COMMERCIAL REAL ESTATE LOAN PORTFOLIO ANALYSIS
MARSHALL S TEVENS
We are caught in the biggest bank crisis of our generation. In dealing with this crisis, control of the pertinent information is key. Marshall & Stevens (”M&S”) has the tools to provide Bank Management that control. We are a valuation firm with over 75 years of experience. We have an experienced team and a cutting edge methodology to assist Bank Management in addressing current challenges.
METHODOLOGY In order to meet the needs of the banking community and achieve market and regulatory transparency with respect to Commercial Real Estate Loan Portfolios, Marshall & Stevens has developed a timely and cost effective methodology that will allow Bank Management to: • Independently and authoritatively verify and document the value of the collateral underlying the existing loans, • Quickly and efficiently identify those loans amenable to restructuring, • Monitor, in real time, the impact of market developments on portfolio and individual loan values and underlying collateral, and • Conduct customized stress tests to demonstrate the strengths of the portfolio.
LOAN PORTFOLIO SERVICES INCLUDE: • Filing in missing loan file data, • Updating information regarding title and encumbrances, • Building DCFs for commercial real estate property collateral on a loan-by-loan basis, • Identifying “at risk” but currently performing loans, • Identifying loans offering solid prospects for capital saving restructuring, • Delivering USPAP compliant summary appraisals on economically reasonable terms, • Developing and running custom Stress Tests, and • Ongoing monitoring for early warning as to impacts of market changes
LOS ANGELES
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NEW YORK
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PHILADELPHIA
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CHICAGO
www.marshall-stevens.com
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ST. LOUIS
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TAMPA
We can assist Bank Management to: 1. Control the Dialogue with Outside Constituencies Bank Management is being called upon by regulators, board members and capital markets participants alike to substantiate loan values. Auditors are demanding substantiation of asset values for booking reserves and supporting balance sheet goodwill. An M&S Loan Portfolio Evaluation can provide Bank Management with the information it needs to anticipate and meet these information demands. 2. Enhance Decision Making by Anticipating Issues Commercial real estate problems are likely to get worse before they get better. Market fundamentals, e.g., lease rates, and vacancies, continue to deteriorate as leases roll and tenants exercise new found bargaining power. An M&S Loan Portfolio Evaluation will help Management to anticipate and address these situations before loans go into default, thus keeping the bank ahead of the curve. 3. Preserve Capital Capital is scarce. Restructuring loans proactively to weather future market turmoil can preserve capital. An M&S Loan Portfolio Evaluation can help management identify those loans on a timely and cost effective basis and provide the documentation needed to meet the standards set forth in the recent Policy Statement on Prudent Commercial Real Estate Loan Workouts.
“Boards of directors should review information that identifies and quantifies the nature and level of risk presented by CRE concentrations, including reports that describe changes in CRE market conditions in which the institution lends.”
4. Raise Capital Historic loss and static pool analysis are backward looking. Investors want to know management is looking into the future and taking steps necessary to quantify and control future losses. An M&S Loan Portfolio Evaluation will give management the confidence to assure investors they have the information and analysis to take those steps and positively differentiate themselves from banks which have not. The Evaluation will be USPAP compliant and may be included in a prospectus. 5. Assist in Bank Acquisitions Consolidation is inevitable. Those banks with the wherewithal to take advantage of the current crisis must accurately and cost/time effectively assess the risks in acquiring another, often weaker, institution. Failure to do so can turn the hunter into the hunted. An M&S Loan Portfolio Evaluation of a prospective acquisition’s CRE portfolio offers the acquirer the means necessary to evaluate a target bank’s CRE portfolio. That analysis can be crucial in management’s discussions of an acquisition with Directors, regulators and investors.
