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M ANAGING C OMMERCIAL R EAL E STATE C ONCENTRATIONS A A S YS U SER G ROUP Tuesday, December 8, 2009.

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Presentation on theme: "M ANAGING C OMMERCIAL R EAL E STATE C ONCENTRATIONS A A S YS U SER G ROUP Tuesday, December 8, 2009."— Presentation transcript:

1 M ANAGING C OMMERCIAL R EAL E STATE C ONCENTRATIONS A A S YS U SER G ROUP Tuesday, December 8, 2009

2 M ICHELLE L UCCI, CRCM & CAMS Risk Management Consultant, Commercial Real Estate Bankers Toolbox, Inc. Former Compliance Officer at Valrico State Bank Director of the Suncoast Compliance Association Former FDIC dual-commissioned examiner for 9 years Published author/speaker on CRE Former Customer of Bankers Toolbox A BOUT THE P RESENTER

3 A GENDA The Banking Crisis Material Loss Review Enforcement Actions Preparing for CRE Examinations Stress Testing Integrating the Results into your Risk Management Program

4 Banker's Toolbox is a market leader in: anti-money laundering compliance; fraud loss prevention; wire automation; and loan risk management for banks and credit unions nationwide. C OMPANY O VERVIEW

5 A BOUT U S Founded by former bankers Privately-held corporation/100% owned by employees ~60 Employees No foreign outsourcing of services or programming Over 3,000 bankers use our products daily across 700 enterprise installations in 45 states. Asset ranges from de novo to $100B

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7 T HE B ANKING C RISIS Note: Size of the circles is based on the value of assets at time of failure. Source: es/documents/info- Failed_Banks-sort.html

8 Commercial Real Estate – The Next Shoe to Drop Commercial Real Estate – The Next Shoe to Drop Commercial RE risk looms for local banks Commercial RE risk looms for local banks Slow recovery ahead for real estate Slow recovery ahead for real estate Why the U.S. Commercial Real Estate Market Will Collapse,... Why the U.S. Commercial Real Estate Market Will Collapse,... Commercial real estate may be next big woe Commercial real estate may be next big woe CRE IN R ECENT H EADLINES

9 B ANK F AILURES - F LORIDA Source: Institution NameCityDate Failed Commerce Bank of Southwest FloridaFort Myers11/20/2009 Orion BankNaples11/13/2009 Century Bank, F.S.B.Sarasota11/13/2009 Flagship National BankBradenton10/23/2009 Hillcrest Bank FloridaNaples10/23/2009 Partners BankNaples10/23/2009 Community National Bank of Sarasota CountyVenice8/7/2009 First State BankSarasota8/7/2009 Integrity BankJupiter7/31/2009 BankUnited, FSBCoral Gables5/21/2009 Riverside Bank of the Gulf CoastCape Coral2/13/2009 Ocala National BankOcala1/30/2009

10 B ANK F AILURES - G EORGIA Source: Institution NameCityDate Failed American United BankLawrenceville10/23/2009 Georgian BankAtlanta9/25/2009 First Coweta BankNewnan8/21/2009 ebankAtlanta8/21/2009 Security Bank of Jones CountyGray7/24/2009 Security Bank of Houston CountyPerry7/24/2009 Security Bank of Bibb CountyMacon7/24/2009 Security Bank of North MetroWoodstock7/24/2009 Security Bank of North FultonAlpharetta7/24/2009 Security Bank of Gwinnett CountySuwanee7/24/2009 First Piedmont BankWinder7/17/2009 Neighborhood Community BankNewnan6/26/2009 Community Bank of West GeorgiaVilla Rica6/26/2009 Southern Community BankFayetteville6/19/2009 Silverton Bank, NAAtlanta5/1/2009 American Southern BankKennesaw4/24/2009 Omni National BankAtlanta3/27/2009 First City BankStockbridge3/20/2009 Freedom Bank of GeorgiaCommerce3/6/2009 FirstBank Financial ServicesMcDonough2/6/2009

11 M ATERIAL L OSS R EVIEWS W HAT IS A M ATERIAL L OSS R EVIEW ? Essentially its an autopsy that details what went wrong and what could have been done to prevent the failure. Source:

12 M ATERIAL L OSS R EVIEWS W HY T HE A UDIT IS D ONE : Section 38(k) of the Federal Deposit Insurance Act states that when the Deposit Insurance Fund incurs a material loss with respect to an insured depository institution, the inspector general of the appropriate Federal banking agency shall make a written report to that agency reviewing the agency's supervision of the institution (including the agency's implementation of prompt corrective action provisions of section 38), which shall ascertain why the institution's problems resulted in a material loss to the Deposit Insurance Fund; and make recommendations for preventing any such loss in the future. A loss is material if it exceeds the greater of $25 million or 2 percent of an institution's total assets at the time the FDIC was appointed receiver. Reports are required six months after the material loss becomes apparent.

13 M ATERIAL L OSS R EVIEWS F INDINGS : REPORT NO. AUD MAY 2009 Material Loss Review of Freedom Bank, Bradenton, Florida FB failed primarily due to bank managements aggressive pursuit of asset growth concentrated in high-risk CRE loans with inadequate loan underwriting and a lack of other loan portfolio and risk management controls. Source:

14 R EGULATORY E NFORCEMENT A CTIONS P EOPLES N ATIONAL B ANK C OLORADO S PRINGS, CO 8/27/09 Article IV COMMERCIAL REAL ESTATE RISK MANAGEMENT (d) portfolio-level multi-factor stress testing and/or sensitivity analysis on homogeneous pools of loans (e.g., HELOC, undeveloped land, office space) to quantify the impact of changing economic conditions on asset quality, earnings, and capital;

15 R EGULATORY E NFORCEMENT A CTIONS W ESTERN C OMMERCIAL B ANK W OODLAND H ILLS, CA FDIC B ; I SSUED 9/18/09 Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a plan requiring the prudent diversification of the Banks loan portfolio. Such plan shall include specific goals, actions and time frames for improving the Banks monitoring and limitation of its concentrations of credit. Such plan shall include, but not be limited to: (j) the establishment of formalized portfolio stress testing to better quantify, monitor, and address the risk to the Bank resulting from changing economic and market conditions.

16 R EGULATORY E NFORCEMENT A CTIONS L OS P ADRES B ANK W ESTERN, CA WN ; 10/14/2009 Concentrations Risk Management Policy By November 30,2009, the Board shall adopt a Concentrations Risk Management Policy that provides for the assessment, monitoring, and control of the potential concentrations risks for all assets other than conforming Single Family Residential (SFR) loans and for all funding sources, including, but not limited to, brokered deposits, uninsured deposits, Federal Home Loan Bank advances, and other borrowings. The Concentrations Risk Management Policy, at a minimum, shall address: (f) the requirement of stress tests or sensitivity analyses of the identified concentrations and portfolio segments with common risk characteristics, over specific time periods, to quantify the impact of changing economic scenarios on asset quality, earnings, and capital conditions, including, but not limited to, those affecting certain relevant industries or sectors on asset quality, earnings, and capital;

17 R EGULATORY G UIDANCE J OINT P RESS R ELEASE December 12, 2006 Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices F INANCIAL I NSTITUTION L ETTERS FIL March 17, 2008 Managing Commercial Real Estate Concentrations in a Challenging Environment

18 P REPARING F OR CRE E XAMINATIONS 1.Classify or segment your portfolio 2.Know the current value of your holdings. 3.Stress test your portfolio. Click hereClick here to view the full article written by Michelle Lucci, CRCM, CAMS and published in the September 2009 issue of Community Banker magazine. Preparing for CRE Examinations

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20 S TEP 1. C LASSIFY & S EGMENT Y OUR P ORTFOLIO Property types Borrower or collateral city/zip Business type DSCR LTV Branch or loan officer

21 S TEP 1. C LASSIFY & S EGMENT Y OUR P ORTFOLIO Identify and Investigate Risky Segments

22 S TEP 2. K NOW THE C URRENT V ALUE OF YOUR H OLDINGS The Moodys/REAL All Property Type Aggregate Index fell to in September 2009, representing a 3.9% decline from a month earlier. Commercial property prices have now fallen 42% from their peak in October Prices have fallen 37% from one year ago and 42% from two years ago. SOURCE: Moodys/REAL Commercial Property Price Indices, November 2009

23 S TEP 3. S TRESS T ESTING The 3 Methods: 1.Antiquated 2.Report Writer 3.Automated

24 S TEP 3. S TRESS T ESTING 1.Antiquated - Enter massive amounts of data into Excel and hope and worry that the data is constantly updated and accurate or your reports will be full of errors. How much time on task are you willing to devote to this project?

