Download The U.S. Economy and 12 District Banking: Conditions & Outlook

San Francisco, CA
November 20, 2012
Call The Fed
The U.S. Economy and 12th District
Banking: Conditions & Outlook
Gary C. Zimmerman, Senior Economist
Gary Palmer, Senior Manager
Colin Perez, Senior Analyst
Federal Reserve Bank of San Francisco
Overview
1.
2.
3.
4.
5.
6.
Goals of U.S. monetary policy
Current U.S. economic conditions
Regional indicators
U.S. economic forecast (FRBSF)
Risks ahead
Monetary policy transparency and actions
These remarks represent my views and not necessarily those of my colleagues in
the Federal Reserve System and the Federal Reserve Bank of San Francisco.
No audio recording, video recording, or photography is permitted without the
permission of the presenter. This presentation may not be reproduced in any
form without the express, written permission of the presenter.
2
1. GOALS OF MONETARY POLICY
3
U.S. Monetary Policy Goals
Congress has set these two goals for the Fed:
1) Promote maximum sustainable output and
employment
2) Promote stable prices
FOMC regularly reports to Congress and the public via:
•
Testimony and Reports, FOMC Statements and
Minutes, Chairman’s press conference, speeches
•
Economic forecasts (Summary of Economic Projections)
4
2. CURRENT ECONOMIC SITUATION
5
Economy Is Growing at a Moderate Pace
•
Beige Book: Economy expanding modestly
•
Marginal increase in the unemployment rate from
7.8% to 7.9% in October, lots of labor market slack
•
Inflation has been subdued
•
Inflation expectations have remained stable
•
Financial conditions are a bit more accommodative
•
Important downside risks remain: fiscal cliff
and European situation
6
Although Output Has Surpassed Pre-Recession Levels,
It Remains Well Below Potential as a Result of the
Long and Deep Recession and Moderate Recovery
7
Modest Wage Growth Anchors Costs/Prices
8
TIPS Inflation Expectations Remain Anchored
(An Important Factor for the Inflation Outlook)
Source: Federal Reserve Board.
9
Labor Market: The Economy Is Adding Jobs at a Quicker
Pace in Recent Months (from the Payroll Survey)
10
October Unemployment Rate Rises Marginally to
7.9 Percent as People Returned to the Workforce
(from the Household Employment Survey)
SPF Natural Rate
Range (≈ 5-7%)
SPF = Survey of Professional Forecasters, FRB Philadelphia.
11
Low Rates: Interest Rate Sensitive Consumption
Spending on Durables Has Rebounded
12
Housing and Construction: The Housing Sector Remains
Depressed, but Is Now Showing Positive Signs of Growth
13
House Prices Appear to Finally Be Stabilizing and/or
Rebounding as Policy Actions Support Housing
14
3. REGIONAL ECONOMIC CONDITIONS –
REFLECT NATIONAL RECOVERY
15
In 2012, Payroll Jobs Are Growing in Each Twelfth
District State – AZ, CA, UT, & WA Show Fastest Growth
16
Unemployment Rates (%) During the Recovery Have
Fallen in All Twelfth District States, Except Nevada
17
In 2012, Case-Shiller House Price Indexes Are Increasing
18
Recording Fewer Past Due and Foreclosed
First Mortgages Is Another Sign of
Improvement in the Financial and
Household Sectors – September 2012
Source:
LPS Analytics
19
Recording Fewer Past Due and Foreclosed First
Mortgages Is Another Sign of Improvement in the
Financial and Household Sectors – September 2012
Source:
LPS Analytics
20
4. NATIONAL FORECAST
FRBSF ECONOMIC FORECAST
(FEDVIEWS) NOVEMBER 8, 2012
http://www.frbsf.org/index.html
21
FRBSF FedViews Forecast: Additional Monetary Policy
Stimulus Is Expected to Support a Stronger Recovery
(Real GDP Growth Rates of 2.5% for 2013 and 3.5% for 2014)
Fedviews
November 8, 2012
Additional Monetary Policy Stimulus Should Bring the
