Managing Troubled Assets Portfolio Management Series Webinar

1. Managing Troubled AssetsPortfolio Management Series Webinar Developed and delivered by

2. Introductions • Ray Waters • President, Enterprise Detroit • You, the participants • Small and Large CDFIs • Credit Unions and Banks • Consultants CDFI Fund Capacity Building Initiative Managing Troubled Assets

3. Overarching Themes • Jump on problems early • Much easier to bring a loan that is 15 days past due to current than to rescue a loan 120 days past due • Diagnose the situation • Why is the borrower not paying? • What is really going on? • Protect collateral, security interests • What is your recourse if the borrower and loan fail? CDFI Fund Capacity Building Initiative Managing Troubled Assets

4. The Risk Grading System • Enterprise Detroit uses a risk grading system that goes from 1 (best) to 8 (worst) • All loans are assigned a grade at closing • Starting grades are usually a “4” or a “5” • Risk grades are adjusted upwards or downwards as necessary • By “Troubled Assets” we primarily mean • Loans on the Watch List (risk grade “6” in this presentation) • Loans on the Problem Asset List (risk grade “7” in this presentation) CDFI Fund Capacity Building Initiative Managing Troubled Assets

5. Progression from Past Due to Charge-Off • Past Due List, Delinquency • Watch List • Borrowers late on payment, haven’t submitted financials or other required information • Risk rating downgrade from 5 to 6 • Problem Asset List • Borrowers with significant deterioration in financial condition • Risk rating downgrade from 6 to 7 • Non-Accrual Status • Subset of the problem asset list • All payment goes to principal reduction • Last resort before write-off CDFI Fund Capacity Building Initiative Managing Troubled Assets

6. Watch List (“6”) Description CDFI Fund Capacity Building Initiative Managing Troubled Assets

7. Problem Loan (“7”) Description CDFI Fund Capacity Building Initiative Managing Troubled Assets

8. Watch List • Typically flagged by loan officer: late on payment, hasn’t submitted financials or other required information • Loan officer can recommend downgrade of loan from 5 to a 6 • Watch list candidate can also be identified from Portfolio Quality Report • At weekly staff meeting, talk about every problem loan and what to do for each of them • First step is lender visit -- get assessment of situation CDFI Fund Capacity Building Initiative Managing Troubled Assets

9. Problem Loan List • Significant deterioration in financial heath of borrower. • Run UCC checks, new credit check, check if any new liens have been filed. • Try to determine what is the real situation. • Often means re-structure; forbearance agreements. • With 7s and some 6s, it’s an exercise in bird-dogging. Force them to meet with us. • Goal is not to write a company off. Better to restructure to fit the situation than to write off and go after the collateral. CDFI Fund Capacity Building Initiative Managing Troubled Assets

10. Loan scrutiny should be dictated by the loan policy and driven by the risk grade. CDFI Fund Capacity Building Initiative Managing Troubled Assets

11. Loan scrutiny should be dictated by the loan policy and driven by the risk grade. CDFI Fund Capacity Building Initiative Managing Troubled Assets

12. An action plan should be devised for each past due, watch list and problem loan. CDFI Fund Capacity Building Initiative Managing Troubled Assets

13. Credit Status & Action Items Report CDFI Fund Capacity Building Initiative Managing Troubled Assets

14. Working with Difficult Borrowers • Common reasons why borrowers don’t pay: • Cash flow problems • More pressure from other creditors • Thinking you are their “partner” – not being tough enough • How to determine the truth: • Dig through their financials • Be hands-on • “We trusted you to give you a loan; you have to be honest with us” • Check credit scores; tax returns; personal financial statements CDFI Fund Capacity Building Initiative Managing Troubled Assets

15. Working with Difficult Borrowers (cont’d) • Negotiation tactics • Default interest rate • Obtain more collateral • Forbearance agreement • Restructuring • If the borrower agrees to certain conditions • Monitoring, review and update protocols • Documentation • Items to include in the loan file CDFI Fund Capacity Building Initiative Managing Troubled Assets

16. Collateral • Write-ups must show the collateral you have • Calculate your risk exposure • For example, in declining housing market, re-assess value of collateral • Risk & Compliance Manager role • Protect your collateral interests; maintain collateral files • Must have mortgages, liens, collateral in line • Tickler system to make sure everything is current • Appropriate Staffing • One person should be responsible for maintaining all UCCs, liens, mortgages, discharging mortgages, etc. CDFI Fund Capacity Building Initiative Managing Troubled Assets

17. Work-Out Strategies • Restructuring loans • When to do restructure; when not to restructure • Calculating ability to pay • Determining appropriate terms • Use of forbearance agreements • Essential to have accurate valuation of collateral • Check personal guarantors CDFI Fund Capacity Building Initiative Managing Troubled Assets

18. Worst-Case Scenarios • Foreclosure processes • Putting it out to collection • Collateral • Personal judgments • Legal issues • Public relations/bad press • What to do with REO CDFI Fund Capacity Building Initiative Managing Troubled Assets

19. Wrap-Up This presentation is part of a series of four webinars, including: • CDFI Loan Policies and Procedures • Raising Debt and Equity from External Sources • Risk-Assessing Your Own Organization • Managing Troubled Assets To participate in upcoming webinars, register at: http://www.carseyinstitute.unh.edu/CDFI-webinars.html For more information about the CDFI Fund’s Capacity Building Initiative, please visit: http://www.cdfifund.gov CDFI Fund Capacity Building Initiative Managing Troubled Assets

20. Wrap-Up Sample documents, etc. will be available as part of a Resource Bank on the CDFI Fund’s Capacity Building Initiative webpage later this summer. Please see http://www.cdfifund.gov/cbi to view the Resource Bank and other helpful information on the Capacity Building Initiative. As part of the CDFI Fund’s Capacity Building Initiative, free Technical Assistance (TA) and Organizational Assessments are available to certified and emerging CDFIs. To sign up, e-mail: Jack Northrup at jack@nemarketresearch.com or Eric Hangen at ehangen@i2community.org If you have not taken the survey, please do so at the following link:http://www.unh.edu/survey-center/cdfi.html CDFI Fund Capacity Building Initiative Managing Troubled Assets

21. Managing Troubled Assets Thanks for being with us today! CDFI Fund Capacity Building Initiative Managing Troubled Assets