District has recovered 62% of the jobs lost during the recession,

compared to 79% for the nation.

24.8

24.5

26.7

24.4

25.8

22.0

23.0

24.0

25.0

26.0

8/00

8/01

8/02

8/03

8/04

8/05

8/06

8/07

8/08

8/09

8/10

8/11

8/12

8/13

2.3 million jobs lost (-8.7%)

Total Nonfarm Jobs within the 12th District (in Millions)

1.4 million jobs added

Source: Bureau of Labor Statistics, Haver Analytics

% of Jobs Lost

% of Lost Jobs Recovered

YoY Job Growth

District 8.7% 62% 1.7%Nation 6.3% 79% 1.7%

FRB-SF

First Glance 12L – Nov. 2013

Nonfarm Jobs – % Change from Pre-Recession Peaks through August 2013

Employment Situation in the 12th DistrictOnly two states have recovered all jobs lost in the recession – AK and UT; another

five have recovered more than half the jobs they lost – CA, HI, ID, OR, and WA.

FRB-SF The pre-recession peak and trough dates are unique for each state based on monthly nonfarm jobs data. Sources: Bureau of Labor Statistics, Haver Analytics; data through August 2013

7

-1.1%

-7.3% -6.7% -7.2%-8.6% -9.0% -8.4%

-11.7%

-14.4%

-6.3%

2.9%1.6%

-1.1%-2.4% -2.7% -3.6% -4.0%

-6.5%

-10.0%

-1.4%

-16%

-12%

-8%

-4%

0%

4%

AK UT WA HI ID CA OR AZ NV US

Peak-to-Trough Peak-to-Now

First Glance 12L – Nov. 2013 8

Housing Recovery: Tailwind for District BanksMountain and Pacific Region home price declines were more severe than

most parts of the Nation, but recovery has gained momentum.

Median Home Price Indices

Source: CoreLogic Home Price Indices, indexed to 100 at 6/09; Mountain: AZ, ID, MT, NM, NV, UT, WY; Pacific: AK, CA, HI, OR, WA

% Chg 1-year

FRB-SF

1-Year Home Price Change by State(September 2013)

80

90

100

110

120

130

140

150

Sep

-03

Sep

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Se p

-13

Pacific Mountain Nation

21%14%12%

First Glance 12L – Nov. 2013

CoreLogic Home Price Indices – % Change from Each State’s Pre-Recession Peak through September 2013

Housing Situation in the 12th DistrictHome prices climbed significantly since 2011, but median prices remain

below pre-crisis peaks in all states except Alaska.

FRB-SF The pre-recession peak and trough dates are unique for each state based on monthly HPI; Source: CoreLogic Home Price Indices for all single-family homes through September 2013 9

-10%

-27%-31% -32% -31%

-40% -43%

-51%-59%

-33%

2%

-9%-15% -15% -16% -19% -22%

-32%

-41%

-17%

-60%

-50%

-40%

-30%

-20%

-10%

0%

AK HI UT OR WA ID CA AZ NV US

Peak-to-Trough Peak-to-Now

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First Glance 12L – Nov. 2013 10

Section 2Commercial Bank Performance

Slides in this section focus on trends among the 376 commercial banks headquartered within the 12th Federal Reserve District.

See Section 3 for coverage of savings institutions and industrial banks.

FRB-SF

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First Glance 12L – Nov. 2013 11

Average Return on Average Assets – Annualized (%)

1.10%1.40%

-1.00%

0.69% 0.67%0.79%

1.09%

1.17%

0.44%

0.86% 0.90% 0.88%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9/12

9/13

District Nation

- - - 1995-2005 District Average

1.15%

Earnings: District Profitability Improving Slowly; Still Well Below Pre-Crisis Averages

FRB-SF Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 data

YTD annualized

First Glance 12L – Nov. 2013

Average Return on Average Assets YTD Annualized (%)

Average ROAAs Improved in 7 of 9 StatesNV and AZ banks had the strongest turnaround.

FRB-SF Based on commercial banks, excluding De Novos; trimmed mean ratios, preliminary 9/30/13 data -*NV: excludes credit card and zero-loan banks 12

1.15%

0.94%0.85%0.79%0.74% 0.72% 0.69%0.67%

0.56%

0.88%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

UT AK HI CA OR AZ WA *NV ID US

9/12 9/13

First Glance 12L – Nov. 2013

Based on commercial banks, excluding De Novos; trimmed means; Sept. ratios are year-to-date annualized; preliminary 9/30/13 data 13

1.3%

-1.0%

0.6% 0.5% 0.7%1.5%

-1.1%

1.2% 1.3% 1.1%

1.7%

0.3%1.1% 1.1% 1.1%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

'05

'06

'07

'08

'09

'10

'11

'12

9/12

9/13

Small (< $1B) Mid-Sized ($1B - $10B) Large (> $10B)

FRB-SF

Large & Mid-Sized Banks Remained Most Profitable The Small Bank average ROAA climbed 20 basis points in the past year.