Unemployment Rate Down a Little Faster – Expect
Unemployment to Fall to the Low 7% Range by the end of 2014
Sept. 2012
(released on
10/5/12)
Fedviews
September 14, 2012
Both Overall & Core Inflation Are Projected to (with monetary
policy stimulus ) Remain Below 2% Goal in 2013 and 2014
Fedviews
24
November 8, 2012
5. RISKS AHEAD
25
The European Sovereign Debt and Banking Crisis Remains
a Cause for Concern in Global Financial Markets and also
May Impact the U.S. Economy through Exports and Trade
Greece
Spain
Germany
26
Approaching the Fiscal Cliff
Federal Deficit Projections
% of GDP
8
7% of GDP
7
6
5
4
Fiscal Cliff
3
FISCAL
CLIFF
2011
2012
2013
2
1% of GDP
2014
Source: Congressional Budget Office
2015
2016
2017
1
2018
2019
2020
0
2021
6. RECENT MONETARY POLICY ACTIONS
28
Traditional Overnight Federal Funds Rate Tool Is Not
Sufficient to Stimulate the Economy
(because of the Zero Bound on Interest Rates)
“Implied” Fed Funds Target Rate
29
Transparency and Forward Guidance:
FOMC Statement (10/24/2012)
Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. The Committee
remains concerned that, without further policy
accommodation, economic growth might not be strong enough
to generate sustained improvement in labor market conditions.
Furthermore, strains in global financial markets continue to pose
significant downside risks to the economic outlook. The
Committee also anticipates that inflation over the medium
term likely would run at or below its 2 percent objective.
30
Large Scale Asset Purchases
 LSAP 1 (often referred to as QE1)
 11/25/2008—announcement of purchases of up to $100 billion in agency
debt and up to $500 billion in agency MBS.
 3/18/2009—announment of purchases of up to an additional $750 billion
of agency [MBS], $100 billion in agency debt, and $300 billion in Treasury
securities.
 LSAP 2 (often referred to as QE2)
 11/3/2010—announcement of purchases of $600 Billion in longer-term
Treasury Securities
 Maturity Extension Program (MEP or called “Operation Twist”)
 Announcement of purchase $400 billion in long-term Treasuries, to be
financed by sales of short-term Treasuries.
 June 20, 2012: Extension of maturity extension program through yearend.
 Main objective: Reduce long-term interest rates
31
Recent Policy Actions Announced on 9/13/2012
Were Continued on 10/24/2012
 Purchase additional agency-backed
mortgage-backed securities (MBS) at a
pace of $40 billion per month (QE3)
 If outlook does not improve substantially,
will continue or expand Large-scale Asset
Purchases (LSAP 3 or QE3), and employ
other policy tools as appropriate
 Extended forward guidance from
“late-2014” to “mid-2015”
32
Unconventional Monetary Policy Actions: Maturity Extension
Program Was Extended through the End of 2012, and $40 Billion in
Monthly MBS Purchases Will Expand the Balance Sheet Again
MBS = Agency Mortgage-backed Securities
33
Forward Guidance on “LIFTOFF”: FOMC Target Fed
Funds Rate Projections by Year of Increase for Each
FOMC Participant
September 2012
Meeting
YEAR: 2012
2013
2014
2015
FOMC Projections Sept. 13,2012
Longer run
34
BREAK FOR QUESTIONS BEFORE
BANKING CONDITIONS TOPIC
Call the Fed
Gary C. Zimmerman, Senior Economist
Federal Reserve Bank of San Francisco
35
Banking Conditions & Outlook
12th Federal Reserve District Focus
Featuring 3Q12 First Glance 12L
http://www.frbsf.org/publications/banking/index.html
Gary Palmer, FRBSF, Banking Supervision & Regulation
(with Tom Cunningham, Colin Perez)
36
COMMERCIAL BANKS
Focus will be on trends among the 410 commercial banks headquartered
within the 12th Federal Reserve District.
