RMA 2016 Annual Risk Management Conference Dallas, TX

Transcription

1 RMA 2016 Annual Risk Management Conference Dallas, TX 1

2 Michael G. Nassy EVP and Chief Credit Officer First Virginia Community Bank (703) Roger G. Shumway EVP and Chief Credit Officer Bank of Utah (801)

3 3

4 CRE exposures have been a hot button issue for many banks this year after regulators warned late in 2015 (SR 15-17) that they would take a harder stance on concentrations, which they define as CRE loans composing at least 300% of total risk-based capital; construction, land development and other land loans composing 100% or more of total risk-based capital; and construction and total CRE growth of 50% or more over the prior 36 months. At least three regional banks said they have heard regulators' concerns and have decided on their own that it would be wise to limit CRE lending growth. Regulators, and in particular the OCC, have asked several institutions exceeding those levels to increase capital or improve risk management practices. Most recently, a bank in New York City entered into a written agreement with the OCC over issues including, among other things, CRE concentrations. The bank s CRE loans equated to 481.2% of total risk-based capital, up from 348.9% a year earlier. The agreement requires, among other things, the bank to develop a risk management program to address CRE concentrations regulator expressed concerns about overheated conditions in CRE markets. SNL.com Thursday, June 09, :26 PM ET Banks with elevated CRE exposures in the crosshairs By Nathan Stovall 4

5 5

6 OCC Analysis of CRE (April 2013) Concentration and failures- + 7,000 banks from 2007 to

7 7

8 Listing of Interagency Regulations and Guidance Related to Commercial Real Estate Lending Title FRB FDIC OCC Interagency Statement on Prudent Risk Management for CRE SR FIL OCC Bulletin Real Estate Lending Standards Regulations and Guidelines 12 CFR 208, subpart E 12 CFR CFR 34, subpart D (national banks) and 12 CFR Appraisal Regulation 12 CFR 208, subpart E 12 CFR 225, subpart G 12 CFR CFR 34, subpart C Standards for Safety and Soundness 12 CFR CFR CFR 30, appendix A appendix A Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings (October 24, 2013) SR FIL OCC Bulletin Interagency Appraisal and Evaluation Guidelines (December 2, 2010) SR FIL OCC Bulletin Prudent Commercial Real Estate Loan Workouts (October 30, 2009) SR 09-7 FIL OCC Bulletin Interagency Guidance on Concentrations in Commercial Real Estate, 71 Fed. Reg (December 12, 2006) SR 07-1 FIL OCC Bulletin Interagency Policy Statement on the Allowance for Loan and Lease Losses (ALLL) (December 13, 2006) SR FIL OCC Bulletin Interagency FAQs on Residential Tract Development Lending (September 8, 2005) SR FIL OCC Bulletin

9 Listing of Interagency Regulations and Guidance Related to Commercial Real Estate Lending Title FRB FDIC OCC FFIEC Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions (July 2, 2001) SR FIL OCC Bulletin Interagency Supervisory Guidance on Stress Testing for Banking Organizations With More Than $10 Billion in Total Consolidated Assets (May 17, 2012) SR 12-7 PR OCC Bulletin Interagency Statement to Clarify Supervisory Expectations for Stress Testing by Community Banks (May 14, 2012) Press Release 5/14/12 PR OCC News Release