Average Return on Average Assets – 12th District Commercial Banks (%)

First Glance 12L – Nov. 2013 14

0.5%

2.0%

0.2%0.1%

0.2%

0.7%

0.2%

0.1%0.0

0.4

0.8

1.2

1.6

2.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9/12

9/13

District Banks

Nationwide Banks

Loan Loss Provisions/Average Assets (% - Adjusted Averages)

Boosting Earnings, Loan Loss Provisions Declined to New 20+ Year Lows

Close to 50% of District banks took zero or negative provisions year-to-date

FRB-SF Based on commercial banks, excluding De Novos; trimmed means; September ratios are annualized; preliminary 9/30/13 data

Through 9/2013 YTD, Percent of Commercial Banks with:

Dist. U.S.Negative loss

provisions 14% 6%

Zero loss provisions 35% 23%Lowered ALLL / Loan

Ratios 66% 56%

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First Glance 12L – Nov. 2013

Based on commercial banks, excluding De Novos; trimmed means; noncurrent = 90+ days past due or on nonaccrual; preliminary 9/30/13 15

1.5% 1.2%

2.7%2.1%

2.9%

7.0%

0.7% 1.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 9/13

ALLL / Total Loans + Leases

ALLL / Noncurrent Loans

FRB-SF

ALLL a Relatively High 2.1% of Loans on Average Despite Declines in Provisions

Average Allowance for Loan and Lease Losses Coverage Ratios – 12th Dist. Bks From 2004-2006,

noncurrent loans were close to zero, causing the ALLL/noncurrents

ratio to balloon

First Glance 12L – Nov. 2013 16

Aggregate Allowance for Loan & Lease Losses / Loans & Leases (%) 9/30/13

3.9%

3.2%

2.3% 2.3%

1.6% 1.5%2.0%2.2%

5.5%

1.1% 1.0%

1.9% 1.9%1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Constr. & Land Devel.

Credit Cards

Commc'l & Indust.

Other Consumer

ResidentialRE

Commc'lRE

Total

District Mid-Sized ($1B-$10B)

District Large (>$10B)

New Reporting of ALLL by Loan Type: Reserving Reflects Credit Risk by Loan Type

Reserving is Considerably Higher at Mid-Sized Banks for C&I, Other Consumer, and C&LD

FRB-SF Based on aggregate data for commercial banks, preliminary 9/30/13 data. Note: banks with assets <$1B do not report this information

First Glance 12L – Nov. 2013 17

Noninterest Income (% of average assets)

FRB-SF

Noninterest Expense Ratios Dropped Slightly (for small & mid-sized banks) While Noninterest Income Ratios Grew Slightly

(including at small banks)

Based on commercial banks, excluding De Novos; trimmed means; September ratios are YTD annualized; preliminary 9/30/13 data

1.05%

0.54%

0.65% 0.65%0.67%0.81%

0.63%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9/12

9/13

District Nation

Average Noninterest Income YTD AnnualizedDistrict Group 9/12 9/13Small (<$1B) 0.61% 0.64%

Mid-Sized ($1B-$10B) 0.81% 0.78%Large (>$10B) 0.82% 0.83%

Noninterest Expense (% of average assets)

3.85%

3.34%3.53% 3.49%

3.40%

3.07%

2.90%

2.0%

2.5%

3.0%

3.5%

4.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9/12

9/13

District Nation

Average Noninterest Expense YTD AnnualizedDistrict Group 9/12 9/13Small (<$1B) 3.64% 3.56%

Mid-Sized ($1B-$10B) 3.13% 2.96%Large (>$10B) 2.25% 2.37%

First Glance 12L – Nov. 2013

63¢59¢

83¢76¢ 75¢

61¢

68¢ 69¢ 70¢

25

35

45

55

65

75

85

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 9/12 9/13

District Banks Nationwide Banks

FRB-SF

18

Average District Bank Efficiency Measure Remained Elevated, but Has Improved Slowly

Large bank ratios remain lower (i.e., better), but they’re moving in the wrong direction.District Banks’ Efficiency Measures - overhead / (net interest income + noninterest income) (this metric measures the cost to produce $1 of revenue)

Average District Efficiency by Bank Size9/12 9/13

Small (<$1B) 80¢ 79¢Mid ($1B-$10B) 65¢ 64¢Large (>$10B) 52¢ 58¢

Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13; year-to-date annualized data

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First Glance 12L – Nov. 2013 19

FRB-SF

However, District Bank Net Interest Margins Have Weakened in 2013 Interest rate environment remains challenging.

Net Interest Income (tax equiv) / Average Earning Assets (NIM) 12th District Commercial Banks

5.3%

4.0%

4.0% 4.1% 4.0%

4.8%

3.7%

4.0% 4.1%4.0%

4.5%

3.7% 3.4% 3.6% 3.4%

3.0%

3.5%

4.0%

4.5%

5.0%

'04

'05

'06

'07

'08

'09

'10

'11

'12

9/13

3Q12

4Q12

1Q13

2Q13

3Q13

Small (< $1B) Mid-Sized ($1B-$10B) Large (> $10B)

Average NIM YTD Annualized – All Banks

9/12 9/13District 4.1% 3.9%Nation 3.9% 3.7%

Based on commercial banks, excluding De Novos; trimmed means; quarterly ratios are annualized; 9/13 is YTD annualized; preliminary 9/30/13 data

Quarterly DataAnnual Data YTD

First Glance 12L – Nov. 2013

Yields – Nationwide Banks (%)

Loan & Investment Securities Yields Continued to FallLarge banks have lower loan yields and higher securities yields than small banks.