Bank Supervisors’ Hot Topics also will be covered
First Glance 12L – Nov. 2012
FRB-SF
37
CAMELS Upgrades Continued to Outpace Downgrades
Pct. of 12th District Exams Each Quarter that Resulted in CAMELS Composite
Rating Upgrade or Downgrade (downgrades are shown as negative percentages)
19%
20%
10%
6%
10%
10% 9%
4%
14%14%
22%
25%
19%
16%
4% 2%
1% 2% 3% 1% 1% 1% 1%
0%
-9% -9%
-15%
-31%
-37%
-43%
FRB-SF
First Glance 12L – Nov. 2012
9/12
3/11
12/10
9/10
12/09
9/09
3/09
12/08
9/08
6/08
3/08
12/07
-70%
6/09
-59%-61%-58%
6/12
-60%
9/07
-5%
% Upgrades
% Downgrades
3/12
-50%
12/11
-40%
9/11
-27%
-32%
-37%-37%
6/11
-30%
-2%
-12%-14%
-15%
-19%
6/10
-20%
-6% -3%
3/10
-10%
Includes any change in composite CAMELS rating for commercial
banks; quarterly trends based on examination completion dates
(mail dates); preliminary 9/30/12 figures; updated 11/9/12
38
Pct. of 12th District Banks Rated CAMELS 3, 4, or 5
Fell for Eight Consecutive Quarters
Percentage of District Banks Rated CAMELS 3, 4, or 5
60%
60%
CAMELS "3"
CAMELS "4"
CAMELS "5"
Nation "3", "4", "5"
50%
39%
40%
44%
32%
30%
25%
20%
4%
10%
FRB-SF
First Glance 12L – Nov. 2012
Sep-12
Sep-11
Sep-10
Sep-09
Sep-08
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Sep-02
Sep-01
Sep-00
Sep-99
Sep-98
Sep-97
Sep-96
Sep-95
Sep-94
Sep-93
Sep-92
Sep-91
Sep-90
0%
Trends for all commercial banks based on examination
completion dates (mail dates); preliminary 9/30/12
39
figures; updated 11/9/12
Financial Slides – A Note on Aggregates vs Averages
12th District Banks as of 9/30/12
Return on Avg. Assets
YTD annualized
Noncurrent Loans /
Total Loans
Total CRE Loan
Concentration Ratio
192%
1.30%
4.5%
1.2%
4.0%
150%
3.0%
0.8%
2.6%
0.67%
100%
97%
2.0%
0.4%
50%
1.0%
0.0%
0%
0.0%
Aggregate
Average
Aggregate
Average
Aggregate
Average
Following slides mainly show District bank
ratio averages (“trimmed means” ).
FRB-SF
First Glance 12L – Nov. 2012
12th District commercial banks, aggregates
include Wells Fargo Bank (60% of District Loans),
preliminary 9/30/12 data
40
Earnings: District Bank ROAA Continued to Recover &
Narrow Gap with Nation - Still Well Below Historical Averages
Average Return on Average Assets – annual (%)
1.40%
1.13%
1.22%
1.2%
0.90%
0.75%
0.8%0.65%
0.4%
0.44%
0.67%
0.34%
0.0%
-0.4%
District 12
Nation
-0.8%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
FRB-SF
First Glance 12L – Nov. 2012
Sep-11
Sep-12
-1.00%
-1.2%
Based on commercial banks, excluding De Novos;
trimmed means; Sept. ratios are YTD annualized;
preliminary 9/30/12 data
41
Just 17% of District Banks Lost Money YTD
2012, Compared to 61% in 2009
Percentage of Commercial Banks
Reporting Net Losses in 2009
12th District: 61% (2009)
Percentage of Commercial Banks
Reporting Net Losses through Sept ‘12
12th District: 17% (9 mo. ending 9/30/12)
63%
0%
22%
66%
0%
25%
69%
83%
57%
First Glance 12L – Nov. 2012
21%
38%
63%
80%
FRB-SF
14%
0%
> 60%
40% - 60%
15% - 40%
< 15%
14%
14%
30%
Preliminary 9/30/12 data for all
commercial banks, excluding De Novos
42
Large and Mid-Sized Bank Profitability Almost Recovered
Small Bank Profits Lag, but Improved
Average Return on Average Assets – 12th District Commercial Banks (%)
