First Glance 12L (4Q17)

Tax Reform Lifted Optimism but Crimped Bank Profits

February 28, 2018

Authors: Judy Plock, Martin Karpuk, and Michael Nimis

Editors:Lauren Brown, Cynthia Course, Gary Palmer, Ron Pavlick, Daniel Phillips, and Wallace Young

This report is based upon preliminary data from 4Q17 and prior Condition & Income Reports as well as other examination and economicsources. Data has been prepared primarily for bank supervisors and bankers. The opinions expressed in this publication are those of theauthors. Opinions are intended only for informational purposes, and are not formal opinions of, nor binding on, the Federal Reserve Bankof San Francisco or the Board of Governors of the Federal Reserve System.

Data Inquiries: please contact sf.fisc.publications@sf.frb.orgPress Inquiries: please contact Media Relations at https://www.frbsf.org/our-district/press/

First Glance 12L: https://www.frbsf.org/banking/publications/first-glance-12l/

Financial Performance of Banks in the 12th Federal Reserve District (“12L”)

Highlights: 12th District Overview and Hot Topics 3 – 6

Section 1:Economic Conditions

Employment expanded and business optimism brightened 7 – 20

Section 2:Commercial Bank Performance

EarningsTax reform-prompted expenses temporarily damped bank profits

Credit QualityDelinquencies and losses remained extremely low

Loan Growth and ConcentrationsStrong but slower loan growth centered in commercial real estate

Liquidity and Interest Rate RiskLiquidity measures tightened; long-term assets remained elevated

CapitalCapital ratios improved year-over-year

21

22 – 25

26 – 28

29 – 37

38 – 42

43 – 45

Section 3: Commercial Bank Regulatory Ratings and Trends 46 – 50

Appendices: Summary of Institutions / Technical Information 51 – 52

Table of Contents

Unemp.Rate

12 Mos. 4Q17 Dec-

17NV 3.02% 5.00%

UT 2.70% 3.10%

OR 2.34% 4.10%

ID 2.33% 2.90%

WA 2.10% 4.50%

CA 1.82% 4.30%

AZ 1.29% 4.50%

HI 1.00% 2.00%

AK -0.48% 7.30%

US 1.50% 4.10%

Nonfarm Job Growth& Unemployment (%)

Year-Over-Year Job Growth

Aggregate job growth in the District continued to outpace the nation and accelerated modestly in4Q17. 12th District (District) nonfarm jobs expanded 1.9% year-over-year, up slightly from 1.8% in3Q17. Improvement was driven mainly by acceleration in Nevada, California, and Idaho. In most otherDistrict states, annual job growth remained positive, but was generally flat or cooled slightly relative to3Q17. One key exception was Alaska, which lost jobs year-over-year. Across many parts of theDistrict, labor availability was relatively tight. State-level unemployment rates were usually below 5%,and dipped below 3% in Hawaii and Idaho (see table at right). In several cases, metro-area joblessrates were below state averages. For example, unemployment in the San Francisco-Oakland, SanRafael, San Jose, and Santa Rosa markets was 3.0% or less versus 4.3% for California as a whole.

Housing markets remained supply-constrained, forcing up home prices and rents. During 2017, 1-4family housing starts in the West increased 12.0%, outpacing a national growth rate of 8.4%.Meanwhile, 5+-unit starts were robust by historical standards but eased slightly from 2016’s pace.Because labor and developed lot shortages and other constraints pushed up input prices,homebuilding increasingly focused on high-end or attached units and lagged household formationrates. In addition, existing for-sale home inventories remained limited, causing home prices toincrease faster than incomes, straining affordability. Per CoreLogic, six of the District’s states rankedin the top ten nationally for annual home price appreciation. Prospectively, rising long-term interestrates could slow home sales and lending. High cost markets also face new, lower caps on propertytax and mortgage interest deductibility, which favors renters over homeowners. Ultimately, tight andhigh-cost housing and labor markets may put several District metros at a competitive disadvantage.

Tax reform boosted CRE investor sentiment, but prices remained a concern. In a January 2018 surveyby National Real Estate Investor magazine, 41% of respondents believed CRE markets were at apeak, down from 59% in November. Likewise, per Situs Real Estate Research Corporation’s(RERC)® 4Q17 Flash Report, investor sentiment shifted favorably relative to the 3Q17 survey. Still, ina sign that property prices may be nearing a peak, an increasing share of respondents indicated itwas a better time to sell than to buy across most property types (except neighborhood retail, suburbanoffice, and industrial warehouse). Further, respondents indicated that risk exceeded returns overall forCRE and price exceeded value in all but the industrial property sector. Some markets and sectorsmay already be facing headwinds: Real Capital Analytics reported that the average price per squarefoot paid in 2017 for most retail and some office markets in the District slipped year-over-year. Also,the volume of property sales declined, especially for apartment buildings. Further, CBRE-EconometricAdvisors expected demand (absorption) for commercial space to slow in 2018 relative to the past fiveyear average in several metros, especially for industrial properties.

12th District Overview“Tax Reform Lifted Optimism but Crimped Bank Profits”

3

Growth based on change in 3-month moving average; all data seasonally adjusted. Source: Bureau of Labor Statistics / Haver Analytics

FRB-SF

% of Banks with Rating of3 or Worse, Dec-17

12th District Overview, Continued

7.5%

4.3%

7.5%

20.4%

11.1%

6.5%

5.7%

0% 7% 14% 21%

Composite

Sen. to Mkt. Risk

Liquidity

Earnings

Management

Asset Quality

Capital Nation12th Dist.

6.3%

0.6%2.1%

0.0%

12.59.9%

-7%

0%

7%

14%

21%

0%

2%

4%

6%

8%

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Delinquencies (left)YTD Net C/O (left)Net Ln. Growth (right)

FRB-SF

*Delinquent = 30+ days past due or nonaccrual; C/O = chargeoff (year-to-date annualized); trimmed means.

Tax reform-driven, one-time expenses crimped 4Q17 bank profits. The District’s average, year-to-date return on average assets (ROAA) ratio (adjusted for Subchapter S tax filers) dipped 10bps to 0.90% quarter-over-quarter, but still outperformed a national average of 0.83%. Duringthe year, deposit pricing did not respond to rising interest rates as strongly as asset yields, liftingnet interest margins. However, in 4Q17, anticipated declines in tax rates prompted write-downsof deferred tax assets (reported as higher tax expenses), payments of one-time bonuses, and insome cases increased charitable donations. These actions dented after-tax profits. Effective taxrates are expected to ease in 2018 as new federal tax rates take effect.

