MANAGING COMMERCIAL REAL
ESTATE CONCENTRATIONS
AASYS USER GROUP
Tuesday, December 8, 2009
ABOUT THE PRESENTER
MICHELLE LUCCI, CRCM & CAMS
Risk Management Consultant, Commercial Real Estate
Banker’s 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 Banker’s Toolbox
AGENDA
 The Banking Crisis
 Material Loss Review
 Enforcement Actions
 Preparing for CRE Examinations
 Stress Testing
 Integrating the Results into your Risk
Management Program
COMPANY OVERVIEW
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.
ABOUT US
 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
THE BANKING CRISIS
Note: Size of the
circles is based
on the value of
assets at time of
failure.
Source:
http://s.wsj.net/public/resourc
es/documents/infoFailed_Banks-sort.html
CRE IN RECENT HEADLINES
Slow recovery ahead
for real estate
BANK FAILURES - FLORIDA
Institution Name
City
Date Failed
Commerce Bank of Southwest Florida
Fort Myers
11/20/2009
Orion Bank
Naples
11/13/2009
Century Bank, F.S.B.
Sarasota
11/13/2009
Flagship National Bank
Bradenton
10/23/2009
Hillcrest Bank Florida
Naples
10/23/2009
Partners Bank
Naples
10/23/2009
Community National Bank of Sarasota County
Venice
8/7/2009
First State Bank
Sarasota
8/7/2009
Integrity Bank
Jupiter
7/31/2009
BankUnited, FSB
Coral Gables
5/21/2009
Riverside Bank of the Gulf Coast
Cape Coral
2/13/2009
Ocala National Bank
Ocala
1/30/2009
Source:
www.fdic.gov
BANK FAILURES - GEORGIA
Institution Name
City
Date Failed
Source:
American United Bank
Lawrenceville
10/23/2009
www.fdic.gov
Georgian Bank
Atlanta
9/25/2009
First Coweta Bank
Newnan
8/21/2009
ebank
Atlanta
8/21/2009
Security Bank of Jones County
Gray
7/24/2009
Security Bank of Houston County
Perry
7/24/2009
Security Bank of Bibb County
Macon
7/24/2009
Security Bank of North Metro
Woodstock
7/24/2009
Security Bank of North Fulton
Alpharetta
7/24/2009
Security Bank of Gwinnett County
Suwanee
7/24/2009
First Piedmont Bank
Winder
7/17/2009
Neighborhood Community Bank
Newnan
6/26/2009
Community Bank of West Georgia
Villa Rica
6/26/2009
Southern Community Bank
Fayetteville
6/19/2009
Silverton Bank, NA
Atlanta
5/1/2009
American Southern Bank
Kennesaw
4/24/2009
Omni National Bank
Atlanta
3/27/2009
First City Bank
Stockbridge
3/20/2009
Freedom Bank of Georgia
Commerce
3/6/2009
FirstBank Financial Services
McDonough
2/6/2009
MATERIAL LOSS REVIEWS
WHAT IS A MATERIAL LOSS REVIEW?
Essentially it’s an autopsy that details what went wrong and what could
have been done to prevent the failure.
Source: http://www.fdicig.gov/MLR.shtml
MATERIAL LOSS REVIEWS
WHY THE AUDIT IS DONE:
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.
MATERIAL LOSS REVIEWS
FINDINGS:
REPORT NO. AUD-09-011 MAY 2009
Material Loss Review of Freedom Bank, Bradenton, Florida
FB failed primarily due to bank management’s 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: http://www.fdicig.gov/reports09/09-011.pdf
REGULATORY ENFORCEMENT ACTIONS
PEOPLES NATIONAL BANK
COLORADO SPRINGS, 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;
REGULATORY ENFORCEMENT ACTIONS
WESTERN COMMERCIAL BANK
WOODLAND HILLS, CA
FDIC-09-370B; ISSUED 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 Bank’s loan
portfolio. Such plan shall include specific goals, actions and time frames for
improving the Bank’s 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.
