CRE Concentrations: Practical Management Techniques

Transcription

1 CRE Concentrations: Practical Management Techniques Tuesday, 6/27/ :00:00 AM - 12:00:00 PM Presented by: Adam Mustafa Co-founder and Managing Partner Invictus Consulting Group 275 Madison Avenue, 14th Floor New York, NY P: (973) E: amustafa@invictusgrp.com

2 Agenda Stress Testing with a Purpose Loan Portfolio Stress Testing Strategic Planning CRE Concentration Leaders & Bleeders

3

4 Top 5 List -- Mistakes Banks Make With Stress Testing

5 Top 5 List -- Mistakes Banks Make With Stress Testing 1. Zero application towards strategic and capital planning 2. Management doesn t understand the results 3. Treated as a check the box exercise 4. Data gathering for loan-level stress tests is a nightmare 5. Only the CRE loan portfolio is being stress tested

6 Top 5 List -- Mistakes Banks Make With Stress Testing 1. Zero application towards strategic and capital planning 2. Management doesn t understand the results 3. Treated as a check the box exercise 4. Data gathering for loan-level stress tests is a nightmare 5. Only the CRE loan portfolio is being stress tested

7 Top 5 List -- Mistakes Banks Make With Stress Testing 1. Zero application towards strategic and capital planning 2. Management doesn t understand the results 3. Treated as a check-the-box exercise 4. Data gathering for loan-level stress tests is a nightmare 5. Only the CRE loan portfolio is being stress tested

8 Top 5 List -- Mistakes Banks Make With Stress Testing 1. Zero application towards strategic and capital planning 2. Management doesn t understand the results 3. Treated as a check-the-box exercise 4. Data gathering for loan-level stress tests is a nightmare 5. Only the CRE loan portfolio is being stress tested

9 Top 5 List -- Mistakes Banks Make With Stress Testing 1. Zero application toward strategic and capital planning 2. Management doesn t understand the results 3. Treated as a check-the-box exercise 4. Data gathering for loan-level stress tests is a nightmare 5. Only the CRE loan portfolio is being stress tested

10 Stress Testing is Redefining Capital Adequacy 12.0% CCAR Banks Implied Required Leverage Ratios 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.9% 5.0% 5.5% Median = 7.4 percent 8.6% 8.6% 7.4% 6.1% 6.3% 6.6% 6.7% 6.8% 6.8% 6.9% 7.0% 7.0% 7.1% 7.1% 7.2% 7.5% 7.7% 7.8% 7.8% 8.0% 8.0% 8.0% 8.1% 8.2% 8.2% 8.2% 8.3% 10.5% 4.0% 3.0% 2.0% 1.0% 0.0% Minimum Nine-quarter Forward Leverage Ratio

11 Stress Testing is Redefining Capital Adequacy 10.7% 6.0% Median = 7.0%

12 Stress Testing is Redefining Capital Adequacy 10.7% 6.0% Median = 7.0%

13 FreeCapital Analysis: Sample Bank Sample Bank 3.8% Available Capital 8% Regulatory Rule of Thumb Capital Requirement

14 Overview of CCAR / DFAST Scenarios Trough Estimates through 3/31/18 Metric Adverse Case Severely Adverse Case GDP -1.3% -6.1% Unemployment Rate 8.0% 10.1% Housing Prices -14% -23% CRE Index -17% -34%

15 Stress Test Results (excluding planned growth and capital actions)

16 Stress Test Results (excluding planned growth and capital actions)

17 Stress Test Results (excluding planned growth and capital actions)

18 Stress Test Results (excluding planned growth and capital actions)

19 Severely Adverse Case Scenario No Growth Reported Tier 1 Capital = 11.6%

20 Severely Adverse Case Scenario No Growth Loan Loss Provisions = -$56.6M (3.0% of loans)

21 Severely Adverse Case Scenario No Growth Pre-Provision Earnings = $33.1M

22 Severely Adverse Case Scenario No Growth Post-Stress Tier 1 Capital = 10.6% Capital Gain (Loss): - $32.5

23 Impact of Stress on Net Income Under stress, the Bank's level of Net Income falls substantially. This is due to a combination of accelerated Loan Loss Provisions and increasing nonaccruals.