25 A NTIQUATED : E XCEL S PREADSHEET

26 Requires CONSTANT data input and maintenance Results are PER LOAN BASIS ONLY – not portfolio level

27 S TEP 3. S TRESS T ESTING 2.Report Writers - Reports can be run on a portfolio wide basis. However, requires massive amount of data entry/maintenance, such as the Net Operating Income; Interest Rate; Capitalization Rate; Appraisal Value and Date. This data is considered static in that it can only be updated manually. Big concern – am I stress testing a loan with an appraisal from 2007 with a loan and appraisal from the current market? Will my results have any value?

28 S TEP 3. S TRESS T ESTING 3. Automated - Using a software model that has the ability to derive values, such as the Net Operating Income, and has the ability to apply modeling techniques update property values.

29 Commercial Real Estate Loan Stress Test A UTOMATED S TRESS T ESTING

30 W EB B ASED T ECHNOLOGY N O I MPLEMENTATION, S OFTWARE OR H ARDWARE R EQUIRED Heit Data Center, Denver CO

31 D ETERMINING I NCOME Current Cap Rate Current or Implied Property Value Net Operating Income

32 C AP R ATE T REND Cap Rate + Date Trend Implied Cap Rate O R A CTUAL C AP R ATE O R Trend Implied Cap Rate

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35 Crest for bktb_MyBank Administration Business Settings Crest Business Settings Stress Factors allow you to apply stress to your loan portfolios. Changes to the Potential Gross Income, Interest Rate, Vacancy Rate, Expenses and Cap Rate help determine the risk within your portfolios. Risk Ratings are the loss factor ranges determined by your institution. Property Value Trends allow you to apply current market value trends to outdated collateral appraisal values to keep them up-to-date. Cap Rate Trends allow you to apply current cap rate trends to outdated cap rates for Commercial Real Estate with Rental Income loans to keep them up-to-date. Welcome admin! Stress Factors Risk Ratings Property Value Trends Cap Rate Trends Home Administration Site Map Log Out

36 Basic Stress Test Advanced Stress Test All loans get the same stress. Define different stresses by segmentations. Combined Report Define stress for individual segments using saved Stress Test settings. Second segmentation: Crest for bktb_MyBankHome Administration Site Map Log Out Printer Friendly Help Crest Report Details: CRE w/ Rental Income Q Portfolio: (Unassigned) Assign… As Of Date: Title: Welcome admin! CRE w/ Rental Income Q /1/2008 SaveCancel Home Print Reports Stress Test Report Details Settings Report Type Individually Stressed Loans Printing Options 1/1/2008 Assign Portfolio All Loans (129 loans) CRE with Rental Income (118 loans) Loan Category Zip Code Property Type Apartments (34 loans) Retail (84 loans) CRE Construction (11 loans) Cancel Select a portfolio to stress test

37 Ability to perform a multi-variable stress test on the following factors: Net Operating Income Business Income Collateral Value Interest Rate – Fixed Rate & Variable S TRESS T ESTING

38 S ET C USTOMIZED S TRESS F ACTORS Nobody knows your customers and community better than you do.

39 S ETTING S TRESS F ACTORS

40 CREST for bktb_MyBankHome Administration Site Map Log Out Printer Friendly Help Crest Stress Factor Details: Q Apt Stress Mild Administration Business Settings Stress Factors Q Apt Stress Mild Stress Title: Q Apt Stress Mild Debt Payment: Welcome admin! Save Cancel Stress Calculator Basic Advanced Fixed Rate: 1 % Variable Rate: % Income: Borrowers Income: 5 % NOI from income property: 5 % NOI from farmland: % Collateral Value: Income property: 5 % Farmland: % Non-income property: 5 % Construction: 5 % Stock: 5 % UCC: % Auto: % Others: % Decrease Amount %

