Rebalancing the Loan Portfolio
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Rebalancing the Loan Portfolio

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Rebalancing the Loan Portfolio Rebalancing the Loan Portfolio Presentation Transcript

  • Jon Winick, President, Clark Street Capital Mike Lubansky, Director of Consulting Services, Sageworks
  • To ask a question during the webinar, feel free to enter it into the chat box along the right hand side of your screen. Slides are available there, too. Link to download slides Area to enter questions or write-in poll answers
  • Full-service bank advisory firm, specializing in review, management and disposition of complex loan portfolios  Expertise in banking, CRE, whole loans, loan sales and workouts  • • • • Bank Asset Network (“BAN”) is a proprietary asset disposition platform Bank Portfolio Management (“BPM”) provides due diligence, valuation and solutions for loan portfolios Specialty Asset Management (“SAM”) provides loan workout services to community and regional banks Bank Advisory helps banking organizations with capital plans, strategic plans, management and compensation studies, and asset disposition plans View slide
  •    Financial information company that provides credit and risk management solutions to financial institutions Data and applications used by thousands of financial institutions and accounting firms across North America Awards ◦ Named to Inc. 500 list of fastest growing privately held companies ◦ Named to Deloitte’s Technology Fast 500 View slide
  •  John Winick Jon is president of Clark Street Capital. Prior to founding Clark Street Capital, John was National Marketing Director for Zions Bank, a $53 billion bank headquartered in Salt Lake City.  Mike Lubansky Mike is a director of consulting services at Sageworks, where he oversees product development, research and implementation in the banking market. He often presents on risk management, most recently to the FFIEC on stress testing methodologies.
  •  Stress Testing Results
  •        What is Stress Testing Interpreting Stress Testing Results Re-Balancing the Loan Portfolio State of the Market Basel III’s Impact Asset Sale Considerations Case Studies
  •      Perform loan, portfolio or institution level analysis Develop scenarios of stressed environments: baseline, adverse and severely adverse Apply stress scenarios and calculate estimated impairment View potential impact on the financial institution’s earnings and capital Determine complexity of stress tests according to bank size, loan portfolio characteristics and risk appetite
  • ALLL Provisions Capital Adequacy
  • Portfolio Concentration by Call Code Risk Based Capital Call Code 1a1. 1-4 family residential construction loans Number of Loans Loan Balance $155,207,000 Balance / Capital Total Commitment Commitment / Capital 44 $16,068,755 10.35 $16,068,755 10.35 19 $1,507,387 0.96 $67,513,270 43.50 635 $29,904,026 19.20 $42,240,768 27.22 1,557 $294,362,372 189.58 $295,117,372 190.14 120 $6,252,356 4.03 $6,252,356 4.03 1,378 $294,185,785 189.68 1e. Secured by nonfarm nonresidential properties 237 $289,597,073 186.64 Review $901,064,503 580.56 individual concentrations $302,393,518 194.83 4. Commercial and industrial loans 995 $353,942,323 228.00 $467,070,767 300.93 6c. Automobile loans 6d. Other consumer loans 251 319 $5,601,824 $2,200,249 3.30 1.29 $5,601,824 $2,345,833 3.61 1.51 5,570 $1,298,646,026 836.27 $2,110,692,842 1,359.92 1a2. Other construction loans and all land development and other land loans 1c1. Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 1c2a. Secured by first liens 1c2b. Secured by junior liens 1d. Secured by multifamily (5 or more) residential properties Total
  •  Stress tests identify risks on the balance sheet ◦ Exiting or selling businesses ◦ Increasing pricing  Don’t meet customer demands
  •  “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (2006): ◦ Management should develop appropriate strategies for managing CRE concentration levels, including a contingency plan to reduce or mitigate concentrations in the event of adverse CRE market conditions. Loan participations, whole loan sales, and securitizations are a few examples of strategies for actively managing concentration levels without curtailing new originations.  Loan sales, participations and securitizations are other options that don’t turn away customers