FRB-SF Based on aggregate nationwide commercial and industrial banks; preliminary 9/30/13 data 20

2.51%

5.47%

5.60%

5.57%

7.24%

2.51%

3.59%

4.26%

4.38%

5.17%

2.15%5.10%

5.33%5.23%

6.51%

2.28%3.35%

3.82%4.17%

4.69%

2.0% 4.0% 6.0%

Investment Securities

Agriculture

C&I

Real Estate

Consumer

Investment Securities

Agriculture

C&I

Real Estate

Consumer

9/139/12

Banks with Assets > $10B

Banks with Assets < $10B

Average Loan Yields YTD

12th Dist. Banks 9/13 YoY Chg

Large (>$10B) 4.83% -31bp

Mid ($1B-$10B) 5.34% -45bp

Small (<$1B) 5.72% -25bpCommercial banks, excluding

De Novos; trimmed means

First Glance 12L – Nov. 2013 21

Core Profitability (Pre-tax pre-provision income/average assets)

FRB-SF

Core Profitability Flat in 2013 on AverageLevels for Small Banks Remain Lackluster But Up, While Other Groups Drop

Based on commercial banks, excluding De Novos; trimmed means; September ratios are YTD annualized; preliminary 9/30/13 data

2.16%

0.79%1.08%

1.11%1.10%

1.17% 1.25% 1.30%1.20%

0.0%

0.5%

1.0%

1.5%

2.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9/12

9/13

District Nation

Average District Core Profitability YTD Annualized

Group 9/12 9/13Small (<$1B) 0.93% 0.96%

Mid ($1B-$10B) 1.65% 1.58%Large (>$10B) 2.02% 1.75%

First Glance 12L – Nov. 2013

0.8%

4.5%

1.7%0.9%

2.4%

1.4%

0.0

1.0

2.0

3.0

4.0

Sep

-01

Sep

-02

Sep

-03

Sep

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

District Nation

22

FRB-SF

Credit Quality: Average 12th District Bank Noncurrent Rate Close to the Nationwide Rate

30-89 day past due rate below pre-crisis lowsAverage Noncurrent Loans + Leases / Total Loans + Leases

Based on commercial banks, excluding De Novos; trimmed means; Noncurrent = 90 Days past due or on nonaccrual; preliminary 9/30/13 data

0.9% 1.3%0.3%

1.3% 1.4%0.8%

0.0

1.0

2.0

3.0

4.0

Sep

-01

Sep

-02

Sep

-03

Sep

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

District Nation

Average Past Due 30-89 Day Loans + Leases /Total Loans + Leases

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First Glance 12L – Nov. 2013

Based on commercial banks, excluding De Novos; trimmed means; Noncurrent = 90+ Days past due or on nonaccrual; preliminary 9/30/13 data 23

1.8%

5.4%

1.3%

4.1%

1.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Small (< $1B) Mid-Sized ($1B - $10B) Large (> $10B)

FRB-SF

Noncurrent Rates Trending Down in All Size Groups; Small Banks Still Have Highest Rates

Average 12th District Bank Noncurrent Loan + Lease Rates (% of total loans + leases)

4.9%

First Glance 12L – Nov. 2013

1.4%

1.1%1.1%

0.1%0.1%

Dec

-12

Mar

-13

Jun-

13

Sep

-13

24

0.0%

1.0%

2.0%

3.0%

4.0%

Sep

-01

Sep

-02

Sep

-03

Sep

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

All Loans Nonfarm Nonresidential Single-fam/Multifamily Resid. C&I Consumer Ag

4.7%

Average 12th District Bank Noncurrent Rates (% of Total Loans + Leases)

FRB-SF Based on commercial banks excluding De Novos; trimmed means; Noncurrent = 90+ days past due or on nonaccrual; preliminary 9/30/13 data

Average Noncurrent Rates Improving Across All Major Loan Types Note: C&LD rates are shown in inset chart

3.1%0%

4%

8%

12%

16%

9/01 9/05 9/09 9/13

1.7%2.4%

2.6%

Quarterly DataData as of 9/30 each year

Const. & Land Development

15.6%

First Glance 12L – Nov. 2013

0.9%1.4%

2.3%

2.7%2.9%

3.4%2.5%

3.3%

5.4%

0.7%

0.8%

1.4%

1.6%

1.6%

1.7%

1.8%

2.1%

2.5%

0% 2% 4% 6%

HI

AK

UT

OR

WA

AZ

CA

ID

*NV

Sep-13 Sep-12

25

By State: Noncurrent Rates Dropped Most in Nevada and Arizona

Based on commercial banks, excl. De Novos; trimmed means; Noncurrent = 90+ days past due or on nonaccrual; preliminary 9/30/13 data.*NV: excludes credit card and zero-loan banks

Other High Noncurrent Rates09/12 09/13

GA 4.8% 3.3%FL 4.4% 2.8%SC 3.8% 2.5%MD 2.8% 2.3%NC 4.0% 2.2%

Nation 1.8% 1.4%

FRB-SF

Average 12th District Bank Noncurrent Loans + Leases / Total Loans + Leases

First Glance 12L – Nov. 2013 26

Average “Texas Ratios” Each State’s Recession Peak vs. Now

Peak* - Average 49%

Texas Ratio: noncurrent loans + foreclosed real estate / equity + allowance for loan and lease losses; *Peak ratios occurred at different times for each state (between 9/09 and 3/11); commercial bank trimmed means, excluding De Novos

Sept. 2013 – Average 14%

90% 0%

FRB-SF

Page 12: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013

1.1%0.7%

0.0

0.5

1.0

1.5

2.0

2.5

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Other Restructured Lns Noncurrent Restructured Lns