24 FreeCapital Analysis: Sample Bank Sample Bank

25 FreeCapital Analysis: Sample Bank Sample Bank CCAR/DFAST Minimum (4.0%)

26 FreeCapital Analysis: Sample Bank Sample Bank Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

27 FreeCapital Analysis: Sample Bank Sample Bank Basel III Adjustments (1.9%) Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

28 FreeCapital Analysis: Sample Bank Sample Bank Customized Requirement 7.2% Basel III Adjustments (1.9%) Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

29 FreeCapital Analysis: Sample Bank Sample Bank FreeCapital TM (4.5%) Basel III Adjustments (1.9%) Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

30 FreeCapital Analysis: Sample Bank Sample Bank FreeCapital TM (4.5%) ($21.9M of non-dilutive capital created) Basel III Adjustments (1.9%) Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

31

32 Top Down or Bottom Up?

33 Top Down or Bottom Up? Top-Down Segmentation

34 Top Down or Bottom Up? Top-Down Segmentation All Loans Originated Acquired Construction Resi Multifamily CRE C&I Consumer Ag Loans Farmland Vintage Lien (Sr./Jr.) Geography OO/Investor Borrower Industry Vintage Commodity Type Vintage Risk Rating Structure (HELOC/IO/ARM) Vintage Property Type SBA 7a (Y/N) Credit Score Production Loans Location Maturity / Payment Shock Vintage Risk Rating Vintage Loan Structure Maturity / Payment Shock Equipment Irrigated/Non- Irrigated Credit Score / DTI Ratio Maturity / Payment Shock Risk Rating Risk Rating Livestock Commodity Type Maturity / Payment Shock Maturity / Payment Shock Maturity / Payment Shock Gov Backed (Y/N)

35 Top Down or Bottom Up? Top-Down Segmentation All Loans Originated Acquired Construction Resi Multifamily CRE C&I Consumer Ag Loans Farmland Vintage Lien (Sr./Jr.) Geography OO/Investor Borrower Industry Vintage Commodity Type Vintage Risk Rating Structure (HELOC/IO/ARM) Vintage Property Type SBA 7a (Y/N) Credit Score Production Loans Location Maturity / Payment Shock Vintage Risk Rating Vintage Loan Structure Maturity / Payment Shock Equipment Irrigated/Non- Irrigated Credit Score / DTI Ratio Maturity / Payment Shock Risk Rating Risk Rating Livestock Commodity Type Maturity / Payment Shock Maturity / Payment Shock Maturity / Payment Shock Gov Backed (Y/N)

36 Top Down or Bottom Up? Pre-2009 Loans Risk Rating 1 Example Segmentation of the CRE Portfolio 2009 Loans 2010 Loans Risk Rating 2 Risk Rating 3 CRE-Investor Loans Office Retail Hotel Mixed-Use Industrial 2011 Loans 2012 Loans 2013 Loans 2014 Loans 2015 Loans Payment Shock No Payment Shock Risk Rating 4 Risk Rating 5 Risk Rating 6 (W) Risk Rating 7 (SM) Risk Rating 8 (Substandard)

37 Top Down or Bottom Up? Pre-2009 Loans Risk Rating 1 Example Segmentation of the CRE Portfolio 2009 Loans 2010 Loans Risk Rating 2 Risk Rating 3 CRE-Investor Loans Office Retail Hotel Mixed-Use Industrial 2011 Loans 2012 Loans 2013 Loans 2014 Loans 2015 Loans Payment Shock No Payment Shock Risk Rating 4 Risk Rating 5 Risk Rating 6 (W) Risk Rating 7 (SM) Risk Rating 8 (Substandard)

38 Top Down or Bottom Up? Pre-2009 Loans Risk Rating 1 Example Segmentation of the CRE Portfolio 2009 Loans 2010 Loans Risk Rating 2 Risk Rating 3 CRE-Investor Loans Office Retail Hotel Mixed-Use Industrial 2011 Loans 2012 Loans 2013 Loans 2014 Loans 2015 Loans Payment Shock No Payment Shock Risk Rating 4 Risk Rating 5 Risk Rating 6 (W) Risk Rating 7 (SM) Risk Rating 8 (Substandard)

39 Top Down or Bottom Up? Pre-2009 Loans Risk Rating 1 Example Segmentation of the CRE Portfolio 2009 Loans 2010 Loans Risk Rating 2 Risk Rating 3 CRE-Investor Loans Office Retail Hotel Mixed-Use Industrial 2011 Loans 2012 Loans 2013 Loans 2014 Loans 2015 Loans Payment Shock No Payment Shock Risk Rating 4 Risk Rating 5 Risk Rating 6 (W) Risk Rating 7 (SM) Risk Rating 8 (Substandard)

40 Top Down or Bottom Up? Pre-2009 Loans Risk Rating 1 Example Segmentation of the CRE Portfolio 2009 Loans 2010 Loans Risk Rating 2 Risk Rating 3 CRE-Investor Loans Office Retail Hotel Mixed-Use Industrial 2011 Loans 2012 Loans 2013 Loans 2014 Loans 2015 Loans Payment Shock No Payment Shock Risk Rating 4 Risk Rating 5 Risk Rating 6 (W) Risk Rating 7 (SM) Risk Rating 8 (Substandard)

