1 Credit Analysis New England Directors College 2007

2 Review and discuss responsibility of Outside Directors to review and evaluate large and problem loans Review and discuss responsibility of Outside Directors to review and evaluate large and problem loans Improve loan analysis and review skills by discussing the 5 “Ps” of credit and applying learned concepts Improve loan analysis and review skills by discussing the 5 “Ps” of credit and applying learned concepts Discuss Real Estate Appraisal concepts and potential concerns Discuss Real Estate Appraisal concepts and potential concerns Provide for an open forum for questions and dialogue involving loan analysis Provide for an open forum for questions and dialogue involving loan analysis Session Objectives

3 Responsibilities of Directors Evaluate current credit quality, project likelihood of future performance, and make appropriate credit decision Evaluate current credit quality, project likelihood of future performance, and make appropriate credit decision Identify and fully understand pertinent aspects of the credit Identify and fully understand pertinent aspects of the credit Ensure initial loan grade is accurate Ensure initial loan grade is accurate Evaluate compliance with internal policies and applicable laws and regulations Evaluate compliance with internal policies and applicable laws and regulations Evaluate adherence with Strategic Plan and lending objectives Evaluate adherence with Strategic Plan and lending objectives Evaluate credit’s impact on portfolio credit quality Evaluate credit’s impact on portfolio credit quality

4 5 “P’s” OF CREDIT People People Purpose Purpose Payment Payment Protection Protection Prospects Prospects

5 PEOPLE Who is the borrower and what do they do? Type of Business/Industry Type of Business/Industry Organizational Structure Organizational Structure Payment History Payment History with Your Institution Credit Report Credit Report Information from Other Lenders/Parties Information from Other Lenders/Parties

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

7 PAYMENT What are the terms of the debt and the borrowers ability/willingness to pay? Terms of Debt Terms of Debt Source of Repayment Source of Repayment Income to Debt Income to Debt Service Requirements Living/Other Expenses Living/Other Expenses Other Sources of Income Other Sources of Income Consistency with People Consistency with People and Purpose

8 PROTECTION What is the collateral, can we get it, and what would it be worth if we have to sell it? Lien Perfection Lien Perfection Lien Position Lien Position Access/Control Access/Control Marketability Marketability Market/ Market/ Liquidation Value Marketability Marketability

9 PROSPECTS What is the likelihood of the borrower continuing to pay? Company Trends/ Company Trends/ Future Prospects Industry Trends/ Industry Trends/ Future Prospects Economic Forecasts Economic Forecasts Succession/ Succession/ Continuation Plans New Developments New Developments New Laws and Legislation New Laws and Legislation

Loan Analysis Case Study

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12 Loan Analysis Case Study For the case, answer the following: Evaluate Request based on 5 “P’s”? Evaluate Request based on 5 “P’s”? Do you have enough information to make a credit decision? Do you have enough information to make a credit decision? If not, what questions do you have and/or what additional information do you need? If not, what questions do you have and/or what additional information do you need?

13 5 “P’s” OF CREDIT People People Purpose Purpose Payment Payment Protection Protection Prospects Prospects

14 It’s Time to Answer the Question:

15 Real Estate Appraisal Concepts 3 Approaches to Value 3 Approaches to Value Cost Cost Income Income Sales Comparison Sales Comparison Real Estate Appraisal Report requirements Real Estate Appraisal Report requirements Must conform to USPAP guidelines Must conform to USPAP guidelines Must provide sufficient information to support value Must provide sufficient information to support value Must analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units Must analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units Must be based on appropriate definition of market value Must be based on appropriate definition of market value Must include “as is” value Must include “as is” value

16 Most Common Real Estate Appraisal Problems Exclusion of one or two approaches without appropriate rationale Exclusion of one or two approaches without appropriate rationale Inappropriate Limiting Conditions Inappropriate Limiting Conditions Unsupported Values Unsupported Values Lack of sufficient information in report Lack of sufficient information in report Inappropriate comparables Inappropriate comparables Unreasonable comparable adjustments Unreasonable comparable adjustments Unsupported future income projections Unsupported future income projections Cost estimates that materially differ from actual construction projections Cost estimates that materially differ from actual construction projections Math errors Math errors Not deducting cost of necessary improvements Not deducting cost of necessary improvements Inexperienced appraiser Inexperienced appraiser Lack of quality control Lack of quality control

17 Real Estate Appraisal Case Study Review Appraisal Order Form, Report, and Review Form and be prepared to discuss the following questions: Review Appraisal Order Form, Report, and Review Form and be prepared to discuss the following questions: Are ordering activities appropriate? Are ordering activities appropriate? Is the appraised value adequately supported? Is the appraised value adequately supported? Would you use the assigned value in your underwriting decision-making process? Would you use the assigned value in your underwriting decision-making process? Do you have any concerns with the appraisal review form and/or process? Do you have any concerns with the appraisal review form and/or process? What steps can/should should be taken to improve the appraisal program? What steps can/should should be taken to improve the appraisal program?

18 Session Objectives Review and discuss responsibility of Outside Directors to review and evaluate large and problem loans Review and discuss responsibility of Outside Directors to review and evaluate large and problem loans Improve loan analysis and review skills by discussing the 5 “Ps” of credit and applying learned concepts Improve loan analysis and review skills by discussing the 5 “Ps” of credit and applying learned concepts Discuss Real Estate Appraisal concepts and potential concerns Discuss Real Estate Appraisal concepts and potential concerns Provide for an open forum for questions and dialogue involving loan analysis Provide for an open forum for questions and dialogue involving loan analysis

19 Questions ?

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