REGULATORY ENFORCEMENT ACTIONS
LOS PADRES BANK
WESTERN, CA
WN-09-031; 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;
REGULATORY GUIDANCE
JOINT PRESS RELEASE
December 12, 2006
Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices
FINANCIAL INSTITUTION LETTERS
FIL-22-2008 March 17, 2008
Managing Commercial Real Estate Concentrations
in a Challenging Environment
PREPARING FOR
CRE EXAMINATIONS
1. Classify or segment your portfolio
2. Know the current value of your holdings.
3. Stress test your portfolio.
“Preparing for CRE Examinations”
Click here to view the full article written
by Michelle Lucci, CRCM, CAMS and
published in the September 2009 issue
of Community Banker magazine.
STEP 1. CLASSIFY &
SEGMENT YOUR PORTFOLIO
•
•
•
•
•
•
Property types
Borrower or collateral city/zip
Business type
DSCR
LTV
Branch or loan officer
STEP 1. CLASSIFY &
SEGMENT YOUR PORTFOLIO
Identify and Investigate Risky Segments
STEP 2. KNOW THE CURRENT
VALUE OF YOUR HOLDINGS
The Moody’s/REAL All Property Type Aggregate Index fell to 109.61
in September 2009, representing a 3.9% decline from a month
earlier. Commercial property prices have now fallen 42% from their
peak in October 2007. Prices have fallen 37% from one year ago and
42% from two years ago.
SOURCE: Moody’s/REAL Commercial Property Price Indices, November 2009
STEP 3. STRESS TESTING
The 3 Methods:
1.
2.
3.
Antiquated
Report Writer
Automated
STEP 3. STRESS TESTING
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?
ANTIQUATED:
EXCEL SPREADSHEET
CRE Worksheet Assumptions
Scenario #1
Scenario #2
Select a descriptor ===>
Origination Loan Amount
Amortization Period
Interest Rate
Annual Debt Service Required (P+I)
Gross Rental Income
Common Area Income
Vacancy Rate
Operating Expenses
Net Operating Income (NOI)
$0
Capitalization Rate
Estimated Collateral Value
DSC Ratio
LTV Ratio
$0
ANTIQUATED:
EXCEL SPREADSHEET
Interest & Cap
Rates
BP Change
BP -300
BP -200
BP -100
Baseline
BP +100
BP +200
BP +300
Vacancy
Rate
-7.50%
-5.00%
-2.50%
0.00%
Interest Rate Effect
Cap Rate
Interest Rate
Impact to LTV
Impact to DSC
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
Vacancy Effect
Vacancy Rate
Impact to DSC
#VALUE!
#VALUE!
#VALUE!
#DIV/0!
5.00%
10.00%
15.00%
• Requires CONSTANT data input and maintenance
• Results are PER LOAN BASIS ONLY – not portfolio level
STEP 3. STRESS TESTING
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?
STEP 3. STRESS TESTING
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.
AUTOMATED STRESS TESTING
Commercial Real Estate
Loan Stress Test
WEB BASED TECHNOLOGY
NO IMPLEMENTATION, SOFTWARE OR HARDWARE REQUIRED
Heit Data Center,
Denver CO
DETERMINING INCOME
Current
Cap Rate
Net Operating
Income
Current or Implied
Property Value
CAP RATE TREND
Cap Rate
+
Date
Implied
Cap Rate
Trend
OR ACTUAL CAP RATE
OR
Trend
Implied
Cap Rate
Crest 2.0.1.1 for bktb_MyBank
Crest
Administration
Home
Administration
Site Map
Business Settings
Welcome admin!
Business Settings
Stress Factors
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
Risk Ratings are the loss factor ranges determined by your institution.
Property Value
Trends
Cap Rate
Trends
Log Out
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.