1.7%
1.5%
1.2%
1.5%
1.3%
0.9%
0.3%
0.2%
0.0%
1.1%
0.9%
1.3%
1.2%
0.5%
0.2%
Small - Assets < $1B
Mid-Sized - Assets $1B - $10B
Large - Assets > $10B
-1.0%
-1.1%
-1.5%
'05
'06
'07
'08
FRB-SF
First Glance 12L – Nov. 2012
'09
'10
'11
9/11 9/12
Based on commercial banks, excluding De Novos;
trimmed means; Sept. ratios are year-to-date
43
annualized; preliminary 9/30/12 data
District Bank Net Interest Margins Remained Depressed
District Banks Have Managed a Stable NIM Despite Declining Asset Yields
Net interest income (tax equiv) / average earning
assets (NIM) (quarterly NIMs annualized %)
5.5
Effective Fed funds rate
(quarterly average annualized %)
8.0
5.3%
5.1%
5.0
4.7%
12th District NIM
(left axis)
4.5%
4.5
4.1%
4.0
U.S. NIM (left axis)
6.0
4.0
3.8%
3.8%
3.9%
3.5
2.0
Fed funds (right axis)
3.0
0.0
3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12
FRB-SF Based on commercial banks excluding De Novos; trimmed
First Glance 12L – Nov. 2012
means; quarterly ratios are annualized; prelim 3Q12 data.
Effective Fed funds rates from FRB-St Louis.
44
Average Bank Efficiency Measures Improved Moderately
in 2012, Especially at Large and Small Banks
District Banks’ Efficiency Measures - overhead / (net interest income +
noninterest income) (this metric measures the cost to produce $1 of revenue)
85¢
85
82¢
76¢
83¢
Nation
80¢
70¢
75
65¢
67¢
65
66¢
65¢
64¢
56¢
54¢
55
47¢
53¢
47¢
45
52¢
61¢
Small Banks (<$1B)
Med. Banks ($1-10B)
Large Banks (>$10B)
35
25
2007
2008
2009
FRB-SF
First Glance 12L – Nov. 2012
2010
2011
Sep-11 Sep-12
Based on commercial banks excluding De Novos; trimmed
means; preliminary 9/30/12 data (year-to-date)
45
Noninterest Income has been Difficult to Grow
Small Banks Have Fewer Fee-Generating Options than Larger Banks
Median Noninterest Income/Avg. Assets
2.5%
Small - Assets < $1B
Mid-Sized - Assets $1B - $10B
Large - Assets > $10B
2.42%
2.0%
1.5%
1.0%
1.39%
1.14%
0.83%
0.79%
0.50%
0.79%
0.74%
0.5%
0.42%
FRB-SF
First Glance 12L – Nov. 2012
9-11
9-12
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.0%
Based on commercial banks, excluding De Novos;
median ratios; preliminary 9/30/12 year-to-date data
46
Core Profitability (pre-provision)
and Pre-Tax Earnings Rates Edged Higher
But Still Well Below Historic Averages
12th District Bank Profitability Ratios - (%)
Core Profitability
2.13%
(Pre-tax pre-provision income/avg. assets)
1.71%
0.98% 1.02% 1.11%
1.0
-0.5
-1.0
Small (<$1B)
0.94%
Mid ($1B-$10B)
1.65%
Large (>$10B)
2.04%
0.50%
-0.17%
0.53%
Pre-tax income/avg. assets
First Glance 12L – Nov. 2012
2008
2007
2006
2005
2004
2003
2002
2001
FRB-SF
9/12
-1.20%
-1.5
2010
0.0
0.79%
Avg. District Core Profitability
by Bank Size – 9/30/12
2009
0.5
0.88%
9/11
1.5
1.86%
2011
2.0
2.16%
Based on commercial banks, excluding De Novos;
trimmed means; 9/30/12 ratios are annualized;
preliminary 9/30/12 data
47
Bank Supervisors’ Hot Topic:
Earnings Trends Good, but Mainly due to Sharply Lower
Provisions for Credit Losses
Loss Provisions/Net Charge-Offs (x)
District
Nation
7.0x
7.0
6.0
5.0
However, ALLL
coverage of total loans
remained relatively
high at 2.4% on avg.