Loan growth flattened. The District’s average annual net loan growth rate was 9.9% in 4Q17, anotch lower than the 10.0% reported in 3Q17, but not as sharp a deceleration as in priorquarters (see chart at left). Slowing in California, Idaho, Washington, and Nevada led the trend.Still, average net loan growth remained strong in relation to a national average of 6.5%. Onaverage, CRE loan categories continued to post double-digit growth rates, further lifting CREloan concentrations. Banks faced strong competition for CRE loans: securitizers ramped uporiginations in part to refinance maturing, pre-crisis debts, and Fannie Mae and Freddie Macremained very active in the multifamily space. Bank past-due loan and net chargeoff rates werevery low, although average delinquency ratios in some loan categories, such as agriculture andautomobile loans, edged higher. Wildfires during 4Q17 appeared to have little effect on averageperformance ratios among banks based in the San Francisco Bay Area or Southern California.

Year-over-year, on-balance sheet liquidity eased but average capital ratios edged higher.Compared with 4Q16, the District’s average loan-to-asset ratio increased to 69.7% at theexpense of lower investments in liquid assets and securities. Although bank funding continuedto center in relatively inexpensive nonmaturity deposits (NMDs), loan growth during 2017outpaced increases in core deposits. To compensate, banks turned to brokered and/or largetime deposits or borrowings, causing the average reliance on noncore liabilities to tick higher.Average regulatory capital ratios improved year-over-year, but large 4Q17 write-downs ondeferred tax assets eroded average capital ratios on a linked-quarter basis. Still, average capitalratios remained well above levels observed prior to the last recession.

Examination upgrades continued to outpace downgrades. More than 92% of District banks wererated satisfactory or strong for safety and soundness, the highest proportion since early 2008.Earnings, and to a lesser degree Management, remained areas of relative weakness (see chartat left). At examinations conducted during 2017, upgrades outpaced or matched downgradesacross all major components. Similarly, at least 94% of District banks were rated satisfactory orbetter for consumer and/or Community Reinvestment Act compliance. 4

District Credit Metrics*

FRB-SF

2008-17** Dec-17

CA 269.4%

WA 237.3%

OR 235.5%

NV 215.3%

AZ 179.2%

ID 166.3%

HI 154.9%

AK 143.9%

UT 127.2%

Nation 127.0%

Average Commercial Real Estate Loans /Total Capital* (%)

The following areas are drawing heightened supervisory attention within the 12th District based onrisk exposures and metrics of Federal Reserve-supervised institutions:

• Cyberthreats continued to evolve and information security remained one of the District’s topbanking risks. Sometimes attackers prey on the vulnerability of humans as opposed tosystems. According to Symantec’s January 2018 Monthly Threat Report, phishing accountedfor 1 in every 1,900 emails received by companies in the Finance, Insurance, and Real Estatesector, higher than any other industry. The pace of phishing compared unfavorably to a year-earlier rate of 1 in every 2,475 emails. Such statistics highlight the need for vigilant stafftraining. For institutions outsourcing core operations and/or security administration, vendormanagement programs remain critical to managing and mitigating cyberthreats. Inherent riskscan increase from a variety of factors, such as system complexity, services, and visibility. In2015, the Federal Financial Institutions Examination Council developed an optional tool to helpbanks assess the adequacy of their cybersecurity preparedness (see Federal Reserve SRletter 15-9 at http://www.federalreserve.gov/bankinforeg/srletters/sr1509.htm).

• Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) compliance. Although most banks inthe District have satisfactory BSA compliance programs, BSA/AML continues to be a significant“hot topic” due to the District’s role in the global economy and the array of activities beingconducted by supervised institutions. Regulatory requirements in this area continue to evolve,such as upcoming Customer Due Diligence rules (effective May 2018). BSA/AML-relatedcriticisms noted at bank examinations most often relate to internal controls (e.g., institutionalrisk assessments, customer due diligence, and suspicious activity monitoring programs).Concerns related to weak program oversight and ineffective independent tests are alsoemerging as common examination issues.

• Commercial real estate lending concentrations. CRE (i.e., non-owner occupied nonfarm-nonresidential, multifamily, C&LD, and other CRE-purpose) loan concentrations to capitaldeclined during the recession, but have edged higher in recent years, and averages remainedat or above the U.S. average across all District states (see table at right). Increased loanconcentration levels, combined with potential competitive easing of underwriting standards andelevated property prices, heighten regulatory concern. A rising interest rate environment couldnegatively impact debt service coverage ratios on variable-rate commercial mortgages andpressure commercial property price appreciation. Given the increasing risks, lenders shouldreview CRE risk management guidance, including the 2015 Interagency Statement on PrudentRisk Management for Commercial Real Estate Lending (SR letter 15-17, available athttp://www.federalreserve.gov/bankinforeg/srletters/sr1517.htm). 5

Hot Topics: Areas We Are Monitoring Most Closely

*Trimmed means; excludes owner-occupied ; **December of each year

264%

155%

231%

305%

352%

163%

150%

330%

FRB-SF

389%

326%

= trough = peak

• Consumer compliance issues. In addition to redlining, overdraft practices have gained attention. Overdraft fees generate a significantshare of deposit service charges, but not without legal, regulatory, and reputational risk. Litigation and/or regulatory action have beentaken for a variety of practices, including use of the “available balance” to assess overdraft fees. While each case is fact specific, theagencies discussed a number of overdraft practices concerns during a November 9, 2016, Outlook Live webinar, “Interagency OverdraftServices Consumer Compliance Discussion” (https://www.consumercomplianceoutlook.org/outlook-live/2016/interagency-overdraft-services-consumer-compliance-discussion/).

• Lengthening asset maturities. Following the financial crisis, many banks increased their holdings of longer-term assets, driven by lowshort-term interest rates and a relatively steep yield curve. This trend moderated somewhat in the past few years; however, the proportionof longer-dated assets remained elevated. In a rising interest rate environment, longer-term assets are slower to reprice and could mutemargin expansion if not appropriately matched, hedged, or managed.

• Quality of loan growth. The District’s average annual net loan growth continued to outpace the national average in several District states.Economic expansion has played a significant role; however, many loans are underpinned by near-historic collateral values and somelenders loosened standards in recent years. If collateral values prove unsustainably high and/or rising interest rates increase debt servicerequirements on variable rate loans, the risk of default and/or loss increases. Recent credit performance has been good, but now is acritical time in the cycle for bankers to maintain lending discipline and enhance risk management practices. This is especially true asbanks approach the implementation of new rules for accounting for credit losses (a/k/a Current Expected Credit Losses, or CECL).

• Nonmaturity Deposit (NMD) risk management. NMDs, which are traditionally viewed as “core” deposits, have become an increasinglyimportant source of funding for most institutions. While these products proved inexpensive in a low-rate environment, these funds maydisintermediate or transition to higher-cost deposit products in a rising interest rate environment. During the last economic expansion andrate tightening cycle (2004-2006), the mix of bank funding shifted away from NMDs and toward higher-cost time deposits and borrowingsas loan demand outstripped NMD availability. The size composition of NMDs also may leave banks vulnerable. On average, “jumbo”NMDs (i.e., accounts with balances above $250,000) supported 36% of bank assets within the 12th District, up from 21% at year-end2010 and above a national average of 23%. Larger depositors in particular may be more sensitive to changes in interest rates.

