Credit Risk I 1

Credit Risk I 1

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 2

Why Review Lending Activities? 3

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 4

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 5

Lending Policies

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. 7

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 8

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 9

Common Loan Policy Provisions Documentation requirements by loan type 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 10

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

Loan Policy Questions?

Loan Analysis

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

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

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

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 17

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

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 19

Questions?

Conclusion