  • FDIC Quarterly Banking Profile Loans and leases, 30-89 days past due Noncurrent loans and leases Restructured loans and leases Other real estate owned Total Problem Assets Q1 2013 80,020 261,161 105,866 35,883 482,930 Decline from Q4 2012 Decline from Q4 2011 Decline from Q1 2010 Increase from Q1 2006 5.15% 14.30% 26.58% 426.05%    Q4 2012 88,898 276,797 104,986 38,490 509,171 Q1 2012 89,755 305,032 123,926 44,789 563,502 Q1 2010 141,492 405,395 64,612 46,265 657,764 Q1 2006 56,334 48,593 3,306 5,117 113,350 Slow progress in resolving problem assets, although encouraging signs With nearly $500 billion in problem assets still in the banking system, total UPB on assets in workout is probably $700 billion plus Top of the fifth, but pace of game is picking up
  •  Non performing commercial loans up 500 – 1000 basis points in the past year  Huge increase in sales of mortgage servicing rights  With low interest rates, legacy loans nearly always have yields higher than new originations today, making seasoned performing loans very attractive  However, for distressed assets, most banks are still experiencing losses of 20% or greater on book values
  • Retail Orig. Bal. Resolved Office Loss % Orig. Bal. Multifamily Loss % Orig. Bal. Lodging Loss % Orig. Bal. Industrial Loss % Orig. Bal. Other Loss % Orig. Bal. Total Loss % Orig. Bal. Loss % 6,900,000 46% 345,182,397 15% 34,964,353 81% 37,000,000 1% 10,182,544 0% 0% 434,229,294 19% DPO 356,836,761 50% 500,096,844 39% 171,133,717 19% 68,619,659 55% 58,558,780 35% 213,277,030 38% 1,368,522,791 40% Note Sale 250,411,555 51% 640,618,469 23% 108,312,639 48% 110,603,320 55% 81,746,388 51% 45,695,648 48% 1,237,388,019 37% Foreclosure - Modification 640,736,022 50% 789,349,333 34% 362,324,420 29% 250,993,519 22% 98,021,594 39% 114,086,968 42% 2,255,511,855 37% 1,969,293,758 REO 64% 1,776,138,002 57% 1,800,858,993 43% 757,356,920 62% 363,292,929 53% 259,297,781 55% 6,926,238,382 56% 74,468,759 0% 777,694,372 9% 0% 38,367,892 42% 23% 38,589,226 38% 213,892,202 10% 168,706,636 22% 273,923,231 3% - 0% 46,703,544 1% Deed in Lieu of Foreclosure 8,108,150 76% 2,899,743 59% 12,560,000 11% - 0% 14,800,000 47% Bankruptcy 7,387,969 28% 1,869,501 17% 21,058,089 44% Extension - 0% - 3,780,000 56% - 0% 4,493,668 0% 44,800,000 1% 0% 16,497,615 0% 0% 61,297,615 1% 30,027,831 1% 103,673,971 1% 110,059,178 6% 330,728,788 0% 31,120,616 1% 603,692,800 0% 1,209,303,184 1% Other 1,394,228,669 31% 1,759,388,084 17% 597,423,009 12% 383,207,732 13% 357,634,705 17% 287,055,810 19% 4,778,938,008 20% Total 4,877,822,916 48% 6,087,922,980 33% 3,537,417,629 31% 1,942,289,938 35% 1,078,558,714 34% 1,602,068,463 22% 19,126,080,639 36% Full Payoff - -  Above is all of the resolutions in 2012 of CMBS loans  Worst outcome, by far, is an REO sale, in which recoveries were 44% of the unpaid principal balance
  •      Does your bank monitor all costs associated with managing NPLs? Expenses are much more than FAS 5 and FAS 114. For a well-capitalized bank, is the strategy of attempting to recover every last possible dollar from an NPL the correct one? What was your total non-interest expense related to managing non-accrual assets in 2006 vs. 2011? What % of time does your chief credit officer spend managing problem credits versus new originations? Consider all expenses carefully
  • Clark Street is conducting research on expenses related to NPAs to assist the industry better understanding the true cost in managing NPAs. 1. 2. 3. 4. 5. 6. 7. 8. 9. Could you provide your bank’s 2012 total interest expense to fund your NPL portfolio? Could you provide us with an estimated cost of capital to carry your NPL portfolio in 2012? Could you provide us the cost of staffing your internal workout group or any other personnel expenses you deem attributable to managing the banks NPLs in 2006 and 2012? (2006 only if available) Could you provide us with your 2012 cost of appraisals for your NPA portfolio? What were your total legal costs in 2012 attributed to your NPLs and OREO, including demand letters, foreclosure litigation, document review, receivers, etc.? What did you pay in property taxes on your REO and NPL portfolios in 2012? What did you pay in property management expenses for your REO portfolio in 2012? What were your costs for outside loan review and workout consultants (if applicable) in 2012? What was your total FAS 114 reserve and charge off expense for 2012?