1.9x
4.0
1.5x
3.0
1.4x
1.1x
0.9x
0.8x
2.0
1.1x
1.1x
1.0
0.7x
First Glance 12L – Nov. 2012
Dec-06
Dec-04
Dec-02
Dec-00
Dec-98
9/12
'11
'10
'09
'08
'07
'06
FRB-SF
Dec-96
0.0
0x
1.5x
Sep-12
1x
1.0x
Dec-10
2x
District
Nation
Dec-08
3x
3.2x 3.0x
Allowance for Loan and Lease Loss
(ALLL) coverage of noncurrent loans (x)
ALLL: Allowance for Loans and Lease Losses;
Based on commercial banks, excluding De Novos;
trimmed means; preliminary 9/30/12 data
48
43% of District Banks Reported Zero or Negative Loss
Provisions in 3Q12
Percentage of District Commercial Banks
Pct. that reduced
57% ALLL / Loan ratios
60%
in the quarter
49%
50%
44%
40%
30%
21%
Pct. with zero
33% provisions in the
quarter
10%
0%
4%
However:
 Examiners expect welldocumented justification for such
decisions
 Reductions in ALLL coverage
should be aligned with:
 Improving credit quality
20%
11%
 Drawing down of reserves is a
sign of improving credit quality
with negative
10% Pct.
provisions
5%
 Reserving needs on new loans
 FASB is proposing an expected
credit loss model for ALLL
accounting
3Q10 3Q11 3Q12
FRB-SF
First Glance 12L – Nov. 2012
ALLL = Allowance for Loan and Lease Losses
Based on all District commercial banks
excluding De Novos. Prelim 3Q12 data
49
Loan Quality: Average 12th District Bank Noncurrent
Loan Rate Continued to Descend
30-89 Day Past Due Loan Rate Approaching Pre-Crisis Lows
Average Noncurrent Loan Rates
Avg. Past Due 30-89 Day Loan Rates
4.8%
District 12
District 12
4.0
4.0
Nation
3.0
3.0
2.4%
1.0
2.6%
1.8%
0.7%
2.0
1.4%
1.0
0.9%
0.3%
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
0.0
FRB-SF
First Glance 12L – Nov. 2012
0.0
0.9%
0.9%
0.5%
0.4%
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
2.0
Nation
Based on commercial banks, excluding De Novos;
trimmed means; Noncurrent = 90 Days past due
or on nonaccrual; preliminary 9/30/12 data
50
By Loan Type: Noncurrent Rates Trending
Down Across Types
12th District Bank Noncurrent Loan Rates (Pct. of loans 90+ days past due or on nonaccrual)
16.1%
16%
14%
All Loans
Constr & Land Devel
Resid mortgage
C&I
Consumer
CRE (Nonfarm Nonresid)
12%
10%
8%
6%
6.5%
2.8%
4%
2.2%
2.1%
1.4%
0.1%
2%
FRB-SF
First Glance 12L – Nov. 2012
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
0%
Based on commercial banks excluding De Novos;
51
trimmed means, preliminary 9/30/12 data
By State: Noncurrent Loan Rates Dropped Broadly,
Especially in CA, HI, and ID
6.0%
NV
3.4%
AZ
OR
2.5%
CA
2.5%
UT
2.3%
AK
1.4% 1.3%
0.9%
0%
Other High Noncurrent
Loan Rates: 9/30/12
4.9%
2.9%
WA
HI
4.0%
3.3%
ID
7.5%
3.8%
3.6%
3.7%
3.2%
GA
FL
NC
SC
NJ
4.8%
4.4%
4.0%
3.7%
3.4%
Nation
1.8%
Sep-12
Sep-11
2.8%
2%
4%
FRB-SF
First Glance 12L – Nov. 2012
6%
8%
Based on commercial banks, excl. De Novos; trimmed
means; Noncurrent = 90+ days past due or on nonaccrual;
preliminary 9/30/12 data. Industrial bank avg. 9/12
52
noncurrent rates were 1.4% in NV and 0.9% in UT
Bank Supervisors’ Hot Topic
CRE Income Property Loan Quality & Vulnerability
 High concentrations / vulnerability
 Property values down >30% from
peaks* - some borrowers left with little
or no equity
 Loans being extended, renewed;
concerns: some maturing loans with
inadequate cash flows and insufficient
collateral values; are TDRs underreported?