10 Historical evidence* demonstrates that financial institutions with weak risk management and high CRE credit concentrations are exposed to a greater risk of loss and failure. In general, financial institutions that succeeded during difficult economic cycles took the following actions, which are consistent with supervisory expectations and established adequate and appropriate: loan policies, underwriting standards, credit risk management practices, and concentration limits that were approved by the board or a designated committee; lending strategies, such as plans to increase lending in a particular market or property type, limits for credit and other asset concentrations, and processes for assessing whether lending strategies and policies continued to be appropriate in light of changing market conditions; and strategies to ensure capital adequacy and allowance for loan losses that supported an institution s lending strategy and were consistent with the level and nature of inherent risk in the CRE portfolio. conducted global cash flow analyses based on reasonable (not speculative) rental rates, sales projections, and operating expenses to ensure the borrower had sufficient repayment capacity to service all loan obligations. performed market and scenario analyses of their CRE loan portfolio to quantify the potential impact of changing economic conditions on asset quality, earnings, and capital. provided their boards and management with information to assess whether the lending strategy and policies continued to be appropriate in light of changes in market conditions. assessed the ongoing ability of the borrower and the project to service all debt as loans converted from interest-only to amortizing payments or during periods of rising interest rates. implemented procedures to monitor the potential volatility in the supply and demand for lots, retail and office space, and multi-family units during business cycles. maintained management information systems that provided the board and management with sufficient information to identify, measure, monitor, and manage concentration risk. implemented processes for reviewing appraisal reports for sufficient information to support an appropriate market value conclusion based on reasonable market rental rates, absorption periods, and expenses. * Federal Deposit Insurance Corporation, Office of the Inspector General, Study on the Impact of Failure of Insured Depository Institutions, January 2013, Most Common Contributing Causes of Material Loss Failures, page 50, Keith Friend, Harry Glenos, and Joseph B. Nichols, An Analysis of the Impact of the Commercial Real Estate Concentration Guidance, April 2013, 10

11 11

12 Peer Analysis Approach: 1.Core geographic area 2.MSA 3.National 4.UBPR peer group 12

13 13

14 14

15 15

16 16

17 17

18 Scope of Regulation Establish board approved Thresholds and Limits/ Caps by category/ CRE asset class; establish a plan of action if Limits/ Caps * are exceeded and reflect in the Capital Plan. Focus on CRE loans and loans for Land Development and Construction (includes 1-4 SF residential and commercial construction). Excludes owner occupied CRE Demonstrate strong and robust underwriting practices & policies Establish guidelines & underwriting procedures Assessing the market using third party, internal, brokers Updating the board and management of market changes Refinance/ sensitivity analysis in your UW Stress scenario s for cash flow in your UW Policies should be commensurate with your organizations risk profile (see peer analysis) * Make sure these are adjusted as market conditions warrant and incorporated into your capital plan! 18

19 19

20 Account Status Code: A, M Collateral Type Bank Owned Principal Assets % of Total Loans % of Total RBC REGULATORY THRESHOLD CONCENTRATION LIMITS % RBC TARGET CAP MARKET RISK LEVEL CRE OWNER OCCUPIED CRE - Daycare Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Flex Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Industrial Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Junior Lien Total $xx xx% xx% xx% xx% HIGH CRE - Medical Office Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Mixed Use Total $xx xx% xx% xx% xx% MEDIUM CRE - Office Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Retail(Non-grocery) Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Schools/Educational Faci Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Self Storage Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Special Use/Church Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Warehouse Total $xx xx% xx% xx% xx% ACCEPTABLE Farm, Ranches & Other Agri Pro Total $xx xx% xx% xx% xx% MEDIUM Gas Station/Convenience Store Total $xx xx% xx% xx% xx% MEDIUM Land, Developed Total $xx xx% xx% xx% xx% ACCEPTABLE Specialty Use-Other, Community Total $xx xx% xx% xx% xx% ACCEPTABLE Specialty Use-Swim & Recreatio Total $xx xx% xx% xx% xx% ACCEPTABLE Subtotal Owner Occupied $xx xx% xx% 150.0% 190.0% CRE NON-OWNER OCCUPIED Condominium/Co-op, For Sale Total $xx xx% xx% xx% xx% HIGH Condominium/Co-op, Investment Total $xx xx% xx% xx% xx% HIGH CRE - Daycare Total $xx xx% xx% xx% xx% MEDIUM CRE - Flex Total $xx xx% xx% xx% xx% MEDIUM CRE - Industrial Total $xx xx% xx% xx% xx% MEDIUM CRE - Junior Lien Total $xx xx% xx% xx% xx% HIGH CRE - Medical Office Total $xx xx% xx% xx% xx% MEDIUM CRE - Mixed Use Total $xx xx% xx% xx% xx% HIGH CRE - Office Total $xx xx% xx% xx% xx% MEDIUM CRE - Retail(grocery-anchored) Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Retail(Non-grocery) Total $xx xx% xx% xx% xx% HIGH CRE - Self Storage Total $xx xx% xx% xx% xx% ACCEPTABLE CRE - Special Use/Church Total $xx xx% xx% xx% xx% MEDIUM CRE - Warehouse Total $xx xx% xx% xx% xx% MEDIUM Farm, Ranches & Other Agri Pro Total $xx xx% xx% xx% xx% HIGH Gas Station/Convenience Store Total $xx xx% xx% xx% xx% HIGH Land, Developed Total $xx xx% xx% xx% xx% MEDIUM Land, Unimproved Total $xx xx% xx% xx% xx% MEDIUM Multi-Family First Lien Total $xx xx% xx% xx% xx% ACCEPTABLE Specialty Use-Hotel/Lodging/Mo Total $xx xx% xx% xx% xx% MEDIUM Specialty Use-Other, Community Total $xx xx% xx% xx% xx% HIGH Specialty Use-Swim & Recreatio Total $xx xx% xx% xx% xx% HIGH Subtotal Non Owner Occupied $xx xx% xx% 300.0% 400.0% 500.0% Total CRE $xx xx% xx% 550.0% 690.0% 20