• Balancing overhead expense pressures with risk management requirements. Asset growth and technology have led to some economiesof scale and improved efficiency ratios, which has helped boost profitability. However, there is a regulatory concern that banks may notbe devoting sufficient resources to back-office operations, internal controls/audit, and compliance programs commensurate with theirincreasing size and complexity.

• Financial technology (fintech) opportunities and risks. It is expected that depository institutions will increasingly partner with fintechcompanies, and with marketplace lenders in particular. Given the different origination and underwriting methods that consumer fintechlenders may use, banks should closely evaluate transactions for credit risk, fair lending, and unfair/deceptive acts or practices, especiallysince credit decisions may use nontraditional data sources. Data from Orchard Platform’s U.S. Consumer Online Lending Index indicatedthat online consumer lending returns (a function of yields, loan prices, re/prepayments, and chargeoffs) continued to improve throughyear-end 2017, led by rising interest rates. Returns had sank in late 2016 because of loan losses and pricing. 6

Hot Topics: Areas We Are Monitoring Most Closely

7

Job Growth

Housing Market Metrics

Commercial Real Estate Market Conditions

Section 1Economic Conditions

For more information on the District’s real estate markets and economy, see:Real Estate Lending Risks Monitor

(https://www.frbsf.org/banking/publications/real-estate-lending-risks-monitor/)Banks at a Glance

(https://www.frbsf.org/banking/publications/banks-at-a-glance/)

For more information on the national economy, see:FRBSF FedViews

(https://www.frbsf.org/economic-research/publications/fedviews/) FOMC Calendar, Statements, & Minutes

(https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm)

8

3.1%

-6.7%

3.1%

1.9%

-1.5%

2.1%

-4.9%

1.5%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

District Nation

Year-over-Year Nonfarm Job Growth

Based on average nonfarm payroll levels over trailing three months; data are preliminary estimates; *year-over-year change trend lines in sector table as of fourth quarter of each year. Source: Bureau of Labor Statistics via Haver Analytics.

Annual Job Growth Accelerated Slightly in the Fourth Quarter, but Slowed Overall from the Year-Ago Pace

FRB-SF

2007-17* 4Q 2017

Construction 6.51%Educ. & Health Svcs. 2.94%Transport. & Utilities 2.51%Leisure & Hospitality 2.45%Other Private 2.04%Information 1.75%Government 1.49%Prof. & Business Svcs. 1.46%Wholesale Trade 1.24%Financial Activities 1.23%Manufacturing 0.49%Retail Trade 0.23%Total 1.90%

Job Growth by Sector12th District

Job Sector1-Yr % Change

Eco

nom

y

34.0%

27.0%

32.0%

25.7%

-6.0%

20.7%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Unable to Fill Positions Now is a Good Time to Expand Planning to Increase Employment

9

Small Businesses Reported Optimism for Expansion,but Will Labor Shortages Hamper Hiring Plans?E

cono

my

Net Percentage of Small Businesses Reporting (Quarterly Average):

All data seasonally-adjusted. Source: National Federation of Independent Businesses, Small Business Economic Trends Report.

FRB-SF

12.0

%

11.0

%

10.7

%

10.7

%

8.2%

6.9%

6.3%

3.9%

1.6%

6.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

WA NV UT ID CA OR AZ HI AK US

Dec-16 Sep-17 Dec-17

10

Home Price Appreciation Rates Accelerated in Five District States; Six States Ranked in Top Ten for Price Gains

HPI = home price index (includes all detached and attached homes, including distressed sales). Source: CoreLogic.

FRB-SF

Eco

nom

y

11

4

18

848

3

15

2

AnnualHPI

Change< 0%0-3%3-6%6-9%> 9%

Dec-17Number = Rank

Year-over-Year % Change in Home Price Index

48%

90%

82%

47%

84%

69%

34%

82%

62%

37%

84%

61%

35%

80%

57%

33%

80%

49%

29%

90%

44%

17%

47%

29% 29%

18%

80%

37%

11%18%13%18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

Dec

-07

Dec

-17

AK ID UT AZ WA OR NV HI CA

Major Metros Other CA Metros So. CA SF Bay Area

11

Housing Affordability Remained under Pressure in Most District Markets, Especially in California and Hawaii

Un-weighted Average Market Housing Opportunity Index, December Each Year(% of Home Sales Deemed Affordable to Median Family Income; Higher Ratio = More Affordable)

FRB-SF

Assumes median income, 10% down payment, ratio of income-to-housing costs (principal, interest, taxes, and hazard insurance) of 28%, and a fixed-rate, 30-year mortgage; So. CA = Los Angeles, Orange, Riverside-San Bernardino, San Diego, and Ventura metros; SF Bay Area = San Francisco, Oakland, San Jose, Napa, Vallejo, and Santa Cruz metros. Sources: National Association of Homebuilders/Wells Fargo via Haver Analytics, Federal Reserve Bank of San Francisco calculations.

AK ID UT AZ WA OR NV HI CA‘07 '17 ’07 '17 ’07 '17 ’07 '17 ’07 '17 ’07 '17 ’07 '17 ’07 '17 ’07 '17

Eco

nom

y

6341 42

18 20 22

83

48 59

16 27 30

64

5057

1829 27

39

4548

20

32 28

249

138

95 9686

118

139 146

167184

206

7259

22 23

4659

7888

99108 107

0

50

100

150

200

250

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

1-4 Family Starts 5+ Family Starts

4Q 3Q 2Q 1Q

Housing Starts – West (Thousands Of Units, Not Seasonally Adjusted)

12

1-4 Family Homebuilding Expanded asMultifamily Starts Cooled

FRB-SF

West = 12th District plus CO, MT, NM, and WY. Source: Census Bureau/Haver Analytics.

Year-over-Year % Change

West Nation1-4

Fam.5+

Fam.1-4

Fam.5+

Fam.

2016 10.2% 9.1% 9.1% -1.3%

2017 12.0% -0.9% 8.4% -9.7%

Eco

nom

y

4.85.0 5.0

5.3

5.86.0 6.0 6.0 6.0

6.5

8.3

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

O

ffice

-S

ubur

ban

Ret

ail-

Pow

er C

ente

r

Hot

el

R

etai

l-R

egio

nal M

all

R

etai

l-N

eigh

borh

'd.

Stu

dent

Hou

sing

Apa

rtmen

t

Indu

stria

l-

Fle

x

Indu

stria

l-

R&

D

Offi

ce-

C

BD

Ind

ustri

al-

War

ehou

se

4Q16 3Q17 4Q17

13

Per Situs RERC, Investment Conditions Improved Post-TaxReform for Most Property Types; Strongest for Warehouse

Based on a survey of CRE institutional investors; Retail Power Center = unenclosed shopping area that contains “big box” retailers; R&D = research & development; CBD = central business district (downtown). Source: Situs Real Estate Research Corporation (RERC) ® Flash Report: 4Q 2017 (https://www.situs.com/situs-rerc-flash-report-4q-2017/).

