M ANAGING C OMMERCIAL R EAL E STATE C ONCENTRATIONS A A S YS U SER G ROUP Tuesday, December 8, 2009.

MANAGING COMMERCIAL REAL ESTATE

CONCENTRATIONS

AASYS USER GROUPTuesday, December 8, 2009

MICHELLE LUCCI, CRCM & CAMSRisk 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

ABOUT THE PRESENTER

AGENDA

The Banking Crisis

Material Loss Review

Enforcement Actions

Preparing for CRE Examinations

Stress Testing

Integrating the Results into your Risk Management Program

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.

COMPANY OVERVIEW

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/resources/documents/info-Failed_Banks-sort.html

Commercial Real

Estate – The Next

Shoe to Drop

Commercial RE risk looms for local banks

Slow recovery ahead for real estate

Why the U.S. Com

mercial Real Estat

e Market Will Colla

pse,...

Commercial real estate m

ay be next big woe

CRE IN RECENT HEADLINES

BANK FAILURES - FLORIDA

Source: www.fdic.gov

Institution Name City Date FailedCommerce 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

BANK FAILURES - GEORGIA

Source: www.fdic.gov

Institution Name City Date FailedAmerican United Bank Lawrenceville 10/23/2009

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 BANKWESTERN, CA WN-09-031; 10/14/2009

Concentrations Risk Management PolicyBy 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 RELEASEDecember 12, 2006

Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices

FINANCIAL INSTITUTION LETTERSFIL-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.

Click here to view the full article written by Michelle Lucci, CRCM, CAMS and published in the September 2009 issue of Community Banker magazine.

“Preparing for CRE Examinations”

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 CURRENTVALUE 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. Antiquated2. Report Writer3. 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?

Scenario #1

$0

DSC Ratio

LTV Ratio

Net Operating Income (NOI) $0

Capitalization Rate

Estimated Collateral Value

Common Area Income

Vacancy Rate

Operating Expenses

Annual Debt Service Required (P+I)

Gross Rental Income

Amortization Period

Interest Rate

Origination Loan Amount

CRE Worksheet Assumptions

Scenario #2

Select a descriptor ===>

ANTIQUATED: EXCEL SPREADSHEET

ANTIQUATED: EXCEL SPREADSHEET

Vacancy EffectCap Rate Interest Rate Vacancy Rate

Impact to LTV Impact to DSC Impact to DSCBP -300 -7.50% #DIV/0! #DIV/0! #VALUE!BP -200 -5.00% #DIV/0! #DIV/0! #VALUE!BP -100 -2.50% #DIV/0! #DIV/0! #VALUE!Baseline 0.00% #DIV/0! #DIV/0!

BP +100 5.00%BP +200 10.00%BP +300 15.00%

Interest & Cap Rates

BP ChangeVacancy

Rate

Interest Rate Effect

• 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.

Commercial Real EstateLoan Stress Test

AUTOMATED STRESS TESTING

WEB BASED TECHNOLOGY

NO IMPLEMENTATION, SOFTWARE OR HARDWARE REQUIRED

Heit Data Center, Denver CO

DETERMINING INCOME

CurrentCap Rate

Current or ImpliedProperty Value

Net Operating Income

CAP RATE TREND

Cap Rate+

DateTrend Implied

Cap Rate

OR ACTUAL CAP RATE OR

Trend ImpliedCap Rate

Crest 2.0.1.1 for bktb_MyBank

Administration Business Settings

Crest

Business Settings

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 are the loss factor ranges determined by your institution.

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.

Welcome admin!

Stress Factors

Risk Ratings

Property Value Trends

Cap Rate Trends

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Basic Stress Test

Advanced Stress Test

All loans get the same stress.

Define different stresses by segmentations.

Combined Report

Define stress for individual segments using saved Stress Test settings.Second segmentation:

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Crest

Report Details: CRE w/ Rental Income Q1 2009

Portfolio: (Unassigned) Assign…

As Of Date:

Title:

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CRE w/ Rental Income Q2 2009

1/1/2008

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Home Print Reports Stress Test Report Details

SettingsReport Type Individually Stressed Loans Printing Options

1/1/2008

Assign Portfolio

All Loans (129 loans)

CRE with Rental Income (118 loans)

Loan Category

Zip Code

Property Type

Apartments (34 loans)

Retail (84 loans)

CRE Construction (11 loans)

Cancel

Select a portfolio to stress test

Ability to perform a multi-variable stress test on the following factors:

Net Operating Income

Business Income

Collateral Value

Interest Rate – Fixed Rate & Variable

STRESS TESTING

SET CUSTOMIZED STRESS FACTORS

Nobody knows your customers and community better than you do.