 Current low interest rates have helped
keep CRE loans performing, so far.
Average 12th District Bank CRE Income
Property Loans (% of Total Loans)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
 Extensions must be well supported
* Based on Moody’s/RCA Commercial Price Property
Index for core sectors (office, retail, industrial) in nonFRB-SF
major markets
First Glance 12L – Nov. 2012
18%
Nonfarm Nonresidential Secured
(Nonowner-occupied portion 52% of total at 9/30/12)
1%
Multifamily
4%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Sep12
Examiners finding most CRE loans
performing and adequately collateralized;
new appraisals have been obtained and
efforts to remargin loans sometimes have
succeeded. However,
Based on all 12th District commercial
banks; trimmed means, preliminary
9/30/12 data
53
Loan Growth: Turnaround Continued
Avg. Loan Growth 2.8% YoY with Fastest Growth at Large and Mid-Sized Banks
Average District Year-Over-Year Loan Growth Rates (%) Avg. Annual Loan Growth
9/11
9/12
17.9%
Small Banks (<$1B)
Med. Banks ($1-10B)
Large Banks (>$10B)
15.016.5%
14.2%
10.0
All 12th Dist.
Banks
-4.8% 2.8%
All Banks
Nationwide
-2.0% 1.2%
6.4%
6.1%
5.0
1.8%
0.0
-2.0%
FRB-SF
First Glance 12L – Nov. 2012
9/12
3/12
9/10
3/10
9/09
3/09
9/08
3/08
9/07
3/07
9/06
-10.0
9/11
-6.9%
-6.9%
3/11
-5.0
Based on commercial banks, excluding De Novos;
trimmed means; preliminary 9/30/12 data
54
CAMELS Rated 1, 2, and 3 Banks Continued Loan Growth
CAMELS 4/5 Rated Further Reduced their Loan Portfolios
Loan Growth Rates – Year-over-Year
Averages within CAMELS Rating Groups
5%
2%
5%
4%
7%
8%
3%
0%
-1%
-2%
-5%
CAMELS 1s/2s
CAMELS 3s
1%
CAMELS 4s/5s
-5%
-10%
-15%
-15%
-13% -11%
-10%
-10%
Jun-12
Sep-12
-20%
Sep-11
Dec-11
Mar-12
Based on a panel of District commercial banks; excludes banks
with significant mergers, loan sales or loan purchases over the
FRB-SF
period; Averages are trimmed means.
First Glance 12L – Nov. 2012
CAMELS: rating system used by banking supervisors
55
Switching to Loan Growth Aggregates: C&I Continued Strong
YoY Growth, Followed by Residential 1st Lien, and Ag
12th District Bank Aggregate Loan Growth Rates - 12 months ending 9/30/12
Commercial & Industrial
16%
1-4 Family First Lien
11%
Ag + Farmland Secrd
5%
Consumer
3%
3%
Multifamily
Nonfarm Nonresid
HomeEquity + Jr Lien
2%
CRE (Nonfarm NR)
Owner-occ:
-7%
Nonowner-occ: 9%
-7%
Construction & Land Dev -16%
All Loans
-20%
FRB-SF
First Glance 12L – Nov. 2012
6%
-10%
0%
10%
Based on a panel of District commercial banks;
excludes banks with significant mergers, loan sales or
loan purchases over the period; prelim 9/30/12 data
56
Focus: C&I -– Growing Percentage of Banks Increased
Commercial & Industrial Loans
Annual C&I Loan Growth Rate Statistics – 12th District Banks (%)
44%
25%
15%
75th Percentile ratio:
25% of all banks grew
C&I loans by 22% or
more through 9/30/12
75th Percentile
Median
25th Percentile
39%
17%
22%
6%
1%
0%
3%
-10%
Median: 3%
(most banks increased
C&I lending)
-12%
-22%
FRB-SF
First Glance 12L – Nov. 2012
Sep-12
Sep-11
Sep-10
Sep-09
Sep-08
Sep-07
Sep-06
-25%
Based data for all District commercial banks,
includes only banks with material volume of
these loans (4%+); preliminary 9/30/12 data
57
Banks with High Rates of C&I Loan Growth
One Quarter of District Banks (and over 40% of Large Banks) Grew
their C&I Portfolios by 20% or More
Pct. of District Banks with 20%+ Growth in C&I Loans in Year Ending 9/30/12
All District Banks:
• 25% had 20%+ growth