Troubled Debt Restructurings Continue Steady Decline

FRB-SF

27

12th District Bank Restructured Loans as a Percentage (%) of Total Loans

Based on commercial banks, excluding De Novos; trimmed means; Noncurrent = 90+ Days past due or on nonaccrual; preliminary 09/30/13 data

1.6%

2.5%

First Glance 12L – Nov. 2013 28

0.3%

2.1%

0.5%0.2%0.2%

0.7%

0.3%

0.2%0.0

0.4

0.8

1.2

1.6

2.0

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

9/12

9/13

Avg. NCO Rate - District Avg. NCO Rate - Nation

Average Ratio of Net Charge-Offs / Average Loans

Average District Bank Net Charge-Off Rate Has Dropped to its Lowest Since 2007

FRB-SFBased on commercial banks excluding De Novos; trimmed means; preliminary 9/30/13 data; September NCO Rates are year-to-date annualized

See Appendix 1 for Detailed Aggregate District Net Charge-Off Rates

YTD Annualized Ratios

First Glance 12L – Nov. 2013

Capital Adequacy: Average District Risk-Based Capital Ratios Edged Down in 2013

This was due to change in asset mix towards loans and away from lower-risk assets; the average tier 1 leverage ratio continued to rise

13.5% 13.0%

17.1%16.9%

15.5%14.5%

17.0%

9.4%

9.3%11.3%10.3%

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

District Total Risk-Based Capital Nation Total Risk-Based Capital District Tier 1 Leverage Nation Tier 1 Leverage

12th District Bank Average Capital Ratios (%)

29Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 dataFRB-SF

First Glance 12L – Nov. 2013

Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 data 30

12.0%

11.8%

15.6%

10.6%

10.1%

14.4%

9.4% 9.4%

14.1%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

Small (< $1B) Mid-Sized ($1B - $10B) Large (> $10B)

FRB-SF

Tier 1 Common Equity Ratios Appear to be at a Turning Point as Loan Growth Accelerates

Average District Bank Tier 1 Common Equity / Risk-Weighted Assets Ratios

Page 13: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 31

61%

39%28% 28%

36% 31% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

'08 '09 '10 '11 '12 9/12 9/13

Number of District Banks Paying Common Dividends Continued to Rise

Pct (and #) of District Banks that Paid a Common Stock Dividend

FRB-SF

(237)

(104)(140)(148)

Based on commercial banks, excluding De Novos; averages are trimmed means; preliminary 9/30/13 data

(103)

S-Corps vs. C-CorpsAt 9/30/13, there were 40 District S-Corps and 332 C-Corps (commercial banks only, excluding De Novos)

Sep. ’13 Data

Pct. that Paid Common

Divs.

Avg. Total Payout Ratio for those that Paid Divs.

C-Corp: 30% 55%S-Corp: 75% 64%

(118) (130)

First Glance 12L – Nov. 2013 32

Liquidity: Traditional Balance Sheet Liquidity Ratios Remain Strong

Loan growth has outpaced other earning asset growth thus far in 2013

66.4%

75.8%

64.8%

61.3%

66.7%

59.6%

50

55

60

65

70

75

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

9-13

District Nation

7.8%

5.0%

12.9%12.2%

7.8%

5.5%

8.2%

0

2

4

6

8

10

12

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

9-13

District Nation

Short-Term Investments/Assets (adjusted average %)

Loans & Leases/Assets (adjusted average %)

Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 data

FRB-SF

First Glance 12L – Nov. 2013 33

19.6%

34.4%

9.1% 9.1%17.1%

25.1%

8.3% 8.6%

0

5

10

15

20

25

30

35

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

District Nation

Average Bank Reliance on Noncore Funding Remains Low, But Rising at Large Banks

Noncore Liabilities / Assets (Adjusted Average %)

Noncore includes borrowed funds, brokered deposits and CDs>250K; Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 data

FRB-SF

Average District Noncore Liabilities/Assets by Bank Size

9/12 9/13

Small (<$1B) 8.5% 8.5%Mid ($1B-$10B) 10.3% 10.2%Large (>$10B) 16.9% 17.5%

First Glance 12L – Nov. 2013

17.9%

5.8%

21.6%

-7.0%

12.1%13.6%

1.1%

9.3%

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

'04

'05

'06

'07

'08

'09

'10

'11

'12

9-13

Small (<$1B) Mid-Sized ($1-10B) Large (>$10B)

FRB-SF

34

Based on commercial banks, excluding De Novos; large bank statistics prior to 2006 reflect nationwide data as there were too few District banks; trimmed means; preliminary 9/30/13 data

Loan Growth: Turnaround AcceleratedAvg. loan & lease growth 6.9% YoY with strongest growth at mid-sized banks

Average District Year-Over-Year Loan & Lease Growth Rates (%)

Average YoY Loan Growth Rates 9/12 9/13

All 12th District Banks 2.8% 6.9%All Banks Nationwide 1.2% 3.5%

- - - 2001-2008 District Bank Average: 14.1%

Page 14: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 35

12%

3% 5%2%

8%11%

6%

0%-3%

-7%

3%

4%

1%

-13%-15% -15%

-10%

-4%

-20%

-15%

-10%

-5%

0%

5%

10%

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

CAMELS 4 / 5

CAMELS 3

CAMELS 1 / 2

Loan Growth Rates – Year-over-YearAverages within CAMELS Rating Groups – 12th District Banks