41 D ATA I NTEGRITY T HROUGH A UTOMATED D ATA S CRUBBING

42 Crest for bktb_MyBankHome Administration Site Map Log Out Printer Friendly Help Crest Portfolio: CRE with Rental Income Assign… As Of Date: Title: Welcome admin! My CRE Loans SaveCancel Home Print Reports Stress Test Report Details Printing Options Report Type Individually Stressed Loans Add Loan + Settings - Basic Stress Test Add Loan + Report Details: CRE w/ Rental Income Q Bay View Complex $7,510, Highlight Park Center $3,701, Subject is located on the NW corner of Bloomingdale and SR 60. The complex is fully rented with long-term leases at MV. Secondary source of repayment is the personal guarantee of Mr. Hal Lanford whose most recent PFS, dated 3/31/09, details NW of $9.8 Million with liquid assets of $1.5 Million. Subject is located at the intersection of US301 and River Road. The shopping center has several franchise stores and is anchored by Giant grocery store. There are currently two vacancies which are being actively marketed. The loan is not designated as a Watch List credit at this time but will be closely monitored. Mr. Hal Lanford also guarantees this loan. Refer to details on note West Side Properties – Mild – … West Side Properties – Severe… West Side Properties – Mild – … West Side Properties – Severe… Note Number Borrower Name Outstanding Balance Mild Stress Severe Stress 3/31/2009 CRE w/ Rental Income Q2 2009

43 Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress Average Interest Rate:7.11%7.51%8.61% Total Annual Payment:$10,526,551.80$11,118,762.88$12,747, Total Collateral Value:$197,403,690.67$177,663,321.60$157,922, Total Net Collateral Shortfall:$3,423,456.78$8,883,166.08$17,766, Portfolio Detail: CRE with Rental Income Portfolio full name: All Loans > CRE with Rental Income STRESS TEST RESULT Overview Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 5% Portfolio Condition with No StressPortfolio Condition with Mild StressPortfolio Condition with Severe Stress LTV Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 10% Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 19% Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 19% Portfolio Condition with No StressPortfolio Condition with Mild StressPortfolio Condition with Severe Stress DSCR Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 12% Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 8%

44 Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress Average Interest Rate:7.11%7.51%8.61% Total Annual Payment:$10,526,551.80$11,118,762.88$12,747, Total Collateral Value:$197,403,690.67$177,663,321.60$157,922, Total Net Collateral Shortfall:$3,423,456.78$8,883,166.08$17,766, Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 5% Portfolio Condition with No StressPortfolio Condition with Mild StressPortfolio Condition with Severe Stress LTV Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 10% Below % From 0.70 to % From 0.90 to % From 1.00 to % From 1.25 and above 19% Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 19% Portfolio Condition with No StressPortfolio Condition with Mild StressPortfolio Condition with Severe Stress DSCR Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 12% Below % From 1.00 to % From 1.20 to % From 1.50 to % From 1.80 and above 8%

45 Segmentation: CRE with Rental Income > Property Type By Property Type Apartments Outstanding Balance: $84,987,041 Retail Outstanding Balance: $63,065,727 DSCR No Stress Mild Severe SegmentLTV No Stress Mild Severe No Stress Mild Severe No Stress Mild Severe SegmentOutstanding Balance% of Portfolio % of Segment over LTV value 0.8% of Segment under DSCR value 1.25 No StressMildSevereNo StressMildSevere Apartments$84,987, %34.21%51.01%73.44%13.87%27.14%56.97% Retail$63,065, %5.00%7.00%9.12%14.50%23.41%47.49%

46 B UILT -I N T RAINING

47 I NTEGRATING THE R ESULTS INTO YOUR R ISK M ANAGEMENT P ROGRAM M ANAGEMENT L ETTER View a sample management letter. Click HereClick Here (Open PDF document)

48 P RICING

49 T HANK Y OU !


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