Lecture Materials LOAN PORTFOLIO MANAGEMENT YEAR 1. George E. Ruth Rosemount, Minnesota

Transcription

1 Lecture Materials LOAN PORTFOLIO MANAGEMENT YEAR 1 George E. Ruth Rosemount, Minnesota gruth_1@yahoo.com August 8, 2017

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3 1 Loan Portfolio Management Year 1 Session 1 Tuesday August 8th: 8:30 to 9:55 2 Presenters and Topics Sessions 1- Speaker: George Ruth, Credit Risk and Portfolio Management Session 2- Rob Newberry, Farin and Associates, Inc.: Stress Testing the Portfolio Session 3 & 4- Speaker: Tom Farin, Farin and Associates, Inc.: Loan Pricing: George Ruth Session 5- Intersession Assignment: George Ruth 1

4 3 Intersession Assignment Three sections Use tab for stress testing section or the OCC model Additionally Tom Farin will conduct a recorded webinar series to assist Final session will be devoted to intersession project and answering questions 4 Loan Portfolio Management Year 1 Objectives Portfolio and Risk Managers: Board of Directors, Owners, CEO/President, Chief Lending/Credit officer, Lenders Gauge the ability of the loan portfolio to weather adverse conditions- stress analysis Link pricing strategy to the risk profile and understand cost of capital Develop skills to prepare Credit Risk Profile- Intersession Project Link to Loan Portfolio Management taught in second year 2

5 5 This Session Objectives Understand you are in the risk business Understand the roles of Owners, Board of Directors, CEO/President, Senior Lender/Chief Credit Office, Lenders Foundation to analyze the portfolio and credit culture 6 Risk Business Rent depositors money Session is not how to make loans Does your bank make loans? Does your bank make portfolio decisions? What is the bank s approach to risk? Is your bank high, moderate or low risk? 3

6 7 Foundations of Managing Credit Risk Credit Culture Soundness, profitability and growth Know your customer Know the industry Setting expectations 8 Building a Bank Credit Culture Developing a bank credit culture What is a bank credit culture? The way we do things around here. Top down, Inside Out 4

7 9 Your Banks History Credit culture started at the beginning When and how was it started? What is the ownership structure: public or private? If private: a family, a few, or many? What lessons has your bank learned? What is credit culture today? 10 Roles Board of Directors- Governance CEO/CCO/ Senior Lender Lead Lenders- Risk takers, portfolio decisions 5

8 11 Who Establishes the Bank s Credit Culture/ Philosophy? Board of Directors 12 Board Composition External verses internal members Industry representation Board Committees- audit, loan, compensation Establish a credit culture Asks hard questions 6

9 13 Board Governance Delegating lending authority Portfolio concentration and limits Uniform Bank Performance Report (UBPR) Risk tolerance by industry Loan policy exceptions Classified to capital Allowance for Loan, Lease Loss Report (ALLLR) 14 Board Communication How often has the Board of Directors changed the credit culture? Was the Board of Directors pro active in the last recession or reactive? How does Board communicate to CEO/CCO/Senior Lender? What is interaction with lenders? Does the Board of Directors call on customers? 7

10 15 CEO/CCO/Senior Lender LEAD Create credit culture Sweet Spot/ bite size When should the CEO/CCO/Senior Lender no longer originate loans and/or manage a loan portfolio? 16 Creating an Effective Bank Credit Culture You have to achieve a balance between a sales culture and a credit culture Building a bank credit culture which relies on Soundness, Profitability and Growth Incent what you expect Inspect what you expect Takes time, patience and focus 8

11 17 What Are Your Bank s Priorities? Long Term View Earnings matter, but do not dominate the credit standards of the bank Building long term shareholder and stakeholder value is the main objective Balance between credit quality and revenue generation It s OK for a credit officer/loan committee /lender to say NO or Wait when warranted It s also OK for a loan officer to push hard for a deal if warranted. 18 Achieving Long Term Consistent Performance Requires Balance I. Portfolio Soundness Long Term Consistent Performance II. Portfolio Profitability III. Portfolio Growth 9

12 19 CEO/CCO/Senior Lender What is an acceptable level of exceptions? What is plan if the bank nears a concentration limit? What is the maximum dollar amount of a loan that we should lend to xxx industry? What is the next problem and what is the bank doing now to prepare? How are we monitoring risk? 20 What is your bank s geographic footprint? Where do you do business? What types of businesses are in your market? What is your expertise? How large is the market? Is the market stable, growing, or shrinking? When would you lend outside of your geographic area? 10

13 21 Geographic Exposure How do you gather this data? How do you determine geographic exposure by industry? What are your concentrations? Should you acquire a bank or other business outside your footprint? 22 Sweet Spot/Bite Size Largest loan willing to lead verses legal limit Largest loan by industry or collateral Baseline industry concentrations Underwriting various industries Commitments/actual 11

14 23 Inputting data Type of information: industry, government guaranty, advance rates, terms, credit scores, collateral Portfolio risk: concentrations, percentages of capital, tolerance Staffing: expertise, experience, support 24 NAICS Input by borrower for operating, equipment, real estate in same name as primary borrower Input by primary occupant when related to primary borrower and investor Input by primary tenants if multiple units 12

