Problem Loans Were Flat in 2015 at Minnesota Banks

Problem Loans Were Flat in 2015 at Minnesota Banks

2016 Forecast of Banking Conditions
and 2015 Results
For Minnesota and the Twin Cities
Ron Feldman
Executive Vice President
Federal Reserve Bank of
Minneapolis
1
2015 MN and TC Bank
Performance Relative to Forecast
• Actuals were generally within forecasted range
but at “worse” end
– Profitability was at lower (worse) end of range for MN banks;
TC bank profitability was in the middle of the range
– Loan growth was slightly worse than range
– Problem loans were at the higher (worse) end of the range
2
Summary of MN and TC Bank
Performance in 2015
• Little to no change in performance measures for
MN and TC Banks in 2015; good for loan quality
but not great for profits
– Profit levels were little changed from 2014; at historical norms
– Rate of loan growth was little changed from 2014;
at historical norms
– Level of problem loans was little changed from 2014 for MN
banks but a bit worse for TC banks; far below long-run norm
Forecast for 2016 MN and
TC Bank Performance
• Another flat year, leaning to slightly worse
outcomes
• Profits should stay flat
• Loan growth should stay about the same
• Problem loans should be flat to worsening
4
Key Factors in 2016 Forecast
• Pressure on borrowers to which MN/TC banks
have significant exposure (e.g., agriculture)
• Continued pressure on lending margins
• Positive economic forecast for 2016, but some
headwinds identified
5
More on 2016 Forecast
• Caveats
– Significant inherent uncertainty
– Post-crisis banking remains in flux
– Limited record forecasting bank conditions
• Approach
– Judgmental forecast
• Informed by many sources (e.g., model, accounting,
outreach)
– Median bank for three variables, one year out
6
MN Bank Profitability
Actuals and Forecasts
1.6
Net loan growth (year-over-year) (%)
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2001
2003
Forecast for 2015
2005
Median Bank
2007
2009
2011
Historical Median (2001 - 2015)
2013
2015
2017
Forecast for Year End 2016
2015 profits came in at low end of forecast range
Little change in 2015 profits
Forecast little change in profits for 2016
7
MN Bank Loan Growth
Actuals and Forecasts
14.00
Net loan growth (year-over-year) (%)
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2001
-2.00
2003
2005
2007
2009
2011
2013
2015
2017
-4.00
-6.00
Forecast for 2015
Median Bank
Historical Median (2001 - 2015)
Forecast for Year End 2016
2015 loan growth came in lower than forecast range
Little change in 2015 loan growth
Little change in loan growth forecasted for 2016
8
MN Bank Problem Loans
Actuals and Forecasts
30
Noncurrent and delinquent loans
(% of capital and allowances)
25
20
15
10
5
0
2001
2003
Forecast for 2015
2005
2007
Median Bank
2009
2011
Historical Median (2001 - 2015)
2013
2015
2017
Forecast for Year End 2016
2015 problem loans came in at high end of forecast range
Little change in 2015 problem loans
Little change in problem loans forecasted for 2016
9
Twin Cities Bank Profitability
Actuals and Forecasts
1.6
Return on average assets (%)
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2001
2003
Forecast for 2015
2005
Median Bank
2007
2009
2011
Historical Median (2001 - 2015)
2013
2015
2017
Forecast for Year End 2016
2015 profits came in at the middle of forecast range
Small gain in 2015 profits
Forecast little change in profits for 2016
10
Twin Cities Bank Loan Growth
Actuals and Forecasts
Net loan growth, year-over-year (%)
20
15
10
5
0
2001
2003
2005
2007
2009
2011
2013
2015
2017
-5
-10
Forecast for 2015
Median Bank
Historical Median (2001 - 2015)
Forecast for Year End 2016
2015 loan growth came in lower than forecast range
2015 loan growth was flat
Little change in loan growth forecasted for 2016
11