41 Overview of Loan-Level Data Must-Have Note number Balance Origination Date Maturity Date Risk Rating Loan Category Interest Rate Fixed / Floating Accrual / Non-Accrual Nice-to-Have Collateral Code LTV DSCR Last Appraised Value Appraisal Date Cap Rates Rental Rates Occupancy Rates NAICS Code Credit Score Government Support (SBA, etc) Zip Code / Market

42 The Importance of Vintage Loan 1 vs Loan 2

43 Loan 1 vs Loan 2 Same type of loan (CRE)

44 Loan 1 vs Loan 2 Same type of loan (CRE) Same property type and market

45 Loan 1 vs Loan 2 Same type of loan (CRE) Same property type and market Same underwriting origination: LTV = 80% DSCR = 1.25 Same risk rating today (3)

46 Loan 1 vs Loan 2 One difference:

47 Loan 1 vs Loan 2 One difference: Loan 1: Originated in 2009

48 Loan 1 vs Loan 2 One difference: Loan 1: Originated in 2009 Loan 2: Originated in 2014

49 Loan 1 vs Loan CRE Price Index (Level)

50 Loan 1 vs Loan CRE Price Index (Level)

51 300 Loan 1 vs Loan Loan 1 (Q4 09) CRE Price Index (Level)

52 300 Loan 1 vs Loan Loan 1 (Q4 09) CRE Price Index (Level)

53 300 Loan 1 vs Loan Loan 1 (Q4 09) Loan 2 (Q3 14) CRE Price Index (Level)

54 300 Loan 1 vs Loan Loan 1 (Q4 09) Loan 2 (Q3 14) CRE Price Index (Severe) CRE Price Index (Adverse) CRE Price Index (Level)

55 300 Loan 1 vs Loan Loan 1 (Q4 09) Loan 2 (Q3 14) No Loss CRE Price Index (Severe) CRE Price Index (Adverse) CRE Price Index (Level)

56 300 Loan 1 vs Loan Loan 2 (Q3 14) Loan 1 (Q4 09) CRE Price Index (Severe) CRE Price Index (Level) CRE Price Index (Adverse) Unemployment rate (right axis)

57 Why Vintage is Important Unemployment Rate - PD CRE Price Index (Level) - LGD FRB Forecast: 2-Year Severely Adverse Case Scenario Loan 1* (Q4 2009) At Origination: Loan 2 (Q3 2014) At Origination: 10.0% 9.9% 6.1% Low PD Low LGD Higher PD Higher LGD *Loan 1 would be seasoned, with a portion of principal already paid off by beginning of forecast

58 Loan 1 vs Loan Loan 2 (Q3 14) Loan 1 (Q4 09) year Treasury yield (right axis) CRE Price Index (Severe) CRE Price Index (Level) Invictus Regional Rate Invictus Regional Rate CRE Price Index (Adverse) Unemployment rate (right axis)

59 Loan 1 vs Loan Loan 2 (Q3 14) Loan 1 (Q4 09) year Treasury yield (right axis) CRE Price Index (Severe) CRE Price Index (Level) Invictus Regional Rate Invictus Regional Rate CRE Price Index (Adverse) Unemployment rate (right axis)

60 Loan 1 vs Loan Loan 1 (Q4 09) Increase in Risk Loan 2 (Q3 14) Decline in Relative Yield year Treasury yield (right axis) CRE Price Index (Severe) CRE Price Index (Level) Invictus Regional Rate Invictus Regional Rate CRE Price Index (Adverse) Unemployment rate (right axis)

61 Unprecedented Duration of Interest Rate Troughs 5% Annual Growth Assumption 19 mo. 13 mo. 7 mo. 11 mo. 86 mo. 8% Trough Loans 15% Trough Loans 80% Trough Loans?