Based on commercial banks, excluding De Novos; trimmed means; preliminary 9/30/13 data; CAMELS is the bank rating system used by regulators: 1=strong; 5 =poor

Loan Growth Rates Have Varied Depending on Bank Condition (i.e., by CAMELS Ratings)

FRB-SF

First Glance 12L – Nov. 2013Based on commercial banks excluding De Novos; trimmed means; preliminary 9/30/13 data

Loan Growth Rates Picked Up Across the WestAZ, CA, NV, & WA are in the top 10 nationwide for average loan growth

36

Nation: 3.5%District: 6.9%

12th District Average Year-Over-Year Loan Growth through June 2013

5.3%

FRB-SF

3.0%

First Glance 12L – Nov. 2013

8%

-3%0%

7%8%8%

11%12%

19%

-5% 0% 5% 10% 15%

All Loans

HomeEquity + Jr Lien

Construction & Land Dev

Consumer

1-4 Family First Lien

Nonfarm Nonresid

Ag + Farmland Secrd

Commercial & Industrial

Multifamily

37

Based on a panel of District commercial banks with assets <$100B; excludes banks with significant mergers, loan sales, or loan purchases over the period; preliminary 9/30/13 data

FRB-SF

CRE (Nonfarm NR)Owner-occupied 6%Nonowner-occupied: 9%

12th District Bank Aggregate Loan Growth Rates - 3Q13 Year-Over-Year

Switching to Loan Growth Aggregates for Bank <$200B: Multifamily and C&I Strongest YoY Growth;

C&LD and HELOC Weakest

First Glance 12L – Nov. 2013 38

12th District Bank Aggregate Loan GrowthSmall Banks

(<$1B)Mid-Sized Banks

($1B - $10B)Large Banks ($10B-$200B)

Loan Growth 9/12–9/13YoY

Growth Rate

Pct. of Total Ln Growth

YoYGrowth

Rate

Pct. of Total Ln Growth

YoYGrowth

Rate

Pct. of Total Ln Growth

Nonfarm Nonresidential Secured 8% 66% 8% 54% 8% 30%Multifamily 17% 15% 34% 29% 19% 12%Commercial & Industrial 3% 10% 8% 20% 12% 26%Ag & Farmland Secured 13% 9% 7% 6% 11% 6%Consumer 3% 2% -1% n/a 7% 5%1-4 Family First Liens -1% n/a -1% n/a 8% 19%Shaded cells highlight loan categories accounting for 25%+ of total loan growth in the past year

FRB-SF

Nonfarm Nonresidential Loans Accounted for Over Half of all Loan Growth at Small and Mid-Sized Banks

While growth rates for NFNR secured loans has been modest, these loans account for the majority of the growth at small and mid-sized banks

Based on a panel of District commercial banks with assets <$200B; excludes banks with significant mergers, loan sales, or loan purchases over the period; preliminary 9/30/13 data

Page 15: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 39

Percent of Banks with High Loan Growth RatesNearly half the multifamily lenders grew these loans by 20%+ YoY;

a third of the C&LD lenders expanded these loans by 20%+

* Based on a panel of 335 District commercial banks without significant mergers, loan sales or loan purchases over the period. Each bar above is based on banks with at least 4% of loans in the particular loan type; preliminary 9/30/13 data

FRB-SF

12%19%

24%26%

30%31%

36%49%

0% 10% 20% 30% 40% 50%

HELOC+Jr Lien

Nonfarm Nonresid

Consumer

Comm & Indust

1-4 Fam. 1st Lien

Constr & Land Dev

Farm+Ag

Multifamily

% of District Banks* With >20% YoY Growth by Loan Type – 9/30/13

First Glance 12L – Nov. 2013

Interest Rate Risk: District Banks Extended Asset Maturities in Recent Years, Seeking Yield

Based on aggregate data for all 12th District commercial banks active as of and grouped into peer groups as of 9/30/13

FRB-SF

14.1%

25.5%

17.9%

30.8%

20.3%

26.4%

6%

10%

14%

18%

22%

26%

30%

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

Small (< $1B) Mid-Sized ($1B - $10B) Large (> $10B)

12th District Banks: Loans & Securities Maturing or Repricing > 5 Years / Assets

40

First Glance 12L – Nov. 2013

Based on a panel of commercial banks active over this period, excluding De Novos; preliminary 9/30/13 data; 10-yr treasury constant maturity rate on last day of each qtr.

1.64%

2.48% 2.62%2.2%

-0.6%

3.3%

-0.2%

1.6%

-1.5%-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

10-Year Treasury Rate Small (< $1B) Mid-Sized ($1B - $10B) Large (> $10B, excluding Wells Fargo)

Unrealized Gains (Losses) on all Securities / Equity – District Banks in Aggregate

Rising Rates Already Leading to Net Unrealized Losses on Securities Across Banks of All Sizes

41

FRB-SF

First Glance 12L – Nov. 2013

Interest Rate Risk Analysis Needs to Consider Likely Outflows of Non-Maturity Deposits as Rates Rise