Twin Cities Bank Problem Loans
Actuals and Forecasts
35
Noncurrent and delinquent loans
(% of capital and allowances)
30
25
20
15
10
5
0
2001
2003
Forecast for 2015
2005
2007
Median Bank
2009
2011
Historical Median (2001 - 2015)
2013
2015
2017
Forecast for Year End 2016
2015 problem loans came in at high end of forecast range
Small increase in 2015 problem loans
Little change in problem loans forecasted for 2016
12
Appendix:
Details on 2015 Minnesota and Twin Cities Bank Performance
13
Profitability Was Flat in 2015 at Minnesota Banks
2.5
Return on average assets (%)
2
1.5
1
0.5
0
2001
2003
2005
2007
2009
2011
2013
2015
-0.5
50th Percentile
Historical Median (2001 - 2015)
25th Percentile
75th Percentile
14
Small Annual Increase in Provisions in 2015 at Minnesota Banks
1.4
Provision expense
(% of average assets)
1.2
1
0.8
0.6
0.4
0.2
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
15
Net Interest Margin Was Flat
in 2015 at Minnesota Banks
5.5
Net interest margin (%)
5
4.5
4
3.5
3
2.5
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
16
Loan Growth Was Flat in 2015 at Minnesota Banks
25
Net loan growth (year-over-year) (%)
20
15
10
5
0
2001
-5
2003
2005
2007
2009
2011
2013
2015
-10
-15
50th Percentile
Historical Median (2001 - 2015)
25th Percentile
75th Percentile
17
Overall Problem Loans Were Flat
in 2015 at Minnesota Banks
45
Noncurrent and delinquent loans
(% of capital and allowances)
40
35
30
25
20
15
10
5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
18
Commercial Real Estate (CRE) Problem Loans
Were Flat in 2015 at Minnesota Banks
Noncurrent and delinquent CRE loans
(% of capital and allowances)
25
20
15
10
5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
19
Construction & Land Development (CLD) Problem Loans
Were Flat in 2015 at Minnesota Banks
12
Noncurrent and delinquent CLD loans
(% of capital and allowances)
10
8
6
4
2
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
20
Commercial & Industrial (C&I) Problem Loans Were Flat
in 2015 at Minnesota Banks
9
Noncurrent and delinquent C&I loans
(% of capital and allowances)
8
7
6
5
4
3
2
1
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
21
Residential Real Estate (RRE) Problem Loans
Were Flat in 2015 at Minnesota Banks
9
Noncurrent and delinquent RRE loans
(% of capital and allowances)
8
7
6
5
4
3
2
1
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
22
Agricultural (Ag) Problem Loans
Were Flat in 2015 at Minnesota Banks
4
Noncurrent and delinquent Ag loans
(% of capital and allowances)
3.5
3
2.5
2
1.5
1
0.5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
23
Medium Annual Decrease in Other Real Estate Owned (OREO)
Problem Loans in 2015 at Minnesota Banks
20
Other real estate owned
(% of capital and allowances)
18
16
14
12
10
8
6
4
2
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
24
Small Annual Increase in Capital in 2015 at Minnesota Banks
12
Tier 1 Leverage Ratio (%)
11.5
11
10.5
10
9.5
9
8.5
8
7.5
7
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
25
Bank Ratings Improved During 2015 at Minnesota Banks
100%
90%
80%
70%
Rated 1
60%
Rated 2
50%
Rated 3
40%
Rated 4
30%
Rated 5
20%
10%
0%
2001
2003
2005
2007
2009
2011
2013
Federal Reserve Risk Management Ratings – Summary of Definitions
1 – Strong or sound in every respect
2 – Satisfactory or fundamentally sound
3 – Fair/less than satisfactory; requires more than normal supervision
4 – Unsatisfactory; unsafe and/or unsound practices and conditions; failure a possibility
5 – Critically deficient; extremely unsafe and unsound; failure is highly probable
Commercial Bank Examination Manual. “Overall Conclusions Regarding Condition of the Bank:
Uniform Financial Institutions Rating System and the Federal Reserve’s Risk Management Rating .” Section A.5020.1. October 2015.