Investment Conditions Rating (1= Poor, 10 = Excellent)

FRB-SF

Eco

nom

y

14Source: National Real Estate Investor (NREI), “Investor Sentiment Indicates More Pros Think CRE Cycle Is in Expansion Phase,” January 8, 2018.

Per NREI, Tax Reform Changed Some CRE InvestorsView of How Much Longer the Cycle May Run

12%

28% 27% 28%

47% 49%42% 46%

58%45%

74%

61%51% 54%

35% 32% 40% 36%

29%41%

9% 6%13% 9% 8% 8% 9% 10% 6% 5%

0

10

20

30

40

50

60

70

80

90

100

Jan-

15

May

-15

Sep

-15

Jan-

16

May

-16

Sep

-16

Jan-

17

May

-17

Sep

-17

Jan-

18

Unsure

Recession/ Trough

Recovery/ Expansion

Peak

Share of Respondents Indicating Current Stage of Commercial Real Estate Cycle

FRB-SF

Eco

nom

y

4.6%

2.1%

5.7%5.9%

5.4% 5.4%

4.9% 4.8%

6.0%

5.7%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

10-Year U.S. Treasury Retail Office Apartment Industrial

15

Year-over-Year, Cap Rates in the West WereFlat-to-Lower for All but the Retail SectorE

cono

my

Commercial Real Estate Capitalization & U.S. Treasury Rates (Trailing 12-Month Average %)

Includes transactions in the West (AK, CA, HI, ID, MT, NV, OR, UT, WA, and WY, but not AZ); property sales > $2.5 million with available capitalization rate data; U.S. Treasury rate at constant maturity. Sources: Real Capital Analytics, Federal Reserve.

FRB-SF

10-Year U.S. Treasury Rate(Trailing 12-Month Avg.)

Year-over-Year % Change in Property Sales ($ Volume)

16

Apartment Property Prices Increased on Lower Volumes; Retail Sector PPSF Fell in the Majority of District Markets

FRB-SFPPSF = price per square foot; EB = East Bay; IE = Inland Empire; LA = Los Angeles; LV = Las Vegas; OC = Orange County; PHX = Phoenix; POR = Portland; SAC = Sacramento; SD = San Diego; SEA = Seattle; SF = San Francisco; SJ = San Jose; bubble size denotes 2017 volume. Source: Real Capital Analytics.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-80% -60% -40% -20% 0% 20% 40% 60% 80%

Year

-ove

r-Ye

ar C

hang

e in

Avg

. PPS

FE

cono

my

PHX

SJ

LA

LV

POR

SF

EB

OC

SACPHX

SD

SEA

LA

POR

EB

SJ

POR

IESF SEA

OC

SF

SAC

SJ

ApartmentIndustrialOfficeRetail

Declining Sales &Declining Price/Sq. Ft.

Declining Sales &Increasing Price/Sq. Ft.

Increasing Sales &Increasing Price/Sq. Ft.

Increasing Sales &Declining Price/Sq. Ft.

SLC

SLC

IE

SD

-2,0000

2,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

Pho

enix

Las

Veg

as

Sal

t Lak

e

Riv

ersi

de

Sac

ram

ento

Tucs

on

Los

Ang

eles

Sea

ttle

Oak

land

Ora

nge

Co.

San

Jos

e

Por

tland

San

Fra

ncis

co

San

Die

go

Hon

olul

u

Ven

tura

5-Year Average Absorption2018 Forecast Absorption2018 Forecast Completion

17

Per CBRE-EA, Apartment Absorption Could Dip Below5-Year Average in Six Markets; Above-Average in Ten Others

Forecast per CBRE Econometric Advisors (CBRE-EA) baseline scenario; 5-year period based on 2013-17. Source: CBRE-EA.

Annual Net Absorption of Apartment Units

FRB-SF

Eco

nom

y

1954

9

1748

4

|------ Forecast 2018 Absorption ------| |-------------------- Forecast 2018 Absorption ----------------------| Below 5-Year Average Above 5-Year Average

-5000

5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,500

Pho

enix

San

Die

go

Sac

ram

ento

Sea

ttle

Riv

ersi

de

Las

Veg

as

Tucs

on

Sal

t Lak

e

Ora

nge

Co.

San

Jos

e

Los

Ang

eles

San

Fra

ncis

co

Oak

land

Por

tland

Ven

tura

Hon

olul

u

5-Year Average Absorption2018 Forecast Absorption2018 Forecast Completion

18

CBRE-EA Expects Office Absorption to Lag Historical Averages in Nine Markets; Forecast Supply Large in a Few

Forecast per CBRE Econometric Advisors (CBRE-EA) baseline scenario; 5-year period based on 2013-17. Source: CBRE-EA.

Annual Net Absorption of Office Space (x 1,000 Square Feet)

FRB-SF

Eco

nom

y

|------------------ Forecast 2018 Absorption ------------------| |-------- Forecast 2018 Absorption --------| Below 5-Year Average Above 5-Year Average

-2,0000

2,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

Riv

ersi

de

Sea

ttle

Pho

enix

Por

tland

Los

Ang

eles

Las

Veg

as

Ora

nge

Co.

Tucs

on

Oak

land

San

Die

go

San

Fra

ncis

co

Hon

olul

u

Ven

tura

Sal

t Lak

e

San

Jos

e

Sac

ram

ento

5-Year Average Absorption2018 Forecast Absorption2018 Forcast Completion

19

Per CBRE-EA, Industrial Absorption Could Run Below theRecent Historical Average in All Major 12th District Markets

Forecast per CBRE Econometric Advisors (CBRE-EA) baseline scenario; 5-year period based on 2013-17. Source: CBRE-EA.

Annual Net Absorption of Industrial Space (x 1,000 Square Feet)

FRB-SF

Eco

nom

y

|------------------------------------------------ Forecast 2018 Absorption -------------------------------------------------| Below 5-Year Average

-500

-250

0

250

500

750

1,000

1,250

Riv

ersi

de

Sea

ttle

San

Die

go

Ora

nge

Co.

Los

Ang

eles

Ven

tura

Sac

ram

ento

San

Fra

ncis

co

Pho

enix

Fres

no

Por

tland

Oak

land

Las

Veg

as

Sal

t Lak

e

San

Jos

e

Tucs

on

Hon

olul

u

5-Year Average Absorption2018 Forecast Absorption2018 Forcast Completion

20

CBRE-EA Expects Retail Absorption in 2018 to Fall Short of the Recent 5-Year Average in Most Major District Markets

Forecast per CBRE Econometric Advisors (CBRE-EA) baseline scenario; 5-year period based on 2013-17. Source: CBRE-EA.