15 25 NAICS Limits Set limits by industry as percentage of capital Monitor annual, quarterly, or monthly When approaching maximums: act! When should a limit be increased or decreased? Need to understand industry trends- National, regional, and local market 26 NAICS Leads to co-variance and stress testing Understand overall use Not for regulators but leaders and lenders Only valuable is used! 13

16 27 Co-Variance Analysis of two or more groups whose results could impact each other Examples Agriculture and auto dealers Price of oil and lodging Residential construction and sub-contractors, appraisers, and title companies Single family home starts and multi-family units 28 Co-Variance Set limits by combined industry as percentage of capital Use NAICS to determine what should be combined Monitor annually or quarterly 14

17 29 Monitoring the Portfolio Classified to capital/ loans Loan Grading/Risk Rating Effectiveness Break-down of real estate portfolio Legal verses internal limits Participations, broker loans Key: What keeps them up at night? 30 Classified to Capital Set maximum May vary by economic conditions Plan if approaching maximum Only as effective as loan grading/risk rating system 15

18 31 Grading Loans Grading and Risk rating Grade loans which leads to portfolio risk rating Usually numerical with 8-10 classifications May be objective assigning weighting to different components: cash flow, management, collateral, etc. May be subjective based an overall description 32 Grading Portfolio Segments Risk rate by category: consumer, commercial, agriculture, investor real estate Consumer: usually all one risk rating unless a problem Pledge of cash usually risk rated a 1 16

19 33 Grading Effectiveness/ Culture Who can downgrade a loans grade? What is the process to upgrade a loans risk rating? What is acceptable number of grading changes identified by regulators or loan review? What happens if a lender has excessive loans downgraded by outside third party? How are loan grades used for stress testing? 34 Split Grades and Guarantors Government guaranteed loans: guaranteed portion and unguaranteed portion Different sources of repayment Guarantors: demonstrate ability and willingness to repay debt may result in one upgrade 17

20 35 Rating Migration Original grade verses current grade Number of deteriorations over time by grade, NAICS code, and collateral Leads to Allowance for Loan and Lease Loss Reserve Analysis 36 Real Estate Loans Source of repayment Rental income verses operating business Monthly rents verses long term leases Financial strength of tenant Value of real estate 18

21 37 Real Estate Concentrations Setting Sub-limits Auto C Store Hospitality Medical Religious Retail Owner occupied 38 Loan Committee verses Signature Signature approval for loans up to XX by type Signature system for all loans Loan committee for all loans over lending limits Loan Committee Membership If all are approved, purpose is training, culture. If so, how else could this be done? 19

22 39 Loan Committees Cash and Only Cash Repays Loans Sensitivity analysis- worst case and can borrower still repay? Individual and loan limits Split votes, denials Are there lenders that overpower loan committee? Does committee challenge lender creativity? 40 Loan Committee Leadership Affirm proposed or existing loan structure and covenants Confirm risk rating Large loan reports Annual reviews Problem loan reports Review concentration limits Charge-off presentations and lessons learned 20

23 41 Exceptions to Loan Policy Define what is an exception Exception to loan policy not same as guideline exception Track number, type, lender Identify acceptable mitigants Report to the Board of Directors If high, change loan policy or change approval 42 Loan Review Done by independent third party or employee Purpose is to confirm existing credit risk Review original approval, closing loan documents, interim data Reaffirm current risk rating on system Final say on risk rating Report to the Board of Directors This is not done by loan operations, lender or inexperienced credit person 21

24 43 Lenders Transactional Individual portfolio: size and mix Underwrite, monitor, and grow Monitoring is key: loans are good when made but then fun begins! Average interest rate Risk rating effectiveness 44 Lenders continued Lender support- credit analysts and administrative Monitoring ticklers weekly Write exit plan at origination Specialized lending- construction, hospitality, indirect, leasing, auto floor plan 22

25 45 Key Lender Question: Lender question: What unique value do I bring to credit risk management? 46 Your Customers Why do they do business with you? What do they expect from you? How does your customer define service? How do you define service? 23

26 47 Industry Expertise Know your customers industry Good news- Banks get to know a lot of different industries Bad news- Does your bank understand lots of different industries? 48 Lessons Learned Soundness Profitability Growth 24

27 49 Other lessons learned Character verses Cash Flow Lender expertise, reliance Size of credit Sensitivity Analysis Portfolio decisions not loan decisions CASH and ONLY CASH repays loans! 50 Nancy Reagan School of Lending At what point does the Board of Directors, CEO, Senior Lender or Lender: Just Say No Hard to do: want to make money, primary source of income for most banks is loan interest income Hard to do: most owners and CEO s want to grow Is wait or maybe a better answer? 25

28 51 Who Who is forward thinking? What is next challenge to the loan portfolio? Goal is to achieve balance Primary concern is Risk Management 52 Summary Risk Business Past gives value to the present Board governance- soundness, profit, growth CEO/CCO/Senior Lender- leaders, culture, portfolio risk Lenders- transaction risk, monitoring Know your customer, know your industry Yes, No or Wait? 26