2015
Small Annual Gain in Profitability in 2015 at Twin Cities Banks
2.5
Return on average assets (%)
2
1.5
1
0.5
0
2001
-0.5
2003
2005
2007
2009
2011
2013
2015
-1
-1.5
-2
50th Percentile
Historical Median (2001 - 2015)
25th Percentile
75th Percentile
27
Provisions Were Flat in 2015 at Twin Cities Banks
Provision expense
(% of average assets)
2.5
2
1.5
1
0.5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
28
Medium Annual Decrease in Net Interest Margin
in 2015 at Twin Cities Banks
5.5
Net interest margin (%)
5
4.5
4
3.5
3
2.5
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
29
Loan Growth Was Flat in 2015
at Twin Cities Banks
30
Net loan growth (year-over-year) (%)
25
20
15
10
5
0
2001
-5
2003
2005
2007
2009
2011
2013
2015
-10
-15
-20
50th Percentile
Historical Median (2001 - 2015)
25th Percentile
75th Percentile
30
Small Annual Increase in Overall Problem Loans
in 2015 at Twin Cities Banks
70
Noncurrent and delinquent loans
(% of capital and allowances)
60
50
40
30
20
10
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
31
Commercial Real Estate (CRE) Problem Loans Were Flat
in 2015 at Twin Cities Banks
40
Noncurrent and delinquent CRE loans
(% of capital and allowances)
35
30
25
20
15
10
5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
32
Construction & Land Development (CLD) Problem Loans
Were Flat in 2015 at Twin Cities Banks
Noncurrent and delinquent CLD loans
(% of capital and allowances)
25
20
15
10
5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
33
Small Annual Decrease in Commercial & Industrial (C&I)
Problem Loans in 2015 at Twin Cities Banks
12
Noncurrent and delinquent C&I loans
(% of capital and allowances)
10
8
6
4
2
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
34
Small Annual Increase in Residential Real Estate (RRE)
Problem Loans in 2015 at Twin Cities Banks
12
Noncurrent and delinquent RRE loans
(% of capital and allowances)
10
8
6
4
2
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
35
Agricultural (Ag) Problem Loans Were Flat
in 2015 at Twin Cities Banks
0.3
Noncurrent and delinquent Ag loans
(% of capital and allowances)
0.25
0.2
0.15
0.1
0.05
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
36
Medium Annual Decrease in Other Real Estate Owned (OREO)
Problem Loans in 2015 Q4 at Twin Cities Banks
40
Other real estate owned
(% of capital and allowances)
35
30
25
20
15
10
5
0
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
37
Medium Annual Increase in Capital in 2015 at Twin Cities Banks
13
Tier 1 Leverage Ratio (%)
12
11
10
9
8
7
2001
2003
50th Percentile
2005
2007
Historical Median (2001 - 2015)
2009
2011
25th Percentile
2013
2015
75th Percentile
38
Ratings Improved During 2015 at Banks in the Twin Cities
100%
90%
Rated 1/2
80%
Rated 3
70%
Rated 4/5
60%
50%
40%
30%
20%
10%
0%
2001
2003
2005
2007
2009
2011
2013
Federal Reserve Risk Management Ratings – Summary of Definitions
1 – Strong or sound in every respect
2 – Satisfactory or fundamentally sound
3 – Fair/less than satisfactory; requires more than normal supervision
4 – Unsatisfactory; unsafe and/or unsound practices and conditions; failure a possibility
5 – Critically deficient; extremely unsafe and unsound; failure is highly probable
Commercial Bank Examination Manual. “Overall Conclusions Regarding Condition of the Bank:
Uniform Financial Institutions Rating System and the Federal Reserve’s Risk Management Rating .” Section A.5020.1. October 2015.
2015