Annual Net Absorption of Retail Space (x 1,000 Square Feet)

FRB-SF

Eco

nom

y

|------------------------------------------ Forecast 2018 Absorption -------------------------------------| |--- 2018 ---| Below 5-Year Average >5-Year Avg.

21

Earnings

Credit Quality

Loan Growth and Concentrations

Liquidity and Interest Rate Risk

Capital

Section 2 Commercial Bank Performance

Note: Bank size groups are defined as very small (<$1B), small ($1B-$10B), mid-sized ($10B-$50B), and large (>$50B) banks. The large bank group covers nationwide banks (a larger statistical

population), while the other three groups cover 12th District banks.

22

For Full-Year 2017, One-Time Deferred Tax Asset Write-Downs Offset Benefits of Wider Margins and Cost Controls

FRB-SF

Average = trimmed mean; YTD = year-to-date (annualized); *ROAA = return on average assets (net income/average assets, with theoretical tax expense deducted from Subchapter S filers for comparability); TE = tax equivalent (yields and applicable tax expense adjusted for tax-exempt revenues); deferred tax asset write-downs flowed through income tax expense.

1.35%

-1.01%

0.88%0.92% 0.90%1.04%

0.37%

0.83%0.85%0.83%

-1.20%

-0.80%

-0.40%

0.00%

0.40%

0.80%

1.20%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

District

Nation

Average YTD ROAA (Adjusted for Subchapter S Filers)*

ProfitComponent Dec-16 Dec-17

Interest Income (TE) 3.97% 4.12%

Interest Expense -0.29% -0.32%

Net Int. Income (TE) 3.66% 3.78%

Nonint. Income 0.61% 0.62%

Nonint. Expense -2.93% -2.89%

Provision Expense -0.06% -0.06%

TaxExpense (TE) -0.44% -0.57%

Average YTD as % of Average Assets

12th District(Expenses = Negative Values)

FRB-SF

Ear

ning

s

3.66%

3.26%

3.62%

3.04%

3.69%

2.91%

3.83% 3.84%

2.84%

2.97%

1.20%

0.84%

1.31%

0.90%

1.45%

0.96%

1.68%

1.53%

1.08%

0.57%0.50%

0.90%

1.30%

1.70%

2.70%

3.10%

3.50%

3.90%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Net InterestIncome (TE)<< Left Axis

NoninterestExpense

<< Left Axis

Pretax NetIncome (TE)Right Axis >>

NetIncome*

Right Axis >>

2014 2015 2016 2017

Average Qtly. Income or Expense / Average Assets – 12th District Banks

23

Quarterly Net Income Ratios Sank, Led by Tax Reform-Driven Bonuses and Deferred Tax Asset Write-Downs

FRB-SFAverage = trimmed mean; quarterly figures are annualized; TE = tax equivalent (theoretical tax benefit added to yields on tax-exempt investments and loans); *Net Income adjusted for Subchapter S filers (theoretical tax expense deducted for comparability); deferred tax asset write-downs flowed through income tax expense.

Ear

ning

s12thDist. Nation

YTD Personnel Exp./ Emp. ($Thous.)

$ 97.5 $ 73.9

Assets per Employee ($Mils.)

$ 6.4 $ 4.9

Assets perDom. Office

($Mils.) $120.2 $ 64.8

TotalAssets ($Mils.)

$917.4 $298.7

Average OverheadMetricsDec-17

1.68%

0.86%

0.31%

1.58%

0.88%

0.32%

0.00%

0.30%

0.60%

0.90%

1.20%

1.50%

1.80%

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Personnel All Other NetOccupancy

District Nation

Average YTD Overhead Expense / Average Assets

24

Declines in Full-Year Noninterest Expense Ratios Slowed;One-Time Tax Reform-Driven Bonuses Fed the Trend

FRB-SF

Average = trimmed mean; YTD = year-to-date (annualized); overhead = noninterest expense.

Includes technology, consulting,

marketing, legal, insurance, audit, etc.

Ear

ning

s

1.95%

2.63%

0.51%

1.33%

0.53%

1.62%

0.66%

1.42%

0.67%

0.25%

1.52%

0.63%

0.24%

0.34%0.17%0.14%0.10%0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Feb-

17

Jun-

17

Oct

-17

Feb-

18

Feb-

17

Jun-

17

Oct

-17

Feb-

18Fe

b-17

Jun-

17

Oct

-17

Feb-

18Fe

b-17

Jun-

17

Oct

-17

Feb-

18

5-Year CD* 1-Year CD* 3-Month CD NonmaturityDeposits**

Benchmark

Jumbo CD

Small CD

JumboMMDA

SmallMMDA

Savings

Int. Chkg.

Mid-Month Average Annual Yield - Nationwide

25

Deposit Pricing Remained Relatively Unchanged Despite Rising Benchmark Interest Rates, Benefitting Margins

FRB-SF

*For certificates of deposit (CDs), small minimum is $10K, jumbo minimum is $100K, and benchmark rate is bond-equivalent yield for similar-maturity U.S. Treasury Bill or Note; **for nonmaturity deposits, minimum is $2.5K, jumbo money market deposit account (MMDA) minimum is $100K, and benchmark rate is the federal funds rate; all data as of mid-month; Source: S&P Global Market Intelligence/SNL Financial.

Ear

ning

s

0.77%

1.43%

0.22%

0.88%

4.66%

0.33%

1.45%

0.59%0.92%

2.29%

0.70%

0.00%

0.75%

1.50%

2.25%

3.00%

3.75%

4.50%

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Past Due 30-89 Days Past Due 90+ Days orNonaccrual

District

Nation

Average Past Due or Noncurrent / Gross Loans & Leases

26

Early-Stage Past-Dues Flattened but Noncurrent RatesEdged Lower; Delinquent Ag. and Auto Moved Higher

FRB-SF

Average = trimmed mean; loans past due 30-89 days are delinquent but still accruing interest (early-stage); noncurrent = loans past due 90+ days or on nonaccrual status; C&I = commercial & industrial; NFNR = nonfarm-nonresidential mortgages; C&LD = construction & land development.

Loan Type Dec-16

Dec-17

1-4 Family 0.73 0.65

C&I 0.70 0.58

NFNR 0.34 0.31 Owner-Occ 0.43 0.38 Other 0.14 0.11

Consumer 0.31 0.27 Credit Card 0.59 0.57 Auto 0.14 0.21 Other 0.23 0.20

Agriculture 0.17 0.26

C&LD 0.24 0.19

All Loans 0.66 0.63

Average % Past Due 30+ Days or Nonaccr.

12th District

Cre

dit

Qua

lity

2.73%

0.08%

3.81%

0.07%

2.71%

0.13%

3.57%

0.29%

1.99%

0.00%

2.86%

0.02%

2.26%

0.09%

2.53%

0.29%

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

District Very Small(< $1B)

District Small($1B - $10B)

District Mid-Sized($10B - $50B)

Nation Large(> $50B)

Provisions Net Chargeoffs

Average YTD Provision Expenses and Net Chargeoffs to Average Loans & Leases

27

On Average, 2017 Provisions Outpaced Net Chargeoffsat 12th District Commercial Banks

FRB-SF

Average = trimmed mean; YTD = year-to-date (annualized).