21 Collateral Type Bank Owned Principal Assets % of Total Loans % of Total RBC REGULATORY THRESHOLD TARGET CAP MARKET RISK LEVEL ALL OTHER LOANS 1-4 Family First Lien Total $xx xx% xx% 1-4 Family Junior Lien Total $xx xx% xx% xx% xx% HIGH 1-4 Family First Lien Total $xx xx% xx% xx% xx% MEDIUM 1-4 Family First Lien-for Sale Total $xx xx% xx% 1-4 Family Junior Lien Total $xx xx% xx% 1-4 Family Junior Lien-for Sa Total $xx xx% xx% Accounts Receivable Total $xx xx% xx% Airplane Total $xx xx% xx% All other Equipment Total $xx xx% xx% Assignment of Lease/Contract Total $xx xx% xx% Assignment of Life Insurance Total $xx xx% xx% Assignment of Note, Secured Total $xx xx% xx% Automobile - New Total $xx xx% xx% Automobile - Used Total $xx xx% xx% Boat, Trailer, Motor Total $xx xx% xx% Business Assets Total $xx xx% xx% Certificate of Deposit Total $xx xx% xx% Commercial Vehicle Total $xx xx% xx% Construction Equipment Total $xx xx% xx% Farm Equipment Total $xx xx% xx% Light Truck Total $xx xx% xx% Manufacturing Equipment Total $xx xx% xx% Marketable Securities, Listed Total $xx xx% xx% Mutual Funds Total $xx xx% xx% Other Deposit Account Total $xx xx% xx% Personal Property Total $xx xx% xx% Transporation Equipment Total $xx xx% xx% Unsecured Total $xx xx% xx% Sub Total $xx xx% xx% Commercial Construction $xx xx% xx% Consumer Construction $xx xx% xx% Total Construction $xx xx% xx% 100.0% 100.0% 150.0% Total Risk Based Capital $xx 21

22 Drive to impact on ALLL & Capital Plan implications Documentation, documentation, documentation 22

23 23

24 Local Economic Updates Local Real Estate Sectors Updates CAP Rates 24

25 25

26 100% & 300% - Enhanced Scrutiny Risk Appetite Statement for CRE Balance Sheet Management Rank by Risk House Concentration Level vs Regulatory Buckets Transaction Size Limitations Geography HELOCs 26

27 27

28 First define Default Impute into present portfolio 28

29 29

30 30

31 31

32 32

33 33

34 Manage Business Document Board Discussions Increase in Interest Rates Decline in EBITDA Increase in CAP Rates Oil & Gas Sector Borrower Builder Tenant Average Size of Loan Duration 34