SETTING STRESS FACTORS

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Stress Factor Details: Q1 2009 Apt Stress Mild

Administration Business Settings Stress Factors Q1 2009 Apt Stress Mild

Stress Title: Q1 2009 Apt Stress Mild

Debt Payment:

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Save Cancel Stress Calculator

Basic Advanced

Fixed Rate: 1 %

Variable Rate: %

Income:Borrower’s Income: 5 %

NOI from income property: 5 %

NOI from farmland: %

Collateral Value:Income property: 5 %

Farmland: %

Non-income property: 5 %

Construction: 5 %

Stock: 5 %

UCC: %

Auto: %

Others: %

Decrease Amount %

Decrease Amount %

Decrease Amount %

Decrease Amount %

Decrease Amount %

Decrease Amount %

Decrease Amount %

DATA INTEGRITY THROUGH AUTOMATED DATA SCRUBBING

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Portfolio: CRE with Rental Income Assign…

As Of Date:

Title:

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My CRE Loans

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Home Print Reports Stress Test Report Details

Printing OptionsReport Type Individually Stressed Loans

Add Loan+

Settings - Basic Stress Test

Add Loan+

Report Details: CRE w/ Rental Income Q1 2009

2347643 Bay View Complex $7,510,127.01

3843743 Highlight Park Center $3,701,146.54

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.

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.

West Side Properties – Mild – … West Side Properties – Severe…

West Side Properties – Mild – … West Side Properties – Severe…

Note Number Borrower Name Outstanding Balance Mild Stress Severe Stress

3/31/2009

CRE w/ Rental Income Q2 2009

Portfolio Condition with No Stress

Portfolio Condition with Mild Stress

Portfolio Condition with Severe Stress

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

Portfolio Detail: CRE with Rental IncomePortfolio full name: All Loans > CRE with Rental Income

STRESS TEST RESULT

Overview

Below 0.70 42%

From 0.70 to 0.90 28%

From 0.90 to 1.00 15%

From 1.00 to 1.25 10%

From 1.25 and above 5%

Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress

LTV

Below 0.70 31%

From 0.70 to 0.90 17%

From 0.90 to 1.00 24%

From 1.00 to 1.25 18%

From 1.25 and above 10%

Below 0.70 22%

From 0.70 to 0.90 8%

From 0.90 to 1.00 30%

From 1.00 to 1.25 21%

From 1.25 and above 19%

Below 1.005%

From 1.00 to 1.20 8%

From 1.20 to 1.5028%

From 1.50 to 1.8040%

From 1.80 and above 19%

Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress

DSCR

Below 1.0015%

From 1.00 to 1.20 18%

From 1.20 to 1.5022%

From 1.50 to 1.8033%

From 1.80 and above 12%

Below 1.0022%

From 1.00 to 1.20 26%

From 1.20 to 1.5020%

From 1.50 to 1.8024%

From 1.80 and above 8%

Portfolio Condition with No Stress

Portfolio Condition with Mild Stress

Portfolio Condition with Severe Stress

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

Below 0.70 42%

From 0.70 to 0.90 28%

From 0.90 to 1.00 15%

From 1.00 to 1.25 10%

From 1.25 and above 5%

Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress

LTV

Below 0.70 31%

From 0.70 to 0.90 17%

From 0.90 to 1.00 24%

From 1.00 to 1.25 18%

From 1.25 and above 10%

Below 0.70 22%

From 0.70 to 0.90 8%

From 0.90 to 1.00 30%

From 1.00 to 1.25 21%

From 1.25 and above 19%

Below 1.005%

From 1.00 to 1.20 8%

From 1.20 to 1.5028%

From 1.50 to 1.8040%

From 1.80 and above 19%

Portfolio Condition with No Stress Portfolio Condition with Mild Stress Portfolio Condition with Severe Stress

DSCR

Below 1.0015%

From 1.00 to 1.20 18%

From 1.20 to 1.5022%

From 1.50 to 1.8033%

From 1.80 and above 12%

Below 1.0022%

From 1.00 to 1.20 26%

From 1.20 to 1.5020%

From 1.50 to 1.8024%

From 1.80 and above 8%

Segmentation: CRE with Rental Income > Property Type

By Property Type

ApartmentsOutstanding Balance:$84,987,041

RetailOutstanding Balance:$63,065,727

DSCR

No Stress

Mild

Severe

Segment LTV

No Stress

Mild

Severe

No Stress

Mild

Severe

No Stress

Mild

Severe

Segment Outstanding Balance % of Portfolio% of Segment over LTV value 0.8 % of Segment under DSCR value 1.25

No Stress Mild Severe No Stress Mild Severe

Apartments $84,987,041 57.40% 34.21% 51.01% 73.44% 13.87% 27.14% 56.97%

Retail $63,065,727 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

CRE Asset Size Annual Subscription Fee Implementation & Training

< $250 M $9,000 $0< $500M $12,000 $0

$1 B $15,000 $0$2 B $30,000 $0$5 B $60,000 $0

Introductory Pricing Based On CRE Asset Size:

THANK YOU!