Cre

dit

Qua

lity

12thDist. Nation

Loans & Leases not

HFS10.0% 6.5%

Noncurrent Loans -9.2% -1.7%

ALLL 5.2% 3.7%

AverageYear-over-Year

Growth RateDec-17

1.30%

2.70%

1.45%1.38%

7.00X

4.91X5.47X

1.30%1.78%

1.33%1.27%

3.49X

2.70X

2.96X

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

ALLL / Loans Not HFS (%) ALLL / Noncurrent (X)

District

Nation

Average ALLL Coverage of Loans not HFS (%)and Noncurrent Loans (X)

28

ALLL Build Lagged Growth in Loans & Leases Not HFSbut Compared Favorably to Change in Noncurrent Loans

FRB-SF

Average = trimmed mean; ALLL = allowance for loan and lease losses; HFS = held for sale; noncurrent = loans past due 90+ days or on nonaccrual status.

Cre

dit

Qua

lity

29

16.6%

-6.5%

12.9%

9.9%9.0%

-2.5%

7.5%6.5%

-7.0%

-3.5%

0.0%

3.5%

7.0%

10.5%

14.0%

17.5%

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

District Nation

Average Year-over-YearNet Loan Growth

Average Annual Loan Growth Was Strong and Flattened;Quarterly District Loan Growth Had Slight Seasonal Uptick

FRB-SFAverage = trimmed mean; growth rates are not merger-adjusted; includes loans and leases held for sale and for investment, net of allowances for loan and lease losses.

6.9%

11.8%

8.5%8.9%

-7.0%

-3.5%

0.0%

3.5%

7.0%

10.5%

14.0%

17.5%

1Q 2Q 3Q 4Q

2017 2016 2015 2014 2013 2012

Average Quarter-over-QuarterNet Loan Growth (Annualized)

|--------- 12th District Banks Only ---------|

Gro

wth

30

Average = trimmed mean; growth rates are not merger-adjusted; NV excludes zero loan and credit card banks. SF Bay = 41 banks based in San Francisco-San Jose Consolidated Statistical Area (CSA); So. CA = 75 banks based in Los Angeles CSA + San Diego Metropolitan Statistical Area; Other CA = 36 banks based in all other California counties.

FRB-SF

Net Loan Growth Was Very Strong in Most District States;Accelerated in Five of Nine States Compared with 3Q17G

row

th

Average Year-over-Year Net Loan Growth (%) | Faster Slower Rate vs. Sep-17

Nation = 6.5%District = 9.9%

Average Year-over-YearNet Loan Growth, Dec-17

> 9.0%

7.0% to 9.0%

5.0% to 7.0%

< 5.0%

SF Bay = 12.3%So. CA = 8.8%Other CA = 12.0%

18% 14% 12% 10% 7% 5%13% 14% 9% 8% 7% 4%

-45%-35%-25%-15%

-5%5%

15%25%35%

Dec

-09

Dec

-13

Dec

-17

Dec

-09

Dec

-13

Dec

-17

Dec

-09

Dec

-13

Dec

-17

Dec

-09

Dec

-13

Dec

-17

Dec

-09

Dec

-13

Dec

-17

Dec

-09

Dec

-13

Dec

-17

All OtherC&LD

1-4 FamilyConstruction

Multifamily Nonfarm-Nonresid.

Commercial& Industrial

1-4 FamilyMortgages

District

Nation

Average Year-over-Year Loan Growth, Selected Loan Categories

31

District Loan Growth Slowed Across Most Categories; Nonresidential C&LD Remained Fastest Growing Segment

FRB-SF

Average = trimmed mean; growth rates are not merger-adjusted; C&LD = construction and land development; nonfarm-nonresidential includes mortgages with owner-occupied collateral.

Gro

wth

District 22.76 10.43 33.46 258.99 86.39 79.83Nation 19.01 10.22 13.52 143.93 71.40 139.68

Memo: Average Concentration to Total Capital, Dec-17

284%

193%

234%

151%129%

145%

88%

35%22% 33%

138%

127%

70% 69%

45% 32% 10% 14%0%

50%

100%

150%

200%

250%

300%

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

CREExcluding

Owner-Occupied

Nonowner-Occupied

NFNR

C&LD Multifamily

District

Nation

Average CRE Concentrations to Total Capital

32

Growth Pushed Overall CRE Loan Concentrations Higher

FRB-SF

Average = trimmed mean; Commercial Real Estate (CRE) Excluding Owner-Occupied = nonowner-occupied nonfarm-nonresidential (NFNR), construction and land development (C&LD), multifamily, and other CRE-purpose loans.

Gro

wth

12th District Including owner -

occupied:Dec-09 439%Dec-12 321%Dec-17 351%

33Includes originations by commercial banks, life insurance companies, Fannie Mae/Freddie Mac, and commercial mortgage backed securities/conduits. Source: Mortgage Bankers Association.

CRE Origination Data from MBA Suggests Both Multifamily and Industrial Loan Originations above Historical Norms

228.3

55.049.5

148.0

0

45

90

135

180

225

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Multifamily

Office

Retail

Industrial

Trailing 4 Quarter Average Origination Index (Indexed, 2006 = 100)

FRB-SF

Gro

wth

8.67%

10.40%

6%

9%

12%

15%

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Apartment

Other Commercial

34

Debt Yield (3-Month Moving Average)

Debt yield = net operating income / loan amount; limited to fixed-rate first mortgages with a 7-10 year loan term where debt yield is between 4% and 20%; Other Commercial = office, industrial, and retail. Source: Real Capital Analytics (RCA).

Per RCA, Apartment Lenders Have Allowed RisingMortgage Balances in Relation to Net Operating Income

FRB-SF

Gro

wth

Declining apartment debt yield implies property net operating incomes have not kept pace with leverage

80%

60%

40%

20%

0%

20%

40%

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Commercial &Industrial

CommercialReal Estate (CRE)

1-4 FamilyMortgages

Consumer

Small Borrowers

Non-Traditional/

Non QM-Jumbo***

All CRE/ Nonfarm-

Nonresid.*

Multi-family

C&LD

Mid-LargeBorrowers

All Consumer/CreditCard****

All/Prime/GSE

Eligible** Auto

Net % of Lenders Reporting Stronger (Weaker) Loan Demand vs. 3 Months Prior(January of Each Year)

35

In 4Q17, Senior Loan Officers Were More Likely to ReportStronger Demand for C&I, Weaker Demand for Some CRE

FRB-SF

Based on a sample of 70+/- loan officers at domestic banks (number varies by period and loan type); C&LD = construction and land development; *includes all CRE loans prior to Oct-13; **includes all residential mortgages prior to Apr-07, “prime” mortgages Apr-07 to Oct-14, and GSE-Eligible starting Jan-15; ***includes “nontraditional” mortgages Apr-07 to Oct-14 and Non QM Jumbo mortgages starting Jan-15; ****includes all consumer loans prior to Apr-11. Source: Federal Reserve Senior Loan Officer Opinion Survey (https://www.federalreserve.gov/data/sloos.htm).

