Mutual Savings Association Advisory Committee November 18, 2015 - - PowerPoint PPT Presentation

Mutual Savings Association Advisory Committee

November 18, 2015

• Industry performance trends
• Risk Assessment – OCC’s perspective on top industry risks

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Introduction

Savings Institutions

• As of September 30, 2015, the savings industry comprises 823 charters

and $1.1 trillion in assets.

• OCC supervises 51 percent, or 416 of these charters and 66 percent, or

$688 billion of the assets.

• The other 407 institutions consist of state savings banks, state savings &

loans and cooperatives.

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Prim Reg # Chart % Chart Assets $ 2015Q3 (000's) % of Assets OCC 416 51% 687,967,762 66% FDIC 407 49% 362,194,982 34%

Total 823 100% 1,050,162,744 100% FSAs vs Other Savings Institutions

Thrift Charter Consolidations and Conversions

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220 214 204 195 189 186 176 172 169 165 429 405 369 351 332 311 292 276 260 251 $853 $863 $749 $667 $668 $654 $645 $659 $646 $642 $56 $55 $54 $52 $50 $48 $48 $47 $48 $46

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 100 200 300 400 500 600 700

2Q11 649 4Q11 619 2Q12 573 4Q12 546 2Q13 521 4Q13 497 2Q14 468 4Q14 448 2Q15 429 3Q15 416 Assets # FSAs

Trends in OCC Supervised Mutual and Stock FSAs

# Mutual # Stock Stock $ (B) Mutual $ (B)

Federal Savings Associations – Departures

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Conversions to State Charters, 94, 40% Conversions to National Banks, 19, 8% Mergers into National Charters 34, 15% Mergers into State Charters, 58, 25% Failures, 14, 6% Vol Liquidations, 14, 6%

FSA Charter Departures by Disposition

FSA Asset Distribution

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# % # % # % Less Than $50MM 52 13% 32 19% 20 8% $50MM To $100MM 68 16% 39 24% 29 12% $100MM To $250MM 130 31% 50 30% 80 32% $250MM To $500MM 69 17% 28 17% 41 16% $500MM To $1B 38 9% 9 5% 29 12% Greater Than $1B 59 14% 7 4% 52 21%

Total 416 100% 165 100% 251 100%

Asset Size All FSAs Mutual FSAs Stock FSAs

FSA Asset Distribution - 9/30/2015

FSA Age Distribution

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0% 1% 11% 46% 42% 24% 13% 12% 24% 27% 14% 8% 12% 33% 33% 0% 10% 20% 30% 40% 50% < 25 Yrs 25 to 50 Yrs 50 to 75 Yrs 75 to 100 Yrs > 100 Yrs

FSA Age Distribution - 9/30/2015

Mutual FSAs Stock FSAs All FSAs

FSA Performance – Asset Quality

Asset quality indicators for FSAs improved in 2015. Classified, special mention and non- performing assets declined year-over-year. The ALLL decreased in tandem with classified loans and net loan losses. Loan growth has been weak but improved year-over-year to 2.61 percent.

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All FSAs Mutual Stock All FSAs Mutual Stock Special Mention /Tier 1 + ALLL 3.90 2.28 4.80 4.47 3.37 5.99 % Classifed Assets /Tier 1+ ALLL 16.75 14.01 18.65 18.54 15.82 23.37 Non-cur Lns&OREO/Lns&OREO 1.46 1.49 1.41 1.71 1.58 1.78 ALLL / Loan & Leases Not HFS 1.09 1.01 1.17 1.19 1.03 1.30 Net Loan & Lease Growth Rate 2.61 0.69 5.47 2.25

• 0.41

5.00 Net Loss / Avg Tot Lns & Ls 0.04 0.04 0.05 0.09 0.08 0.10 Financial Measure 9/30/2015 9/30/2014

Asset Quality (median values)

FSA Performance – Earnings and Capital

• Earnings indicators are mixed through the first nine months of 2015. While ROAA rose by five

basis points, NIM fell two basis points and efficiency ratios edged higher to 80.93.

• Capital levels remain strong and stable year-over-year. The new capital rules introduced

Common Equity Tier 1 as a new capital adequacy ratio beginning March 31, 2015. The new ratio was the same as Tier 1 RBC Ratio for all but seven FSAs as of September 30, 2015.

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All FSAs Mutual Stock All FSAs Mutual Stock ROAA Adj Sub S 0.49 0.38 0.59 0.44 0.34 0.54 Net Interest Margin (NIM) 3.28 3.19 3.40 3.30 3.15 3.43 Efficiency Ratio 80.93 83.61 79.31 80.88 82.94 79.22 T1 Leverage Capital 11.81 13.34 11.18 11.83 13.20 10.94 T1 RBC to Risk-Wt Assets 20.21 26.69 17.63 20.55 27.03 17.61 Total RBC to Risk-Wt Assets 21.54 27.44 18.58 21.61 27.73 18.80 Common Equity Tier 1 20.21 26.69 17.63

• Earnings and Capital (median values)

Financial Measure 9/30/2015 9/30/2014

FSA Performance – Liquidity and Sensitivity

• Liquidity ratios remain stable.
• Sensitivity indicators reflect higher risk. The long term assets to total assets ratio increased

and poses a supervisory concern should rates rise.