• 9% had 40%+ growth
40%
35%
30%
25%
20%
41%
15%
19%
10%
25%
5%
0%
Large (>$10B)
FRB-SF
First Glance 12L – Nov. 2012
Mid ($1B-$10B)
Small (<$1B)
Based on a panel of District commercial banks with at
least 4% of loans in C&I as of 9/11, excludes banks with
significant mergers, loan sales or loan purchases over 58
the period; preliminary 9/30/12 data
Bank 1-4 Family First Lien Loan Growth
Significant Portions of Banks Had Significant Residential Loan Growth
Pct. of District Banks with 20%+ Growth in 1-4 Family First Lien Loans in
Year Ending 9/30/12
All District Banks:
• 31% had 20%+ growth
• 17% had 40%+ growth
40%
35%
(mostly small and mid sized banks)
30%
25%
40%
20%
15%
31%
29%
10%
5%
0%
Large (>$10B)
FRB-SF
First Glance 12L – Nov. 2012
Mid ($1B-$10B)
Small (<$1B)
Based on a panel of District commercial banks with at
least 4% of loans in 1-4 First Lien Loans as of 9/11,
excludes banks with significant mergers, loan sales or
loan purchases over the period; preliminary 9/12 data
59
Bank Supervisors’ Hot Topic
Expansion into New or Unfamiliar Lending Areas
12th District Bank Aggregate Loan Growth
Rates - 12 months ending 9/30/12
24%
C&I
Large Bks
(>$10B)

Portfolio rebalancing may reduce earnings
volatility and improve diversification, but…
7%
Mid Sized
($1B-$10B)
17%
23%
Multifamily
1%
Small Bks
(<$1B)
Banks are targeting growth in areas such as
C&I, 1-4 family residential, and multifamily
Different loan types require
different underwriting skills
9%
1%

1-4 Fam
1st
lien 20%
High competition in some areas
e.g., small C&I loans
Historical loss rates on C&I are
higher than on CRE
8%
0%
C&I
5%
10%
15%
1-4 Fam 1st Lien
FRB-SF
First Glance 12L – Nov. 2012
20%
25%
Multifamily
Management must establish and
maintain robust risk management
processes around all products
Based on a panel of District commercial banks;
excludes banks with significant mergers, loan sales or
60
loan purchases over the period
Liquidity: Banks Flush with Short Term Assets
Loan Demand Remains Weak / Investors Wary of Equities are Parking Money in Banks
Short-Term Investments/Assets
(average %)
Loans/Assets (adj. average %)
12th District
Nation
75.8%
75
12
70
10
66.4%
12th District
Nation
12.5%
66.7%
9.1%
63.7%
65
8
6
60
59.0%
4
50
0
FRB-SF
First Glance 12L – Nov. 2012
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
9/12
2
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
11
9/12
55
5.1%
Based on commercial banks, excluding De Novos;
trimmed means; preliminary 9/30/12 data
61
Bank Supervisors’ Hot Topic
Market Risk: Lengthening Asset Maturities
Loans and Securities Maturing or Repricing in Five
Years or More / Assets – District Banks Under $1B
 Vulnerability to rising interest
rates
 Rising rates would have a
negative cash flow impact on
many borrowers
24%
20%
15%
10%
5%
Also, “excess” liquidity could disappear 0%
quickly if customers decide to move
cash into higher yield investments and
bank loan growth keeps strengthening
FRB-SF
First Glance 12L – Nov. 2012
13%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sep-12
 District banks extended
maturities on assets
reaching for yield
Based on aggregate data for 12th District banks
with assets < $1 billion; includes commercial
and industrial banks; 9/30/12 data is
62
preliminary
Capital Adequacy: Tier 1 Common Equity Ratios also are
Up Sharply from Pre-Crisis Levels for Banks of All Sizes
Average District Bank Tier 1 Common Equity / Risk Weighted Assets Ratios
Small - Assets < $1B
Mid-Sized - Assets $1B - $10B