35 35

36 3 rd Party Accuracy of Calculations Assumptions 36

37 37

38 Primary Name Note Number Maturity Date Loan Rating Code1 Commitment LTV CALCULATED DCR Calculated DCR with a 10% Decline in EBITDA Calculated DCR with a 20% Decline in EBITDA Calculated DCR with a 30% Decline in EBITDA GLOBAL DCR Calculated Global DCR with a 10% Decline in EBITDA Calculated Global DCR with a 20% Decline in EBITDA AVALON HOLDING INC /01/ $2,175, % BAER CREEK VILLAS LLC /22/ $1,038, % DISCOVERY RANCH HOLDINGS LL /15/ $3,356, % GREEN VALLEY ACADEMY LLC /24/ $1,246, % L & M FONG LIMITED PARTNERSH /25/ $956, % OBA PROPERTIES LLC /23/ $3,175, % OQUIRRH MEADOWS INVESTMEN /20/ $4,624, % SPRING GARDENS OF LINDON LC /29/ $8,825, % $25,397,673 Loans >=$500M on Assisted Living Properties As of: 5/31/2016 STRESS TEST SCENARIOS STRESS TEST SCENARIOS AVERAGE $3,174,709 52% % of Dollars in red Category 0% 0% 9% 9% 22% 75% 4% 4% 39% 51% Calculated Global DCR with a 30% Decline in EBITDA Estimate of Loss based on net 5-year loss given default rate for CRE Term (non-owner) of 2.05%. Default defined as dollars in Red Category. Loss scenario severity colored from most (darkest red) to least (darkest green). 46,847 46, , ,354 21,294 21, , ,294 Assumptions: Interest rate increase calculated as additional annual payment of 1-3% of the outstanding principal loan balance. DCR calculated as (EBITDA - CAPEX) / P&I PAID Global DCR calculated as (EBITDA - CAPEX + GUARANTOR CF) / GLOBAL P&I PAID LTV highlighting is based on the following ranges: <50% = green, 50%-75% = yellow, >75% = red. DCR highlighting is based on the following ranges: >1.3x = green, 1.1x-1.3x = yellow, <1.1x = red. Global DCR highlighting is based on the following ranges: >1.5x = green, 1.3x-1.5x = yellow, <1.3x = red. Risk Rating highlighting is based on the following ranges: Pass Grades= green, Marginal= yellow, Special Mention & Substandard = red. For construction loans, DCR estimates were based on projections provided in LAR's 38

39 2016 Consolidated Stress Test Loss Analysis by Loan Segment Calculated DCR with a 10% Decline in EBITDA STRESS TEST SCENARIOS Calculated DCR with a 20% Decline in EBITDA Calculated DCR with a 30% Decline in EBITDA Calculated Global DCR with a 10% decline in EBITDA STRESS TEST SCENARIOS Calculated Global DCR with a 20% decline in EBITDA Calculated Global DCR with a 30% decline in EBITDA HOTEL 95,647,997 5/10/ , ,909 1,346,135 19,380 19, ,035 OFFICE 41,604,365 5/31/ , , , , , ,918 RETAIL 64,285,777 5/31/ , , ,411 43,425 91, ,399 MINI-STORAGE 35,793,318 5/31/ , , , , , ,310 INDUSTRIAL 24,316,516 5/31/ , , ,755 12,659 86, ,580 ASSISTED LIVING 25,397,673 5/31/ , , ,354 21, , ,294 OIL AND GAS 29,377,713 1/31/ , , , , , ,555 APARTMENTS* 30,961,781 4/30/ , , , , , , ,385,140 Estimate of Loss based on net 5-year loss given default rate for each loan segment. Default defined as dollars in Red Category per the specific stress test definitions. Loss scenario severity colored from highest (darkest red) to lowest (darkest green). $ $ $ $ $ $ Estimate of Loss to 5/31/16 ALLL 9,308,831 X% X% X% X% X% X% Estimate of Loss to 5/31/16 Total Capital 138,455,510 X% X% X% X% X% X% Stress Tests were performed on each of the above mentioned loan segments. This report shows the consolidated results of those stress tests. * A specific apartment stress test was not performed given BOU has not recognized any loss in this loan segment and therefore does not have any PD LGD data. The stress test shown here is estimated using 5-year net loss PD (X%) LGD (X%) figures for BOU's Construction and Land Development segment. Loss estimates were increased by 10% for each scenario. 39

40 40

41 41

42 42

43 43