62 Sample Bank Total Loans Call Report Data Total Loans Total Loans

63 Sample Bank Total Loans Step 1: Incorporating Vintage Total Loans Total Loans

64 Sample Bank Total Loans Step 2: Applying Risk/Reward Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total Loans % 9% 3% 3% 9% 10% 0.0 CRE Index Unemployment Invictus Regional Rate

65 Under the Hood Loan Portfolio Stress Test 2016 Q4 CRE-OO Loan Portfolio Risk Rating Description Portfolio Distribution (%) Current Distribution ($) Loan Distribution ($) 1 Excellent 3.5% $ $ Very Good 8.7% Above Average 21.1% Average 21.8% Low Pass 25.0% Watch 8.0% Special Mention 4.3% P Substandard Performing 3.7% N Substandard Non Accrual 2.5% Loss 1.3% Total $ $ 697.9

66 Under the Hood Loan Portfolio Stress Test 2016 Q4 CRE-OO Loan Portfolio Risk Rating Description Portfolio Distribution (%) Current Distribution ($) Loan Distribution ($) 1 Excellent 3.5% $ $ Very Good 8.7% Above Average 21.1% Average 21.8% Low Pass 25.0% Watch 8.0% Special Mention 4.3% P Substandard Performing 3.7% N Substandard Non Accrual 2.5% Loss 1.3% Total $ $ 697.9

67 Under the Hood Loan Portfolio Stress Test 2016 Q4 CRE-OO Loan Portfolio Risk Rating Description Probability of Default Loss Given Default Calculated Provision Factor Loan Distribution ($) Total Estimated Loss 1 Excellent 0.0% 27.6% 0.0% $ $ - 2 Very Good 1.0% 27.6% 0.3% Above Average 2.5% 27.6% 0.7% Average 5.0% 27.6% 1.4% Low Pass 10.0% 27.6% 2.8% Watch 15.0% 27.6% 4.1% Special Mention 20.0% 26.7% 5.3% P Substandard Performing 33.0% 26.7% 8.8% N Substandard Non Accrual 50.0% 27.8% 13.9% Loss 100.0% 24.5% 24.5% Total $ $ 19.0 Percent of Portfolio at Risk 2.7%

68 Under the Hood CECL Readiness 2016 Q4 CRE-OO Loan Portfolio Risk Rating Description Probability of Default Loss Given Default Calculated Provision Factor Current Distribution ($) Total Estimated Loss 1 Excellent 0.0% 27.6% 0.0% $ $ - 2 Very Good 1.0% 27.6% 0.3% Above Average 2.5% 27.6% 0.7% Average 5.0% 27.6% 1.4% Low Pass 10.0% 27.6% 2.8% Watch 15.0% 27.6% 4.1% Special Mention 20.0% N/A N/A P Substandard Performing 33.0% N/A N/A N Substandard Non Accrual 50.0% N/A N/A Loss 100.0% N/A N/A - - Total $ $ 11.3 Percent of Portfolio at Risk 1.6%

69

70 Illustrative Strategic Plan Next 2 Years Loan growth of ~15.0% per annum Mild increase in non-interest expense (5% per annum)

71 Stress Testing the Strategic Plan 15%

72 Stress Testing the Strategic Plan 15% Will require an allocation of FreeCapital TM

73 Stress Testing the Strategic Plan Stressed capital levels decline when capital actions for loan growth are included, but remain well above regulatory minimums.

74 Stress Testing the Strategic Plan Stressed capital levels decline when capital actions for loan growth are included, but remain well above regulatory minimums.

75 Stress Testing the Strategic Plan Stressed capital levels decline when capital actions for loan growth are included, but remain well above regulatory minimums. Strategic Plan 15% Loan Growth

76 Stress Testing the CRE Conecntration Plan Stressed capital levels decline when capital actions for loan growth are included, but remain well above regulatory minimums. CRE Concentration Plan 47.5% Loan Growth

77 FreeCapital Analysis: Sample Bank Sample Bank FreeCapital TM (4.5%) ($21.9M of non-dilutive capital created) Basel III Adjustments (1.9%) Stress Losses (1.3%) CCAR/DFAST Minimum (4.0%)

78 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

79 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

80 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

81 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

82 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

83 Stress Testing the Strategic Plan The Bank is using $61.8m of its FreeCapital TM in the Strategic Plan to support Loan Growth and Dividends.

84

85 Customizing your CRE Concentration Policy Limits Loan Growth Rate: 0% Annual Dividends: $0M CCAR/DFAST Post-Stress Capital Levels

86 Customizing your CRE Concentration Policy Limits Loan Growth Rate: 15% Annual Dividends: $14M CCAR/DFAST Post-Stress Capital Levels

87 Customizing your CRE Concentration Policy Limits Loan Growth Rate: 22.1% Annual Dividends: $14M CCAR/DFAST Post-Stress Capital Levels

88 Customizing your CRE Concentration Policy Limits Loan Growth Rate: 45.7% Annual Dividends: $14M CCAR/DFAST Post-Stress Capital Levels

89 Customizing your CRE Concentration Policy Limits Loan Growth Rate: 45.7% Annual Dividends: $14M CCAR/DFAST Post-Stress Capital Levels

90 Thank You For more information about Invictus, please contact: George Callas Managing Partner & National Sales Director (718)