Large - Assets > $10B
16.0%
14.0%
15.5%
15.4%
15.2%
12.0%
12.0%
10.6%
11.8%
10.0%
8.0%
9.4%
9.4%
10.1%
FRB-SF
First Glance 12L – Nov. 2012
Sept-12
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
6.0%
Based on commercial banks, excluding De Novos;
trimmed means; preliminary 9/30/12 data
63
95% Exceed “Well Capitalized” thresholds, but…
Percentage of District Commercial Banks
“Well Capitalized” under PCA framework*
9/09
9/10
9/11
9/12
88%
92%
94%
95%
Well Capitalized: Main ratio
criteria is the Total Risk
Based Capital Ratio >= 10%
 9% of District Banks hold a CAMELS Capital ratings of “1” (strong)
 Capital must be sufficient to absorb unanticipated losses & declines
in asset values
 Examiners consider**:
•
•
•
•
•
•
the level and severity of problem assets
interest rate exposure; liquidity, funding, and market risks
the quality and level of earnings
concentrations of credit
risks from nontraditional activities
effectiveness of loan and investment policies, and management’s ability
to monitor and control financial and operating risk
FRB-SF
First Glance 12L – Nov. 2012
Capital categories based on Prompt Corrective Action
framework, using Call Report data.
** From Commercial Bank Examination Manual, Section
3020.1, Federal Reserve System
64
Other
“Hot Topics”
First Glance 12L – Nov. 2012
FRB-SF
65
Bank Supervisors’ Hot Topic
Earnings Challenges
EARNINGS ISSUE
Low interest rate environment – narrow margins
Modest loan demand / intense competition for quality borrowers
Limited opportunities to grow fee income, esp. for smaller banks
Higher overhead (fraud prevention, IT systems, compliance costs)
Not likely to see high rates of C&LD lending anytime soon
DURATION?
Temporary
Temporary
Permanent?
Permanent?
Permanent?
Relationship Between Construction & Land Development Every 10 pctg point increase in a
Lending and Earnings – 12th District Banks 2005 bank’s 2005 C&LD ratio was
associated with a 25 bp increase in
6%
pretax core earnings / avg. assets
2005 Pretax
Pre-provision
4%
“Core” Earnings /
Avg. Assets (District
Avg.)
2%
• Avg. C&LD ratio ’07 peak:
• Avg. C&LD ratio now:
y = 0.025x + 0.0173
Correlation Coefficient: 0.40
0%
FRB-SF
0%
20%
40%
60%
80%
2005 C&LD Loans / Total Loans
First Glance 12L – Nov. 2012
21%
5%
Earnings scenario based only on
lower C&LD lending in the future:
• Avg. Core earnings ’04-’07 2.00%
• Avg. ROAA ‘04-’07
1.30%
Outlook?
• Core: 25 bp lower
• ROAA: 16 bp lower
1.75%
1.14%
66
Bank Supervisors’ Hot Topic
Assorted Other Issues
 Capital planning / stress testing expectations of banks
 Fiscal Cliff – Impact on U.S. credit ratings & economy if we go over the cliff
 Information security issues – e.g., denial of service attacks
 Liquidity management:
•
Potential impact of planned expiration of the Transaction Account Guarantee
(TAG) program at YE2012 – depositors may chose to move funds elsewhere
 Regulatory compliance challenges and costs from Dodd Frank Act
 Proposals in Basel III, e.g., running unrealized gains/losses on AFS
securities through capital
•
Concern that banks might move large blocks of securities into Held to Maturity
portfolio; this would reduce liquidity; potential for "tainting" the portfolio if a HTM
security must be sold
•
Rule would create volatility in capital ratios from interest rates fluctuations
First Glance 12L – Nov. 2012
FRB-SF
67
Summary
 Banking recovery is advancing – but still a ways to go
 Challenges include slow growing economy, profitability
challenges
Questions?
68