Gro

wth

30%

15%

0%

15%

30%

45%

60%

75%

90%

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Jan-

04

Jan-

11

Jan-

18

Commercial &Industrial

CommercialReal Estate (CRE)

1-4 FamilyMortgages

Consumer

Small Borrowers

Non-Traditional/Non QM-Jumbo***

All CRE/ Nonfarm-Nonresid.*

Multi-family

C&LD

Mid-LargeBorrowers

CreditCard

All/Prime/GSE

Eligible**Auto

Net % of Lenders Reporting Tighter (Looser) Loan Standards vs. 3 Months Prior(January of Each Year)

36

Nationally, Lenders Were Less Likely to Tighten Standardsin 4Q17 Compared with the Same Period in 2016

FRB-SF

Based on a sample of 70+/- loan officers at domestic banks (number varies by period and loan type); C&LD = construction and land development; *includes all CRE loans prior to Oct-13; **includes all residential mortgages prior to Apr-07, “prime” mortgages Apr-07 to Oct-14, and GSE-Eligible starting Jan-15; ***includes “nontraditional” mortgages Apr-07 to Oct-14 and Non QM Jumbo mortgages starting Jan-15. Source: Federal Reserve Senior Loan Officer Opinion Survey (https://www.federalreserve.gov/data/sloos.htm).

Gro

wth

37

17%

11%

5%

2%

10%

21%

21%

4%

4%

73%

81%

80%

81%

87%

78%

77%

81%

90%

10%

9%

15%

17%

3%

1%

1%

14%

6%

0% 50% 100%

Credit Cards

Auto LoansJumbo 1-4 Fam.

GSE-Elig. 1-4 Fam.

Nonfarm-Nonresid.

C&LD

Multifamily

Mid-Large C&I

Small C&I

Tighter Same Easier

Small C&IMid-Large C&I

MultifamilyC&LD

Nonfarm-Nonres.GSE Elig.1-4 Fam.Jumbo 1-4 Family

Auto LoansCredit Cards

Expectations for 2018 – Share of Senior Loan Officers Reporting:

Based on a sample of loan officers at 49-70 domestic banks (count varies by loan type); C&I = commercial and industrial (excludes syndicated loans); CRE = commercial real estate; C&LD = construction and land development. Source: Federal Reserve Senior Loan Officer Opinion Survey (http://www.federalreserve.gov/BoardDocs/snloansurvey/), Jan. 2018.

In 2018, Some Lenders Expect Tighter Standards for CRE & Consumer Loans, Weaker Consumer Loan Performance

FRB-SF

39%

18%

7%

9%

5%

6%

4%

2%

6%

57%

75%

88%

86%

95%

94%

93%

88%

84%

4%

7%

5%

5%

0%

0%

3%

11%

9%

0% 50% 100%

Worse Same Better

Expectations for Expectations forLending Standards: Loan Performance:

Gro

wth

71%

76%

64%

69%70%

65%67%

59%

66%

50%

55%

60%

65%

70%

75%

80%

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

District

Nation

FRB-SF

38

Net Loans and Leases / Assets*

On-Balance Sheet Liquidity Retreated in the Past Year,Approaching Year-End 2005 Levels

24%

18%

30%

26%25%

30%27%

36%

30%29%

10%

15%

20%

25%

30%

35%

40%

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

District

Nation

Securities + Liquid Invest. / Assets*

*All data are averages (trimmed means); liquid investments = cash, due from balances, interest bearing balances, and federal funds sold & securities purchased under agreements to resell.

FRB-SF

Liqu

idit

y

39Average = trimmed mean; noncore liabilities = sum of borrowings (e.g., federal funds purchased, repurchase agreements, and other borrowed money), foreign deposits, certificates of deposit > $250K, and brokered deposits < $250K.

Average District Noncore Funding Edged Higher

13.0%

9.1%10.1%

10.8%

10.6%

8.3%9.2% 9.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

District Nation

Average Noncore Liabilities / Total Assets

Liqu

idit

y

FRB-SF

51%

67% 67%

21%

34% 36%46%

60% 61%

14%

22% 23%

0%

10%

20%

30%

40%

50%

60%

70%

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

All NMDs NMDs > $250K

District

Nation

Average Nonmaturity Deposits to Assets

40

Jumbo Nonmaturity Deposits Continued toIncrease, Especially in the District

FRB-SF

Average = trimmed mean; NMD = nonmaturity deposits (all deposits excluding time deposits); Jumbo = > $250K.

Liqu

idit

y

41

25.0%

44.4%42.8%

29.0%

46.3%

43.8%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

District

Nation

Average % of Loans & Securities Maturing > 3 Years

Average = trimmed mean; *December of each year; NV excludes credit card and zero-loan banks.

Exposures to Longer-Term Assets Remained Elevated,with a Seasonal Uptick in the Fourth Quarter

FRB-SF

2005-17* Dec-17

AK 54.6%

AZ 47.2%

CA 43.4%

HI 47.9%

ID 33.9%

NV 39.9%

OR 52.6%

UT 30.0%

WA 47.6%

Nation 43.8%

Average Loans & Securities > 3 Years /

Assets (%)

Int.

Rat

e R

isk

= trough = peak

Rising Interest Rates and Changes in Tax-Related Adjustments Steepened Unrealized AFS Securities Losses

Average = trimmed mean (12th District banks only); AFS = available-for-sale; changes in valuation reported net of deferred tax effects; UST = end of period U.S. Treasury yield at a constant maturity (from Federal Reserve via Haver Analytics).

-1.26%

1.99%

-0.85%

1.19%

-0.71%

5.03%

2.25%

1.65%

3.04%

1.49%

2.40%

-1.50%

-0.75%

0.00%

0.75%

1.50%

2.25%

3.00%

3.75%

4.50%

5.25%

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Average Net Unrealized Gains (Losses) on AFS Securities / AFS Securities 10-Yr. UST Yield

42

FRB-SF

Int.

Rat

e R

isk

10.3%11.2% 11.0%

12.1%

15.8%

14.5%

13.2%

17.0%

15.7%

9.8%10.7%

13.7%

15.5%14.8%

16.6%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

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

District

Nation

Average Regulatory Capital Ratios

43

Average Regulatory Capital Ratios ImprovedYear-over-Year

FRB-SFAverage = trimmed mean; new risk-based capital rules that became effective March 2015 for most banks (March 2014 for some larger/more complex banks) included the phase out of some capital instruments and higher risk weights on some asset and off-balance sheet commitment categories.

