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Rebalancing the Loan Portfolio
1. Jon Winick, President, Clark Street Capital
Mike Lubansky, Director of Consulting Services, Sageworks
2. 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
3. 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
4.
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
5.
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.
7.
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
8.
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
10. 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
11.
Stress tests identify risks on the balance sheet
◦ Exiting or selling businesses
◦ Increasing pricing
Don’t meet customer demands
12.
“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
13. 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
14.
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
15. 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
16.
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
17. 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?
18.
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
19. 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)
20.
21. 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
23.
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
24.
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
25.
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
26.
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.
27.
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.
28.
29. 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