Crest
Home
Crest 2.0.1.1 for bktb_MyBank
Assign Portfolio
Print Reports
Stress Test
Home
Select a portfolio to stress test
CRE w/ Rental Income Q2 2009
Portfolio:
(Unassigned) Assign…
As Of Date: 1/1/2008
1/1/2008
Report Type
Printer Friendly
All Loans (129 loans)
Cancel
Title:
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Welcome admin!
Report Details
Report Details: CRE w/ Rental Income Q1 2009
Save
Administration Site Map
Loan Category
CRE with Rental Income (118 loans)
Zip Code
Settings
Individually Stressed Loans
Printing Options
Property Type
Basic Stress Test
All loans get the same stress.
Advanced Stress Test
Apartments (34 loans)
Retail (84 loans)
Define different stresses by segmentations.
CRE Construction (11 loans)
Combined Report
Second segmentation:
Define stress for individual segments using saved Stress Test settings.
Cancel
Help
STRESS TESTING
Ability to perform a multi-variable stress test
on the following factors:
 Net Operating Income
 Business Income
 Collateral Value
 Interest Rate – Fixed Rate & Variable
SET CUSTOMIZED STRESS
FACTORS
Nobody knows your customers and community better than you do.
SETTING STRESS FACTORS
CREST 2.0.1.1 for bktb_MyBank
Crest
Administration
Business Settings
Stress Factors
Home
Q1 2009 Apt Stress Mild
Stress Factor Details: Q1 2009 Apt Stress Mild
Save
Basic
Stress Title:
Debt Payment:
Cancel
Advanced
Q1 2009 Apt Stress Mild
Decrease Amount %
1
Variable Rate:
Income:
%
%
Borrower’s Income:
Decrease Amount %
5
%
NOI from income property:
Decrease Amount %
5
%
NOI from farmland:
Collateral Value:
Income property:
Log Out
Welcome admin!
Printer Friendly
Stress Calculator
Fixed Rate:
Administration Site Map
%
Decrease Amount %
5
Farmland:
%
%
Non-income property:
Decrease Amount %
5
%
Construction:
Decrease Amount %
5
%
Stock:
Decrease Amount %
5
%
UCC:
%
Auto:
%
Others:
%
Help
DATA INTEGRITY THROUGH
AUTOMATED DATA SCRUBBING
Crest 2.0.1.1 for bktb_MyBank
Crest
Home
Print Reports
Stress Test
Home
Administration Site Map
Welcome admin!
Report Details
Report Details: CRE w/ Rental Income Q1 2009
Save
Printer Friendly
Cancel
Title:
My CRE
CRE
w/ Rental
Loans Income Q2 2009
Portfolio:
CRE with Rental Income Assign…
As Of Date: 3/31/2009
Report Type
Settings - Basic Stress Test
Individually Stressed Loans
Printing Options
+ Add Loan
Note Number
Borrower Name
Outstanding Balance
2347643
Bay View Complex
$7,510,127.01
Mild Stress
West Side Properties – Mild – …
Severe Stress
West Side Properties – Severe…
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.
3843743
Highlight Park Center
$3,701,146.54
West Side Properties – Mild – …
West Side Properties – Severe…
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 2347643.
