Sound Fundamentals of Loan Portfolio Management

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Sound Fundamentals of Loan Portfolio Management
Regional Assistant Vice President
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Fundamentals of Loan Portfolio Management - Key
Discussion Topics

• What are the historical trends in loan
  composition in District banks?
• Why is there growing regulatory scrutiny in the
  area of commercial real estate concentrations?
• What risk management techniques do regulators
  expect you to employ and what issues are
  identified during routine examinations?

Loans
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Fundamentals of Loan Portfolio Management

• What key questions should your directors be
  asking?
• What are current expectations around appraisal
  processes?

Loans
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Commercial Real Estate Loans Have Grown Rapidly
at Kansas Missouri Banks
Millions
of Tot RBC
- All Banks in States - Selected Real Estate
Loan Categories. Source Reports of Condition and
Income
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Commercial Real Estate Loans Have Grown Rapidly
at Colorado Banks
Millions
of Tot RBC
- All Banks in State w/o Wells Fargo
subsidiaries - Selected Real Estate Loan
Categories. Source Reports of Condition and
Income
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Commercial Real Estate Loans Have Grown Rapidly
at Wyoming Banks
Millions
of Tot RBC
- All Banks in State w/o Wells Fargo
subsidiaries - Selected Real Estate Loan
Categories. Source Reports of Condition and
Income
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Commercial Real Estate Loans Have Grown Rapidly
at New Mexico Banks
Millions
of Tot RBC
- All Banks in State w/o Wells Fargo
subsidiaries - Selected Real Estate Loan
Categories. Source Reports of Condition and
Income
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Commercial Real Estate Loans HaveGrown Rapidly
at Nebraska Banks
Millions
of Tot RBC
- All Banks in State w/o Wells Fargo
subsidiaries - Selected Real Estate Loan
Categories. Source Reports of Condition and
Income
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Commercial Real Estate Loans Have Grown Rapidly
at Oklahoma Banks
Millions
of Tot RBC
- All Banks in State - Selected Real Estate
Loan Categories. Source Reports of Condition and
Income
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CRE Concentrations by District

• CRE loans to Tier 1 Capital at 6/30/05

Dist 1 246
Dist 9 233
Dist 2 236
Dist 7 249
Dist 3 233
Dist 4 197
Dist 12 394
Dist 10 247
Dist 8 227
Dist 5 292
Dist 6 316
Dist 11 197
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District Commercial Real Estate Concentrations
Centered in West
Above 300
250 - 299
256
150 - 249
169
339
309
237
224
326
noted are CRE Loans/Tier 1 Capital
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Why the concern over commercial real estate and
escalating real estate concentrations?

• Banks are a primary source of funding for
  commercial real estate projects and rapid growth
• Past real estate market cycles have posed
  significant risk to institutions with CRE
  concentrations
• Some evidence that risk management practices
  havent kept pace with the level of
  concentrations in real estate

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Overview of Proposed Interagency Guidance
Commercial Real Estate

• Recognized concentrations in commercial real
  estate require heightened risk management
  practices and levels of capital
• Established benchmarks for determining
  concentrations
• Described sound risk management practices and
  regulatory expectations

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Sound Risk Management Principles-Proposed
Interagency Guidance

• Board and Management Oversight and Strategic
  Planning
• Underwriting

Planning
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Sound Risk Management Principles-Proposed
Interagency Guidance

• Management information systems designed to
  measure concentrations
• Market Analysis
• Stress Testing
• Capital Adequacy and Reserves

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What questions should directors be asking?

• Are well supported concentration limits
  established?
• Is there a need for stronger, more sophisticated
  risk management systems?
• Is our MIS capturing the information we need to
  appropriately monitor this risk?
• Does our capital level and our ALLL reasonably
  accommodate the higher level of risk associated
  with our concentrations?

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What questions should directors be asking?

• Are underwriting parameters consistent with
  maintaining quality loans or are changes
  necessary for proper protection?
• Are the concentrations sufficiently diversified
  (by property type, geographic location,
  developer/contractor)?

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Appraisal Processes

• Supervisory expectations on independence between
  engaging, ordering and reviewing appraisals and
  making credit decisions
• FannieMae appraisal forms and appraisal standards
  changes
• USPAP changes including appraiser qualification
  changes

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Sound Fundamentals of Loan Portfolio Management
Questions
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