Credit Risk I

1. Credit Risk I

2. Session Objectives • Discuss Importance of lending to institutions • Discuss Importance of lending policies and convey elements of a sound Loan Policy • Improve loan analysis and review skills by reviewing the five “P’s” and applying them • Provide for an open forum for questions and dialogue involving lending policies and credit issues

3. Why Review Lending Activities?

4. Why are Loans Important? • Major Portion of the Asset Structure • Have largest Impact on Earnings • Greatest Credit Risk and Potential Loss • Loan Losses/Fraud Cause MOST Bank Failures

5. Director Role in Credit Approval and Monitoring • Outside directors are not expected to be lending experts • Directors are an independent voice in the management of the bank • Hire and maintain qualified senior management • No surprises for directors at an examination

6. Lending Policies

7. Why are Loan Policies Important? • Establish authority, rules, and framework to operate and administer the loan portfolio effectively, • Convey the Board’s tolerance for risk, and • Provide for measurable goals and standards.

8. Loan Policy • Statement of business and lending philosophy • Cornerstone of sound lending and loan administration • Establishes basic standards to: • maintain sound credit underwriting standards • control and manage risk • evaluate new business opportunities • identify, administer, and collect problem loans

9. Common Loan Policy Provisions • General fields or type of lending • Lending authority • Board responsibility to review, ratify or approve loans • Guidelines for unsecured loans • Guidelines for rates and terms on loans • Loan-to-value ratios for various types of loans

10. Common Loan Policy Provisions • Documentation requirements by loan type • Guidelines for valuations and appraisals • Requirements for ongoing documentation review and update of credit files • Collection procedures and responsibilities • Portfolio mix and diversification

11. Common Loan Policy Provisions • Overdraft limits and approval authority • Trade area • Concentrations • Loan review and grading

12. Loan Policy Questions?

13. Loan Analysis

14. 5 ‘Ps’ OF CREDIT • People • Purpose • Payment • Protection • Prospects

15. PEOPLE Who is the borrower and what is their ability/willingness to pay? • Type of Business/Industry • Organizational Structure • Payment History with Your Institution • Credit Report • Information from Other Lenders/Parties

16. PURPOSE What will the money be used for? • Purchase of Specific Assets • General Working Capital • Asset-Based Lending • Refinance Other Debt • Consistency with People

17. PAYMENT What are the terms and borrower’s ability to pay? • Terms of Debt • Source of Repayment • Income to Debt Service Requirements • Living/Other Expenses • Other Sources of Income • Consistency with People and Purpose

18. PROTECTION What is the collateral and what would it be worth? • Lien Perfection • Lien Position • Market/Liquidation Value • Marketability • Access/Control

19. PROSPECTS What is the likelihood of continued repayment ability • Company Trends/Future Prospects • Industry Trends/Future Prospects • Economic Forecasts • Succession/Continuation Plans • New Developments • New Laws and Legislation

20. Questions?

21. Conclusion