+ Add Loan
Log Out
Help
Portfolio Detail: CRE with Rental Income
Portfolio full name: All Loans > CRE with Rental Income
STRESS TEST RESULT
Overview
Portfolio Condition with
Portfolio Condition with
Portfolio Condition with
Average Interest Rate:
7.11%
7.51%
8.61%
Total Annual Payment:
$10,526,551.80
$11,118,762.88
$12,747,343.32
Total Collateral Value:
$197,403,690.67
$177,663,321.60
$157,922,952.53
Total Net Collateral Shortfall:
$3,423,456.78
$8,883,166.08
$17,766,332.16
No Stress
Mild Stress
Severe Stress
LTV
Portfolio Condition with No Stress
Portfolio Condition with Mild Stress
Portfolio Condition with Severe Stress
Below 0.70
42%
Below 0.70
31%
Below 0.70
22%
From 0.70 to 0.90
28%
From 0.70 to 0.90
17%
From 0.70 to 0.90
8%
From 0.90 to 1.00
15%
From 0.90 to 1.00
24%
From 0.90 to 1.00
30%
From 1.00 to 1.25
10%
From 1.00 to 1.25
18%
From 1.00 to 1.25
21%
From 1.25 and above
5%
From 1.25 and above
10%
From 1.25 and above
19%
DSCR
Portfolio Condition with No Stress
Portfolio Condition with Mild Stress
Portfolio Condition with Severe Stress
Below 1.00
5%
Below 1.00
15%
Below 1.00
22%
From 1.00 to 1.20
From 1.00 to 1.20
From 1.00 to 1.20
Portfolio Condition with
Portfolio Condition with
Average Interest Rate:
No Stress
7.11%
Portfolio Condition with
Total Annual Payment:
$10,526,551.80
$11,118,762.88
$12,747,343.32
Total Collateral Value:
$197,403,690.67
$177,663,321.60
$157,922,952.53
Total Net Collateral Shortfall:
$3,423,456.78
$8,883,166.08
$17,766,332.16
Mild Stress
7.51%
Severe Stress
8.61%
LTV
Portfolio Condition with No Stress
Portfolio Condition with Mild Stress
Portfolio Condition with Severe Stress
Below 0.70
42%
Below 0.70
31%
Below 0.70
22%
From 0.70 to 0.90
28%
From 0.70 to 0.90
17%
From 0.70 to 0.90
8%
From 0.90 to 1.00
15%
From 0.90 to 1.00
24%
From 0.90 to 1.00
30%
From 1.00 to 1.25
10%
From 1.00 to 1.25
18%
From 1.00 to 1.25
21%
From 1.25 and above
5%
From 1.25 and above
10%
From 1.25 and above
19%
DSCR
Portfolio Condition with No Stress
Portfolio Condition with Mild Stress
Portfolio Condition with Severe Stress
Below 1.00
5%
Below 1.00
15%
Below 1.00
22%
From 1.00 to 1.20
8%
From 1.00 to 1.20
18%
From 1.00 to 1.20
26%
From 1.20 to 1.50
28%
From 1.20 to 1.50
22%
From 1.20 to 1.50
20%
From 1.50 to 1.80
40%
From 1.50 to 1.80
33%
From 1.50 to 1.80
24%
From 1.80 and above
19%
From 1.80 and above
12%
From 1.80 and above
8%
Segmentation: CRE with Rental Income > Property Type
By Property Type
Segment
LTV
DSCR
Apartments
No Stress
No Stress
Outstanding Balance:
$84,987,041
Mild
Mild
Severe
Severe
Retail
Outstanding Balance:
$63,065,727
Segment
No Stress
No Stress
Mild
Mild
Severe
Severe
Outstanding Balance
% of Portfolio
Apartments
$84,987,041
Retail
$63,065,727
% of Segment over LTV value 0.8
% of Segment under DSCR value 1.25
No Stress
Mild
Severe
No Stress
Mild
Severe
57.40%
34.21%
51.01%
73.44%
13.87%
27.14%
56.97%
42.60%
5.00%
7.00%
9.12%
14.50%
23.41%
47.49%
BUILT-IN TRAINING
INTEGRATING THE RESULTS
INTO YOUR RISK MANAGEMENT PROGRAM
MANAGEMENT LETTER
View a sample management letter.
Click Here (Open PDF document)
PRICING
Introductory Pricing Based On CRE Asset Size:
CRE Asset Size
Annual Subscription Fee
Implementation & Training
< $250 M
< $500M
$1 B
$2 B
$5 B
$9,000
$12,000
$15,000
$30,000
$60,000
$0
$0
$0
$0
$0
THANK YOU!