FRB-SF

44.0%

38.3%

56.0%

39.1%34.6%

63.4%

25%

30%

35%

40%

45%

50%

55%

60%

65%

Dec

-91

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Dec

-12

Sep

-13

Banks < $10B

Banks $10B - $50B

Non-Maturity Deposits / Total Assets – Nationwide Bank Aggregates

42

Approximate pre-surge average 43%

Based on aggregate nationwide banks; preliminary 9/30/13 data

Page 16: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 43

1%

23%26%

-59%-61%-58%

-6% -2%

-70%-60%-50%-40%-30%-20%-10%

0%10%20%

9/07

12/0

73/

086/

089/

0812

/08

3/09

6/09

9/09

12/0

93/

106/

109/

1012

/10

3/11

6/11

9/11

12/1

13/

126/

129/

1212

/12

3/13

6/13

9/13

% Upgrades% Downgrades

Pct. of 12th District Exams Each Quarter that Resulted in CAMELS Composite Rating Upgrade or Downgrade (downgrades are shown as negative percentages)

Regulatory Ratings: CAMELS Upgrades Outpaced Downgrades for the Past 10 Quarters

Includes any change in composite CAMELS rating for commercial banks; quarterly trends based on examination completion dates (mail dates); preliminary 9/30/13 figures; updated 11/14/13

FRB-SF

First Glance 12L – Nov. 2013

23%

32%

18%

0%

10%

20%

30%

40%

50%

60%

Sep

-90

Sep

-91

Sep

-92

Sep

-93

Sep

-94

Sep

-95

Sep

-96

Sep

-97

Sep

-98

Sep

-99

Sep

-00

Sep

-01

Sep

-02

Sep

-03

Sep

-04

Sep

-05

Sep

-06

Sep

-07

Sep

-08

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

Dist. CAMELS "3" Dist. CAMELS "4" Dist. CAMELS "5" Nation "3", "4", "5"

39%33%

44

Percentage of Banks Rated CAMELS 3, 4, or 5

Percentage of Banks Rated CAMELS 3, 4, or 5 Continued to Fall

Trends for all commercial banks based on examination completion dates (mail dates); preliminary 9/30/13 figures; updated 11/14/13

FRB-SF

60%

4%

First Glance 12L – Nov. 2013

2.7

2.3

3.2

2.5

2.9

2.5

3.4

2.7

2.4

2.2

1.8

2.5

2.0

1.5

2.0

2.5

3.0

3.5

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Average CAMELS Component Ratings for 12th District Banks (1: strong; 2: satisfactory; 3-5: less than satisfactory)

Recession

EarningsAsset QualityManagementCapitalSensitivity*Liquidity

CAMELS Rating Components Continue to ImproveAsset quality & earnings ratings improved most YoY; sensitivity ratings

remained pressured by interest rate risk concerns.

45FRB-SF Trends for all commercial banks based on examination

completion dates (mail dates); preliminary 9/30/13 figures; updated 11/14/13

* Sensitivity to Market Risk

First Glance 12L – Nov. 2013

27%

5%

13%

8%

14%

3%0%

5%

10%

15%

20%

25%

Sep

-91

Sep

-93

Sep

-95

Sep

-97

Sep

-99

Sep

-01

Sep

-03

Sep

-05

Sep

-07

Sep

-09

Sep

-11

Sep

-13

46

Percentage of District Banks with Less-than-Satisfactory Ratings

District Bank Consumer Ratings Improving with CRA Ratings Holding Steady

Trends for all commercial banks based on examination completion dates (mail dates); CRA = Community Reinvestment Act; prelim. 9/30/13 figures; updated 11/14/13

FRB-SF

Consumer

CRA

Page 17: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 47

Section 3 – Savings Institution and Industrial Bank Performance

Slides in this section focus on trends among the 46 savings institutions and 30 industrial banks headquartered within the 12th Federal Reserve District.

The savings institutions represent a combined population of District savings & loan associations plus savings banks – regardless of whether they filed the thrift Call Report or the bank Call Report. Starting

March 2012, all savings institutions file the bank Call Report.

FRB-SF

Page 18: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013

1.1%

-1.0%

0.7% 0.7%

0.8%

1.5%

3.4%

0.9%

4.3% 4.2%

3.6%

1.0% -0.3%0.7% 0.7%

0.7%

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

9/12

9/13

Commercial Banks Industrial Banks Savings Institutions

48

District Return on Average Assets – Averages (%)

FRB-SF Based on District commercial banks, savings institutions, and industrial banks; excluding De Novos; trimmed means; 3Q ratios YTD annualized; preliminary 9/30/13 data

District Industrial Bank Profitability Remains Far Higher than that of Commercial Banks and Savings InstitutionsIndustrials typically conduct nationwide consumer or C&I lending (contributing to

strong loan yields) from one office (limiting overhead expenses)

First Glance 12L – Nov. 2013

4.8%

1.7%

0.7%

3.5%

1.6%0.9%

3.6%

1.4%

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

49

Average 12th District Noncurrent Loans and Leases /Total Loans and Leases - quarterly (%)

FRB-SF

Savings

Loan Quality: District Industrial Bank Noncurrent Ratios Remain Lower than Those of Commercial and Savings Institutions on Average

Based on District commercial banks, savings institutions, and industrial banks; excluding De Novos; trimmed means; Noncurrent = 90+ days past due or on nonaccrual; preliminary 9/30/13 data

