Problem Loan Workout in Today’s Challenging Market Presented by: Osburn & Associates, LLC

2 Author/Instructor DAVID L. OSBURN David is the founder and managing member of Osburn & Associates LLC, a Las Vegas-based business training and contract CFO firm that provides seminar, webinars, and keynote speeches for various groups including CPAs, bankers, attorneys, credit union employees, credit managers, and business owners. He also provides contract CFO services for contractors, real estate developers, financial institutions, and medical practitioners. His extensive professional background encompasses over 28 years in banking and finance. His bank commercial lending credentials include comprehensive loan underwriting, management, customer development, and loan workout experience. In addition, David is an Adjunct Professor for Regis University, an accredited MBA program and the College of Southern Nevada, a community college. He has taught college courses for over 27 years, covering Finance, Accounting, Economics, Marketing, Banking, Business Law, and Management. He earned an MBA in Finance/Marketing from Utah State University and a BS in Finance from Brigham Young University. He is also a graduate of the University of Oklahoma National Commercial Lending School. Osburn & Associates, LLC A Business Training & Contract CFO Firm David L. Osburn, MBA Managing Member 7426 Alamo Summit Drive Las Vegas, Nevada Direct: (702) Website: dlosburn.com

3 Problem Loan Workout in Today’s Challenging Market I. Management of Problem Loans: a. When is a Member Business Loan (MBL) considered a “problem” loan or non-performing asset? b. How will you know if it is a “problem” loan? c. Are all problem loans “past due” on their payments? II. Who is In Charge of Problem Loans: a. Front Line Lender b. Credit Union’s Special Asset Team c. Credit Union’s Legal Counsel (In-House vs. Out-Side)

4 III. How to Avoid Having a Problem Loan: a. “Correct” Business Structure: ex. LLC

5 b. Six (6) Elements of a Proper Loan Structure: 1. Loan Purpose: (A = L + O/E) 2. Sources of Repayment (typically three) 3. Adequate Amount 4. Appropriate Term 5. Appropriate Pricing 6. Framework for Monitoring

6 c. Four (4) Aspects of Adequate Loan Support: 1. Collateral 2. Guaranties 3. Loan Agreement 4. Subordination Agreements

7 IV. What Happens When a “Good” Loan Turns into a “Bad” Loan? A. The Scenario: 1. The Market Turns Down 2. The Tenants Have Left 3. The Payments are Delinquent B. Initial Assessment i.e. Where Are We At? 1. How Delinquent are the Payments? 30, 60, 90 days

8 2. What is the Financial Condition of the Member Business? Five Step Financial Statement Analysis Model a. Liquidity b. Activity c. Leverage d. Operating Performance e. Cash Flow

9 3. What is the Condition of Our Collateral? a. Liquidity b. Marketability c. Dependability of Value d. Controllability

10 4. What is the Condition of Our Loan Documentation & File? a. Loan Documentation: 1. Documents: Note & UCC Filing/Deed of Trust 2. Insurance b. File: 1. Complete? 2. Too Complete?

11 V. The Collection Process i.e. Practical Steps to Getting Your Payments! a. Ask for the Payments (The Negotiation Process): What is Negotiations? Negotiations is a “Communicative” Interaction Between Two Parties Sender---- Communication Channel--- Receiver (Encodes) “Roadblock” (Decodes) “Static”

12 b. Demand the Payments: Collections (How Hard Can You Push?): Fair Debt Collections Practices Act 1. Postcard 2. Represented by an attorney 3. Time: 8am-9pm 4. Place of Employment 5. Not communicate with other parties 6. Refuses to pay, cease to communicate 7. No harassment

13 VI. The Restructure Process (when “regular” payments cannot be made) Line of Credit Commercial R/E Loan Orig. New Orig. New a. Loan Terms: b. Loan Pricing: c. Collateral: d. Additional Support:

14 VII. The Credit Union’s Strategy When Negotiations, Collections, and Restructuring Fails a. What is the credit union’s strategy? b. Is our strategy realistic in today’s market? c. Will the law assist or hurt us? d. What are the political ramifications?

15 VIII. The Credit Union’s Strategy to Protect Its Collateral? a. Repossession of Personal Property Ex. FF & E, Inventory, A/Rs 1. Logistics (including timing) 2. Legal Rights 3. Costs 4. Marketability b. Foreclosure of Real Property Ex. Land, Building, House 1. Logistics (including timing) 2. Legal Rights 3. Costs 4. Marketability

16 b. Foreclosure of Real Property (Continued): 1. Single Form of Action Rule 2. Fee Simple “Traditional” Foreclosure 3. Judicial Foreclosure

17 c. File a Lawsuit to Obtain a Judgment i.e. The Judicial Process Stages of the Litigation Process 1. Pre-litigation concerns 2. Pleadings stage 3. Pretrial activities (Judgment Obtained) 4. Trial procedures 5. Post-judgment concerns 6. Appellate process

18 d. The “Judgment” 1. The process 2. Perfecting the Judgment 3. What does it really do for the credit union? e. Forcing the Customer into Bankruptcy (Who Wins?) 1. Chapter 7 2. Chapter 9 3. Chapter Chapter Chapter 13

19 f. Alternatives to Litigation 1. Arbitration 2. Mediation (Business Marriage Counseling)

20 IX. Influence from the “Regulators” a. What is the financial condition of the credit union? b. What is the financial condition of the loan portfolio? c. Who is the regulator? Federal, State? d. What type of relationship does the credit union have with the regulator?

21 X. Lender Liability: Lender Liability Defined: Lender's exposure to financial compensation claims relating directly or indirectly to actions taken by the lender. Lender liability is a complex topic and can include the following: a. Conflicts of Interest b. Misrepresentations c. Inappropriate Control d. Failure to Fund Commitment e. Inappropriate Behavior by Lender f. Etc.

22 XI. Ethical Behavior and the Role of the Credit Union Lender Be Trustworthy and full of Integrity aka “Your Word is Your Bond!”