  •  Despite delays, still on track for final rules this summer ◦ “While there are difficult open issues with which we must contend, there is every reason to think that the institutional arrangements we have at the Basel Committee will be able to rise to the challenge.” Charles Taylor, OCC Deputy Controller and Chairman of the Basel Committee Supervision and Implementation Group, 5/2013  New risk weights are significantly different and will change how banks value and price assets
  • Risk weight for category 1 residential mortgage exposures (percent) Risk weight for category 2 residential mortgage exposures (percent) Less than or equal to 60% 35% 100% Greater than 60% and less than or equal to 80% 50% 100% Greater than 80% and less than or equal to 90% 75% 150% Greater than 90% 100% 200% LTV ratio (in percent)
  • Key assumptions  Percent of DTA’s related to Operating Losses and Tax Credit Carry forwards = 5%  Percent of 1-4 Family Loans ◦ Category 1 = 54% (50% <60% LTV; 35% 60 to 80% LTV; 10% 80-90% LTV; 5% >90% LTV) ◦ Category 2 = 46% (80% <80% LTV; 10% 80-90% LTV; 10% >90% LTV)  Percent of High Volatility Commercial Real Estate (HVCRE) loans = 10%  Percent of TRUPS to total assets = 1.5%  No minority interests, past due government guaranteed loans or other items under Basel III
  • Current Rules Basel III Difference (decrease) Leverage Ratio 10.91% 9.20% (1.71) Common Equity Tier 1 Ratio N/A 12.59% N/A Tier 1 Capital Ratio 15.91% 12.59% (3.32) Total Capital Ratio 17.16% 16.57% (0.59)
  •  Timeline and sales process  Which advisor (if any) to hire?  Which assets make sense to dispose?  The representations and warranties in the sale agreement – “As Is” v. other reps such as lien positions, performance, risk rating, etc. This will also depend on whether this is a distressed versus non-distressed sale
  •  How wide of an audience? How many interested parties constitute successfully establishing a market? Are files scanned and available for off-site due diligence?  How do you pool the portfolio? How current is the information? Operating statements, rent rolls, appraisals, etc.?  Closing process - preparing the assignment documents, negotiating the sale agreement
  •      Bulk disposition vs. systematic disposition Bulk disposition allows a bank to quickly move past legacy problems and focus on growth and opportunities Systematic disposition is helpful to more capital-sensitive banks, but likely to depress earnings over a long period vs. an expeditious resolution Larger NPL portfolio sales attract institutional buyer interest and are fairly quick to execute Smaller banks can join in multi-bank loan sales organized by Clark Street and other providers; assets organized by geography, collateral and performance “Stop being a company with its face toward the CEO and a$$ towards the customer.” - Jack Welch
  •  Palmetto Bancshares After receiving a consent order in June 2010 and raising additional capital, Palmetto Bancshares faced its problems head-on and focused much of its energies on reducing NPAs. Using a series of loan sales, the Greenville, SCbased institution reduced NPAs by 80% in three years and exited its consent order earlier this year. After first disclosing a loan sale in June 2012, the stock price increased by 98% in less than a year, while the KBW bank index rose by 36%.  Flagstar Flagstar Bancorp decided to exit a non-core business of Northeast asset-based loans, equipment leases, and commercial real estate loans. At the end of 2012, Flagstar sold a $1.2 performing portfolio of loans and loan commitments (current outstandings were $785 million) for 99% of tangible book value to CIT. The transaction was consummated just 21 days after CIT first reviewed the transaction.
  •  Multi-Bank Sale Clark Street successfully sold a $15MM non-performing, non-cash flow generating CRE loan in Kentucky. The loan was secured by the Turfland Mall, the most high-profile distressed retail asset in the state of Kentucky. The loan was originated and initially serviced by an investment bank that sold participations to 14 banks in 6 states. That’s right – fourteen banks! Ultimately, we needed 16 parties to unanimously agree on the resolution of the loan relationship, resulting in a win/win for all parties involved.
  • Jon Winick President, Clark Street Capital (312) 662-1500 ext. 13 jon.winick@clarkstcapital.com www.clarkstcapital.com Mike Lubansky Director of Consulting Services, Sageworks 866.603.7029 ext. 651 mike.lubansky@sageworks.com www.sageworksanalyst.com