Commercial

Industrial

First Glance 12L – Nov. 2013 50

10.4%

9.9%

11.6%

10.1%

12.4%12.5%

18.5%

8

10

12

14

16

18

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

FRB-SF

Average 12th District Institution Equity/Assets Ratios

Savings Commercial

Industrial

Based on District commercial banks, savings institutions, and industrial banks; excluding De Novos; trimmed means; preliminary 9/30/13 data

Total Risk-Based Capital Ratios 9/30/13 (Average)

Industrial 24.4%Savings 22.0%

Commercial 16.9%

Equity/Assets Ratios Appear to be Peaking For Commercial & Savings Institutions; Ratios at Industrial Banks Continue to Rise

First Glance 12L – Nov. 2013 51

5%

60%

33%29% 21%

9%

35%

14%

0%

10%

20%

30%

40%

50%

60%

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Sep

-13

FRB-SF

Percentage of District Institutions Rated CAMELS 3, 4, or 5

Trends for all institutions based on examination completion dates (mail dates); preliminary 9/30/13 figures; updated 11/14/13

Savings Commercial

Industrial

Percent Rated CAMELS 3, 4, or 5 Down for All Institution Groups; Commercial Banks Continue to Lag

Page 19: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 52

Section 4 Bank Supervisors’ Hot Topics

Supervisory hot topics are a sampling of issues on bank supervisors’ radar screens that tend to be a focus of attention during on-site examinations or off-site reviews.

FRB-SF

1. Interest Rate Risk2. Cybersecurity3. Leveraged Lending4. Underwriting Risk in Rapid Loan Growth Areas5. Managing Outsourcing Risk6. Capital Planning and Stress Testing Expectations7. Model Risk Management 8. Maintaining Compliance with Laws and Regulations

Page 20: First Glance 12L (3Q13) · First Glance 12L – Nov. 2013 3 First Glance 12L - Third Quarter 2013 Banking Recovery – Slow and Steady Capital & Liquidity—Peaking: District bank

First Glance 12L – Nov. 2013 FRB-SF

Bank Supervisors’ Hot Topics

53

1 – Interest Rate RiskWith an extended period of low short-term interest rates, many banks expanded their investments in higher-yielding, longer-dated loans and securities. Over a quarter of District bank assets are loans and securities maturing or repricing more than 5 years out (see section starting slide 40). With the recent rise in longer-term rates, District banks in general have unrealized losses in securities portfolios. As banks conduct interest rate sensitivity analyses, potential outflows of non-maturity deposit balances need to be considered. A “Call the Fed” audio conference on “Managing Interest Rate Risk in a Rising Rate Environment” is scheduled for 12/5/13. For more information and to register, see: http://www.frbsf.org/banking-supervision/programs/call-the-fed/2013/december/interest-rate-risk-management/

2 – CybersecurityCybersecurity remains a top concern for banks to protect the confidentiality, integrity and availability of bank data and services and circumvent criminal efforts to steal funds or data. Concerns include distributed denial of service attacks; evolution of malicious software, including software targeting mobile devices; account takeovers/fraudulent funds transfers; coordinated ATM cash-out attacks; vendor security and resiliency; and, targeted attacks against bank employees to steal or destroy data, or disable systems. Additionally, banks, vendors and customers using Windows XP may be at heightened risk from cyber-attacks after April 2014, when Microsoft ends support for this popular software. Banks need tools to effectively monitor for anomalous activity and documented crisis management plans for such events, but the additional tools may increase operating expenses.

First Glance 12L – Nov. 2013

Bank Supervisors’ Hot Topics

54FRB-SF

4 – Underwriting Risk in Rapid Loan Growth AreasLoan growth is a welcome sign of the strengthening economic recovery. While overall loan growth is not fully recovered, many banks are experiencing fairly rapid growth in certain lending areas, such as C&I, 1-4 family residential, and multifamily (see Slides 34-39). Concerns include: 1) loan growth pressures may be pushing institutions to take on greater interest rate and credit risk with relaxed underwriting terms and aggressive pricing and 2) expertise in new lending areas may be lacking. Management must maintain robust risk management processes around all products and credit concentrations; rapid growth must be considered in ALLL methodologies.

3 – Leveraged LendingRegulatory agencies have become increasingly concerned with the quality of loans provided to highly-leveraged borrowers. Leveraged lending volumes have grown sharply and the agencies have noted concerns regarding underwriting and broader credit risk management. In March 2013, the agencies issued guidance that describes expectations for the sound risk management of leveraged lending activities and addresses issues such as pipeline management, underwriting, stress testing, risk management, and reporting. Supervised firms need to properly evaluate and monitor credit risks in their leveraged loan commitments and ensure borrowers have sustainable capital structures - see http://www.federalreserve.gov/bankinforeg/srletters/sr1303.htm.

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6 – Capital Planning and Stress Testing ExpectationsNew capital rules implementing Basel III will be phased-in starting January 1, 2014, for advanced approaches firms. Former Capital Plan Review (CapPR) firms are transitioning to Comprehensive Capital Analysis & Review (CCAR), with their first supervisory stress test to be conducted in 2014. Other over-$10B institutions are preparing for their first submission under Dodd-Frank Act Stress Testing (DFAST) in March 2014. Large and regional banks are expected to conduct regular stress tests to support their risk identification and capital and liquidity management. For more information on the Basel regulatory framework and U.S. banks, see: http://www.federalreserve.gov/bankinforeg/basel/USImplementation.htm.Community banks become subject to Basel III on January 1, 2015. In November, the agencies released a regulatory capital estimation tool for community banks – see http://www.federalreserve.gov/newsevents/press/bcreg/20131119a.htm.