• The residential real estate to total assets ratio remains high, but decreasing and the non-

maturity deposits to long-term assets improved slightly.

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All FSAs Mutual Stock All FSAs Mutual Stock Non-Core Funding Dependence 1.20

• 3.90

7.58 0.95

• 4.34

5.57 % Reliance on Whole. Funding 5.84 1.25 10.50 5.07 1.37 9.22 Loans to Deposits 86.51 83.31 90.77 83.31 81.50 87.88 % LT Assets /Total Assets 46.02 51.09 41.23 46.88 52.94 41.73 % Res Real Estate /Total Assets 53.52 59.43 47.17 54.70 61.78 48.06 Non-Mat Deposits/Long Assets 79.00 69.29 86.05 75.39 64.63 84.35

Liquidity and Sensitivity to Market Risk (median values)

Financial Measure 9/30/2015 9/30/2014

OCC National Risk Committee Top Risks

• Strategic Risk
• Compliance – BSA/AML and Consumer Compliance
• Operational - Cybersecurity
• Credit - Underwriting
• Interest Rate Risk

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FSA Level of Risk

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A high aggregate level of risk rating was most often assigned for Strategic, at 15 percent, followed by Credit risk, at 10 percent.

7% 10% 8% 3% 9% 5% 9% 15% 55% 57% 63% 44% 67% 25% 39% 50% 38% 33% 30% 53% 24% 67% 52% 35% 0% 20% 40% 60% 80% 100% COMP CREDIT IRR LIQ OPER PRICE REP STRAT

All FSAs Aggregate Level of Risk

High Moderate Low

FSA Direction of Risk

An increasing direction of risk rating was most often assigned for Strategic, at 37 percent, followed by Compliance and Operational, at 32 and 31 percent, respectively.

13 31% 25% 26% 17% 32% 11% 19% 37% 68% 68% 73% 82% 68% 80% 80% 63% 1% 7% 1% 1% 0% 5% 1% 0% 0% 20% 40% 60% 80% 100% COMP CREDIT IRR LIQ OPER PRICE REP STRAT

All FSAs Direction of Risk

Increasing Stable Decreasing

FSAs with High or Moderate and Increasing Risk

More FSAs have high or moderate and increasing strategic risk, at 35 percent, versus any other category. Operational risk is close behind at 33 percent, but levels of risk have declined year-over-year. IRR has moved into the third spot at 28 percent followed by compliance risk and credit risk at 26 percent and 25 percent, respectively.

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33% 31% 29% 15% 38% 12% 21% 35% 26% 25% 28% 16% 32% 10% 19% 34% 0% 15% 30% 45% 60% 75% Comp Credit IRR Liq Oper Price Rep Strat % of Institutions

% of All FSAs with High or Moderate and Increasing Risk

% 2014Q3 % 2015Q3

Strategic Risk

Anxiety for income

• Bankers are assessing strategic viability, existing business models, risk

appetites, and merger/acquisition opportunities

• Entry into new products/services without adequate expertise, due

diligence or appropriate risk controls and infrastructure

• Limited management succession and talent retention options
• Increased risk taking and risk layering to meet competition and increase

revenues

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Operational Risk

Systems are not keeping pace with changes and threats

• Banks continue to be targets of coordinated, sophisticated and evolving cyber-
• attacks. The OCC and the FFEIC are working to raise awareness, including the

Cybersecurity Assessment Tool (CAT)

• Banks may not incorporate resiliency considerations into their overall governance

processes, increasing their vulnerability

• Business models are under pressure as bankers launch new products, leverage

technology, and increase reliance on automated controls

• The number, nature, and complexity of third-party relationships continue to

expand

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Interest Rate Risk

There is increasing vulnerability to rapidly rising interest rates

• Risk of nonmaturity deposits, which may include surge deposits, being more

volatile and rate sensitive than in past rate cycles merits additional analysis to support underlying assumptions

• Banks that extend asset maturities for yield could face significant earnings

pressure and capital erosion, depending on the severity and timing of interest rate moves

• Diminished market liquidity and market depth could exacerbate liquidity concerns

during a stress event that causes excessive volatility

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Compliance Risk

New and evolving consumer compliance and BSA/AML requirements coupled with inadequate resources or expertise

• Industry feedback that the integrated mortgage disclosure requirements

(TRID) continue to pose significant compliance challenges

• Some compliance programs have failed to evolve or incorporate appropriate

controls into new products, services, regulatory changes and changing customer profiles

• Changing money laundering methods and growth in the volume and

sophistication of electronic banking fraud challenge compliance risk managers

• Difficult to attract and retain compliance and BSA/AML expertise

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Credit Risk

Underwriting loosening and increased risk layering

• Credit risk is building while traditional lagging credit quality metrics improve

– Competition is resulting in eased underwriting across a variety of credit products – Weakening of underwriting standards already noted in syndicated leveraged loans, indirect auto, ABL, CRE, multifamily and C&I lending – Risk layering via increased collateral advance rates, waiving/loosening of guarantees, and more liberal repayment terms such as extended interest-only payments – Increasing policy, underwriting, and collateral exceptions

• ALLL, capital, and concentration risk management need to keep pace with

increased loan growth and underwriting concessions

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Mutual Savings Association Advisory Committee

November 18, 2015