We can assist Investors to: 1. Evaluate the Adequacy of Bank Reserves Many banks carry inadequate reserve levels on their CRE loan exposures. These reserves are in many cases based upon historic loss data which does not reflect forward looking analysis of the CRE markets. An M&S Loan Portfolio Evaluation can help investors gain valuable insight as to the future cash flow and valuation issues of collateral across a loan portfolio. 2. Enable Investors to Submit Accurate Negative Bids Whether acquiring loans through direct purchase or negative bid for a failed bank, the buyer takes all of the financial risk of the loan portfolio. With no risk sharing backstop, accurate loan evaluation is imperative. Investors typically receive limited information from the FDIC and face strict time constraints. An M&S Loan Portfolio Evaluation can help investors get a quick and highly accurate assessment of the collateral value in order to make the best decision about how to price a transaction. 3. Differentiate Amongst Bank/Portfolio Investments The accuracy of our work is a function of the quality of the information we have to work with. Loan specific data is important to maximize accuracy. Even without loan specific data; however, an M&S Loan Portfolio Evaluation can make valuable preliminary conclusions about the stress in a bank’s portfolio based upon publicly available information. This can be a useful tool in differentiating one bank loan portfolio from another. Below is a sample display from an M&S Loan Portfolio Evaluation report:
All Performing Loans
Balances by Amount ($000) DSC Greater than DSC From 1.2 1.2 to 1.1
LTV Less than 80% LTV 80% to 90% LTV 90% to 100% LTV 100% to 110% LTV 110% to 120% LTV Greater than 120% Total LTV Greater than 100%
DSC From 1.1 to 1.0
DSC From 1.0 to 0.9
DSC From 0.9 to 0.8
DSC Less than 0.8
Total
DSC Less than 1.0
$2,421,676
$448,494
$451,564
$91,125
$0
$18,372
$3,431,231
$55,000
$121,720
$17,400
$36,430
$56,100
$7,100
$293,750
$109,497 $99,630
$14,000
$65,000
$0
$237,155
$33,738
$40,170
$390,063
$311,063
$0
$0
$53,750
$0
$232,955
$122,000
$408,705
$354,955
$0
$0
$0
$58,000
$25,000
$69,100
$152,100
$152,100
$0
$50,000
$85,000
$122,350
$71,600
$136,275
$465,225
$330,225
$2,490,676
$685,214
$607,714
$545,060
$419,393
$393,017
$5,141,074
$1,357,470
$0
$50,000
$138,750
$180,350
$329,555
$327,375
$1,026,030
$837,280
We are not offering static point-in-time appraisals. Rather, an M&S Loan Portfolio Evaluation is a dynamic tool that allows Bank Management to test the portfolio against a variety of assumptions and keep up to date with changing market conditions and changing regulatory demands. The M&S Loan Portfolio Evaluation is real time, and enables Bank Management not only to observe performance characteristics at the portfolio level, but also to drill down into individual loans and their underlying collateral.
QUALITY VALUATION QUALITY DECISION MAKING INDEPENDENCE & INTEGRITY
POLICY STATEMENT ON PRUDENT COMMERCIAL REAL ESTATE LOAN WORKOUTS (OCT. 30, 2009): An institution’s risk management practices for reviewing and restructuring CRE loans should be appropriate for the complexity and nature of its lending activity and should be consistent with safe and sound lending practices and relevant regulatory reporting requirements. These practices should address: • Management infrastructure to identify, control, and manage... the workout activity • Documentation standards to verify the borrower's financial condition and collateral values • Adequacy of management information systems and internal controls to identify and track loan performance and risk, including concentration risk *** • An ongoing credit review function.
COMPANY OVERVIEW Established in 1932, Marshall & Stevens is a recognized leader in valuation, serving business owners, managers, boards and trusted advisors throughout the world. We assist our clients with planning, due diligence, negotiation and reporting issues related to their mergers, acquisitions, divestitures, financings, insurance placement and tax related transactions. Our in-house specialists provide a full complement of valuation-related services, from transaction advisory and opinion letters to the valuation of businesses and business assets, both tangible and intangible.
For more information contact: Doug Pugliese Executive Managing Director 267.519.5009 dpugliese@marshall-stevens.com Kendall Raine ExecutiveManaging Director 213.233.1504 kraine@marshall-stevens.com