5 – Managing Outsourcing RiskVendor Management – Institutions need to have risk assessment processes for outsourced activities and appropriate monitoring procedures consistent with their size, risk, and complexity.

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7 – Model Risk ManagementReliance on complex models to manage risks and operations requires strong governance. Risks include the appropriateness of the model for the purpose intended as well as the accuracy of model inputs and assumptions, model implementation, and interpretation of model outputs. Erroneous or misused model results can have significant potential for adverse consequences and / or financial loss.

8 – Maintaining Compliance with Laws and Regulations Banks are facing a host of new rules and regulations. Many of these stem from the Dodd-Frank Act, such as the CFPB’s “Ability-to-Repay Rule” for mortgage lending. However, regulators also remain focused on legacy laws and regulations in areas such as BSA/AML compliance and foreign wire transfer activities. Management must evaluate the applicability of new and existing rules, particularly as the bank’s products and services evolve; implement appropriate processes and controls, including internal audit coverage; and develop effective staff training programs.

A Federal Reserve “Outlook Live” webcast on “Small Creditor Qualified Mortgages” will discuss the Ability-to-Repay / Qualified Mortgage Rule provisions and the exemption applicable to small creditors. See: http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/

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Appendix 112th District Bank Aggregate Net Charge-Off Rates

NCO rates declined significantly year-over-year

NCO rates for all District commercial banks, annualized; Red: >= 2%; Yellow: 0.75% to 2%; Green: net recovery. This data soon will be available at http://www.frbsf.org/banking-supervision/banking-economic-data/aggregate-data/ - see 12th District Net Charge-Off Rates

Aggregate District Commercial Bank Net Charge-Off Rates (%)All Banks Small Bks (<$1 Billion)

09/12 09/13 09/12 09/13Construction & Land Development 1.02 (0.55) 1.81 0.29

Residential Construction 0.44 (0.45) 1.41 (0.09)Other C&LD 1.17 (0.57) 1.94 0.42

CRE - Nonfarm Nonresidential Loans 0.33 0.08 0.50 0.15 Owner-Occupied 0.37 0.10 0.39 0.15

Nonowner-Occupied 0.30 0.07 0.59 0.16 Residential Closed-End Loans 0.97 0.40 0.90 0.25 Home Equity Loans 2.42 1.17 0.66 0.18 Multifamily Loans 0.03 (0.02) 0.19 0.00 Commercial & Industrial Loans 0.44 0.17 0.65 0.37 Agricultural Loans 0.80 (0.26) (0.05) 0.12 Farmland Secured 0.64 (0.26) 0.81 (0.01)Credit Card Loans 4.08 3.64 2.09 1.72 Installment Loans 0.82 0.78 0.87 0.52

Total Loans 0.86 0.40 0.65 0.22

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Appendix 2 - Banks Covered in this Report

Geography Commercial Banks(De Novos)

Industrial Banks(De Novos)

Savings Institutions (De Novos)

09-12 09-13 09-12 09-13 09-12 09-13

Alaska 4 (0) 4 (0) - - 2 (0) 2 (0)

Arizona 29 (0) 23 (0) - - 1 (0) 1 (0)California 218 (15) 203 (3) 8 (1) 6 (0) 18 (2) 18 (1)

Guam 2 (0) 2 (0) - - 1 (0) 1 (0)Hawaii 6 (0) 6 (0) 1 (0) 1 (0) 2 (0) 2 (0)Idaho 15 (1) 15 (0) - - 1 (0) 1 (0)

Nevada 18 (2) 14 (0) 4 (0) 4 (0) 2 (0) 2 (0)Oregon 30 (1) 25 (0) - - 3 (0) 3 (0)

Utah 32 (2) 32 (0) 19 (0) 19 (0) 4 (0) 4 (0)Washington 57 (2) 52 (1) - 14 (0) 12 (0)

12th District 411 (23) 376 (4) 32 (1) 30 (0) 48 (2) 46 (1)Nation 6,110 (153) 5,871 (40) 34 (1) 32 (0) 1,035 (12) 983 (4)

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Appendix 3 – Technical Information

This report focuses on the financial trends and performance of commercial banks headquartered within the 12th Federal Reserve District (“12L”). 12L includes 9 western states: AK, AZ, CA, HI, ID, NV, OR, UT, and WA, as well as Guam.

De Novos: Many of the charts exclude “De Novo” banks, or banks less than five years old.

Trimmed Mean (also referred to as “adjusted average” or “average”): Many of the charts present trends in ratio averages, adjusted for outliers. The method used is to eliminate or “trim” out the highest 10% and the lowest 10% of ratio values, and average the remaining values.

Aggregate: In some cases, the trimmed mean method is not appropriate (e.g., when many banks have zero values for a particular ratio or, for example, for some growth rates where there may be many highly positive and highly negative values). In these cases, District aggregates sometimes are computed (i.e., summing numerator values across all District banks and dividing by the sum of all denominator values), as opposed to averaging individual bank ratios). When an aggregate is used, it is indicated on the chart.

Industrial banks and savings institutions: The main focus of this report is on commercial banks. Industrial banks and savings institutions have different operating characteristics so are highlighted separately in Section 3. There, the saving institution data include institutions that file the bank Call Report plus those that, up until recently, filed the thrift Call Report.

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