Cap

ital

44

79.7%

84.7%

70.4%

75.7% 75.9%

69.9%72.1%

64.4%

69.6% 70.3%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

District

Nation

Average Risk-Weighted Assets / Total Assets

Average = trimmed mean; Risk-Weighted Assets are weighted according to regulatory risk-based capital rules in effect as of the report filing date (weights generally reflect perceived credit risk); includes off-balance sheet values subject to credit conversion and risk weighting; new capital rules that became effective March 2015 for most banks (March 2014 for some larger/more complex banks) included higher risk weights on some asset and off-balance sheet commitment categories.

District Bank Risk-Weighted Asset Mix Held Steady vis-à-vis Total Assets, Benefitting Risk-Based Capital Ratios

FRB-SF

Cap

ital

64%

24%

49%

24%

4%

14%20%

68%

47%

62%61%

38%

29% 31%

0%

10%

20%

30%

40%

50%

60%

70%

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Subchapter S Tax Filers Non Subchapter S Tax Filers

District

Nation

Average YTD Cash Dividends / Net Income

45

Average 12th District Dividend Payout Ratios Trailed theNation but Strengthened Notably for C-Corporation Banks

FRB-SF

Cap

ital

Average = trimmed mean; YTD = year-to-date; Subchapter S filing banks (13% of banks in the 12th District, 39% of banks nationwide) pay taxes at the shareholder rather than corporate level and typically have higher dividend payout rates (also known as distributions) so that shareholders can cover tax obligations.

46

Section 3Commercial Bank Regulatory Ratings & Trends

Focusing on trends in safety and soundness, consumer

compliance, and Community Reinvestment Act

examination ratings assigned by regulatory agencies to

commercial banks headquartered within the

12th Federal Reserve District.

-55%

-4%

22%

11%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

% Upgrades

% Downgrades

47

Trailing 4-Quarter Share of 12th District S&S Examinations that Resulted in CAMELS Composite Rating Upgrade or Downgrade(Downgrades Shown as Negative Percentages)

S&S = safety and soundness; includes any change in composite CAMELS rating for commercial banks regardless of severity; includes De Novo banks; dated based upon examination completion; preliminary fourth quarter 2017 data through 02/13/18.

During 2017, Composite Safety and Soundness Examination Rating Upgrades Continued to Outpace Downgrades

FRB-SF

Rat

ings

11.5%

31.8%

6.4%

0%

10%

20%

30%

40%

50%

60%

Dec

-93

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

District - Composite 3

District - Composite 4 or 5

Nation - Composite 3, 4, 5

60.6%

7.5%

32.6%

Percentage of Banks Rated Composite 3, 4, or 5

48Dated based upon examination completion; includes De Novo banks; preliminary fourth quarter 2017 data through 02/13/18.

FRB-SF

As a Result, the Share of District Banks with Composite Ratings of 3, 4, or 5 Dropped Notably by Year-EndR

atin

gs

13.3%

-48%

-4%

-62%

-4%

-48%

-7%

-57%

-4%

-43%

-6%

-34%

-3%

20%

7%

31%

14%25%

13%

28%

14% 20%

6% 9%

-65%

-52%

-39%

-26%

-13%

0%

13%

26%

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Dec

-05

Dec

-09

Dec

-13

Dec

-17

Capital Asset Quality Management Earnings Liquidity Sensitivityto Mkt. Risk

% Upgrades

% Downgrades

Trailing 4-Quarter Share of 12th District S&S Examinations that Resulted in CAMELS Component Rating Upgrade or Downgrade(Downgrades Shown as Negative Percentages)

49S&S = safety and soundness; includes any change in component CAMELS rating for commercial banks regardless of severity; includes De Novo banks; dated based upon examination completion; preliminary fourth quarter 2017 data through 02/13/18.

Earnings and Asset Quality Upgrades Still Most Common; Upgrades Matched or Outpaced Downgrades in All Areas

FRB-SF

Rat

ings

4.6%

12.5%

4.3%5.0%

0.4%

2.9%

1.3%1.4%3.3%

7.1%

2.7% 2.3%0.4%

2.7%

2.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Dec

-17

Consumer Compliance Community Reinvestment Act (CRA)

District

Nation

Percentage of 12th District Banks with Less-than-Satisfactory Ratings(Includes Consumer Compliance Ratings of 3-5 or CRA Rating of NI or SN)

50

The District’s Share of Banks with Less-Than-Satisfactory Consumer Compliance/CRA Ratings Edged Higher

FRB-SF

Rat

ings

NI = Needs to Improve; SN = Substantial Noncompliance; includes De Novo banks; dated based upon examination completion; preliminary fourth quarter 2017 data through 02/13/18.

Summary of Institutions

Technical Information

Appendices

51

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

Banking Statistics: Unless otherwise noted, all data are for commercial banks based upon headquarters location. Averages are calculated on a “trimmed” basis by removing the highest 10% and lowest 10% of ratio values prior to averaging to prevent distortion from outliers. Earnings figures are presented on an annualized year-to-date or quarterly basis, as noted. Growth rates are not adjusted for mergers. The latest quarter of data is considered preliminary. Other than the table to the left, most graphics exclude “De Novo” banks (banks less than five years old) and industrial banks and savings institutions (which have different operating characteristics).

Groups by Asset Size: “Very Small,” “Small,” and “Mid-Sized” bank groups are based on total asset ranges of <$1 billion, $1-$10 billion, and $10-$50 billion, respectively. The “Large” bank group uses banks with assets >$50 billion nationwide because these banks typically operate beyond the District’s geographic footprint and a larger statistical population is needed to construct trimmed means.

52Based on preliminary fourth quarter 2017 data.

Appendix 1: Summary of Institutions

Appendix 2: Technical Information

AreaCommercial

Banks(De Novos)

Industrial Banks(De Novos)

Savings Institutions (De Novos)

Dec-16 Dec-17 Dec-16 Dec-17 Dec-16 Dec-17

AK 4 (0) 4 (0) - - 1 (0) 1 (0)

AZ 16 (0) 15 (0) - - 1 (0) -

CA 164 (0) 152 (1) 3 (0) 3 (0) 11 (0) 11 (0)

GU 2 (0) 2 (0) - - 1 (0) 1 (0)

HI 5 (0) 5 (0) 1 (0) 1 (0) 2 (0) 2 (0)

ID 11 (0) 12 (0) - - 1 (0) 1 (0)

NV 9 (0) 10 (0) 4 (0) 4 (0) 2 (0) 3 (0)

OR 21 (0) 17 (0) - - 3 (0) 3 (0)

UT 30 (0) 27 (0) 15 (0) 15 (0) 2 (0) 2 (0)

WA 39 (0) 37 (0) - - 10 (0) 10 (0)

12L 301 (0) 281 (1) 23 (0) 23 (0) 34 (0) 34 (0)

U.S. 5,084 (2) 4,889 (7) 25 (0) 25 (0) 801 (1) 753 (1)