1. 1 Credit Risk I

2. 2 Session Objectives Discuss Importance of lending to institutions Discuss Importance of lending to institutions Discuss Importance of lending policies and convey elements of a sound Loan Policy 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 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 Provide for an open forum for questions and dialogue involving lending policies and credit issues

3. 3 Why Review Lending Activities?

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

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

6. Lending Policies

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

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

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

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

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

12. Loan Policy Questions?

13. Loan Analysis

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

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

16. 16 PURPOSE 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 What will the money be used for?

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

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

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

20. Questions?

21. Conclusion