Bo Singh, TGA President

Transcription

1 Bo Singh, TGA President 1

2 ABOUT US T. Gschwender & Associates, Inc. is a diversified consulting company that has been providing services to financial institutions and businesses in the Northeast United States since Our financial institutional clients include small community banks and credit unions with less than $100 million in assets to much larger regional institutions with over $7 billion in assets. Our business clients include small sole proprietorships to middle market privately held corporations. T. Gschwender & Associates, Inc. is best known for our loan review services. But we do more than just loan reviews. Credit analysis, field audits, TDRs, ALLL, equipment evaluations, appraisal reviews, business valuations, environmental remediation, and problem loan management are just some of the services we provide. We can also assist clients to meet all components of a regulatory enforcement action. Our Consultants have extensive banking and corporate management experience. Some of our Associates have been with us since the company was started, and our current staff provides a wide depth of experience, having held high level positions within banking, accounting, and regulatory institutions. With expertise spanning both sides of the street the company s Associates provide a well balanced and thorough approach to all that we do. 2

3 OUR FOCUS Not just a Loan Review Company.a Credit Risk Management Company We like to describe ourselves as a highly sophisticated Credit Department, able to handle all functions from initial borrower due diligence to collateral liquidation and everything in between. Supplement in house personnel; bring independence and expertise to an institution s credit function in a cost effective manner. Growth (12 to 100 clients; 5 to 30 consultants) Expansion of services Expansion of market area Federal Home Loan Bank of Pittsburgh (collateral exam reviews/large banks) Provide our clients with realistic solutions that will save time and enhance their credit risk management processes SBA Veteran Owned Business Achievement Award for 2014 Personnel the real key to our success Our success is based on the expertise of our staff which includes Bank Presidents, Chief Credit Officers, Senior Loan Officers, and OCC Assistant Deputy Comptroller. 3

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5 GOAL Avoiding mistakes that caused many banks to fail during the last recession. Know how much risk you are carrying in the portfolio at all times. What is the impact of the loan you are approving on your overall loan portfolio risk level? How are your Loan Officers performing? Helping the Board set proper risk tolerances. 5

6 MONITORING THE NET OPERATING INCOME It has been TGA s experience that most banks will realize the greatest losses from commercial real estate (CRE) loans where the collateral value has significantly declined. These are primarily associated with investor owned properties where value is based on income approach using market rents at stabilization. Banks should monitor current Net Operating Income (NOI) for investment owned properties with the NOI used in the appraisals. NOI significantly less than those used by the appraiser can result in dramatic devaluation of the collateral property in case the loan becomes impaired, requiring large ALLL allocation. Reserve should be increased periodically if NOI of a particular loan is not achieving stabilization and the loan is showing credit quality concerns. NOI, and the LTV, should be stress tested based on changing interest rates, cap rates, and vacancy factors. 6

7 MONITORING THE NET OPERATING INCOME Borrower Name Loan Number Original Loan Amount Origination Date Maturity Date Interest Rate Interest Rate Variable or Fixed Current Balance Overall Appraisal Market Value Date of Appraisal Appraiser Name Property Type Property Street Address Property City Property State Property ZIP Cap Rate Appraisal NOI Appraisal Income Approach Value Date of Most Recent Financial Statements Annual P&I Payments Current NOI Value Based on Current NOI Current Collateral Property DSCR Global DSCR 7

8 WHY USE THE WEIGHTED AVERAGE RISK RATING? If determined properly, the risk rating takes into account the risk the loan poses to the bank: Capacity DSCRs Capital Profitability, Liquidity, Leverage Collateral Secondary Protection Character Delinquencies Conditions Environmental factors Credit Administration Financial statements/loan structure Easy to calculate, understand and explain. 8

9 RISK RATINGS RISK RATING DESCRIPTOR 1 Secured by Liquid Collateral /Government Guaranteed 2 Excellent 3 Satisfactory 4 Pass/Watch 5 Special Mention 6 Substandard 7 Doubtful 8 Loss 9

10 AVERAGE RATING vs. WEIGHTED AVERAGE RISK RATING AVERAGE RISK RATING Loan # Exposure Risk Rating 1 $ 100, $ 1,000, $ 250, $ 3,500, $ 4,850, WEIGHTED AVERAGE RISK RATING Loan # Exposure Risk Rating Weighted Dollars 1 $ 100, $ 100, $ 1,000, $ 4,000, $ 250, $ 750, $ 3,500, $ 21,000, $ 4,850, $ 25,850,

11 ACCEPTABLE WARR RISK RATING DESCRIPTOR 1 Secured by Liquid Collateral /Government Guaranteed 2 Excellent 3 Satisfactory 4 Pass/Watch 5 Special Mention 6 Substandard 7 Doubtful 8 Loss basis points Below the Pass/Watch Risk Rating (4 Pass Ratings) 5 Pass Ratings: Pass Ratings:

12 USING THE WARR RISK TOLERANCE STATEMENT Key Ratios: Classified Loans to Tier 1 Capital + ALLL not to exceed 25% Special Mention to Tier 1 Capital + ALLL not to exceed 25% Weighted Average Risk Rating (WARR) of all commercial loans not to exceed 3.50 No policy exceptions if WARR exceeds 3.50 Loans Approved with Policy Exceptions to Total Loans not to exceed 10% (measured in dollars) Net Loans to Average Assets not to exceed 75% Net Loans to Equity not to exceed 8.00x Loan Growth not to exceed more than 20% from previous year Losses, Non-Accrual Loans, and Loans Days Past Due to Total Loans Ratios below national peer group average 12

13 THE PASS/WATCH RISK RATING The following should result in loans being risk rated as Pass/Watch: Loans lacking current financial statements but paying as agreed and adequately protected by collateral. Usually done when Borrower will not provide current financials despite repeated requests and financial statements become more than 24 months old. Loans approved based on projections. New entity/no historical cash flow performance. Existing entity that did not cash flow most recent FYE, but have in the past, and have provided realistic projections that will cash flow in the upcoming year. Loans dependent on secondary source of repayment (i.e., owners/guarantors). Collateral property does not cash flow on its own. Business entity does not cash flow on its own. 13

14 MONITORING CREDIT RISK 14

15 MONITORING CREDIT RISK 15

16 MONITORING CREDIT RISK 16

17 MONITORING CREDIT RISK 17

18 MONITORING CREDIT RISK Year Originated Total Weighted Average Risk Rating YTD 2016 $ 18,991, $ 66,909, $ 41,610, $ 30,830, $ 23,617, $ 20,778, $ 4,648, & Before $ 35,720,

19 POLICY EXCEPTIONS POLICY EXCEPTIONS TOTAL EXPOSURE WEIGHTED AVERAGE RISK RATING (WARR) Total Loans Reviewed $ 89,310, Loans Approved With Policy Exceptions $ 40,574, Percent Approved with Policy Exceptions 45.43% 19

20 POLICY EXCEPTIONS Origination Date POLICY EXCEPTIONS BY ORIGINATION DATE TOTAL EXPOSURE WEIGHTED AVERAGE RISK RATING (WARR) 2014 Total Loans Reviewed $ 22,758, Loans Approved With Policy Exceptions $ 11,336, Percent Approved with Policy Exceptions 49.81% 2013 Total Loans Reviewed $ 23,949, Loans Approved With Policy Exceptions $ 15,060, Percent Approved with Policy Exceptions 62.89% 2012 Total Loans Reviewed $ 19,547, Loans Approved With Policy Exceptions $ 6,279, Percent Approved with Policy Exceptions 32.12% 20

21 POLICY EXCEPTIONS Loan Type POLICY EXCEPTIONS BY LOAN TYPE TOTAL EXPOSURE WEIGHTED AVERAGE RISK RATING (WARR) Commercial Real Estate Mortgages (CREMs) Total Loans Reviewed $ 49,186, Loans Approved With Policy Exceptions $ 24,037, Percent Approved with Policy Exceptions 48.87% Commercial & Industrial (C&I) Total Loans Reviewed $ 35,787, Loans Approved With Policy Exceptions $ 13,598, Percent Approved with Policy Exceptions 38.00% 21

22 POLICY EXCEPTIONS By Industry POLICY EXCEPTIONS BY INDUSTRY TOTAL EXPOSURE WEIGHTED AVERAGE RISK RATING (WARR) Retail Trade Total Loans Reviewed $ 11,882, Loans Approved With Policy Exceptions $ 5,278, Percent Approved with Policy Exceptions 44.42% Real Estate and Rental and Leasing Total Loans Reviewed $ 31,428, Loans Approved With Policy Exceptions $ 18,324, Percent Approved with Policy Exceptions 58.31% Accommodation and Food Services Total Loans Reviewed $ 10,780, Loans Approved With Policy Exceptions $ 3,516, Percent Approved with Policy Exceptions 32.62% 22

23 SUMMARY Have a good risk rating methodology in place to properly risk rate your pass loans. It can t be all subjective, you must build some objectivity into it. It has to ensure consistency and transparency in your risk rating process. Just having definitions of risk ratings in your policy is not going to cut it. Use the WARR to monitor and control risk in the portfolio. By using the WARR, you will know how much risk you are carrying in the portfolio at all times. You will know what the impact is of the loan you are approving on your overall loan portfolio risk level. Set risk tolerance limits using the WARR. Board of Directors understand the concept of the WARR better than just showing them metrics on portfolio (volume, risk ratings, delinquencies, non performing loans, etc.). Monitor the NOI of your non owner occupied CREMs. Stress test the NOI and LTV continually and know which loans show high probability of default (weak DSCR) and high probability of loss (weak LTV). 23

24 QUESTIONS? T. GSCHWENDER & ASSOCIATES, INC. 311 MONTGOMERY STREET, SUITE 1 SYRACUSE, NY assoc.com 24