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Credit AnalysisCredit Analysis

New England Directors College2007

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Review and discuss responsibility of Outside Review and discuss responsibility of Outside Directors to review and evaluate large and Directors to review and evaluate large and problem loansproblem loans

Improve loan analysis and review skills by Improve loan analysis and review skills by discussing the 5 “Ps” of credit and applying discussing the 5 “Ps” of credit and applying learned conceptslearned concepts

Discuss Real Estate Appraisal concepts and Discuss Real Estate Appraisal concepts and potential concernspotential concerns

Provide for an open forum for questions and Provide for an open forum for questions and dialogue involving loan analysis dialogue involving loan analysis

Session ObjectivesSession Objectives

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Responsibilities of Responsibilities of DirectorsDirectors

Evaluate current credit quality, project likelihood of Evaluate current credit quality, project likelihood of future performance, and make appropriate credit future performance, and make appropriate credit decisiondecision Identify and fully understand pertinent aspects of Identify and fully understand pertinent aspects of

the creditthe credit Ensure initial loan grade is accurateEnsure initial loan grade is accurate

Evaluate compliance with internal policies and Evaluate compliance with internal policies and applicable laws and regulationsapplicable laws and regulations

Evaluate adherence with Strategic Plan and lending Evaluate adherence with Strategic Plan and lending objectivesobjectives

Evaluate credit’s impact on portfolio credit qualityEvaluate credit’s impact on portfolio credit quality

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5 “P’s” OF CREDIT5 “P’s” OF CREDIT

PeoplePeople PurposePurpose PaymentPayment ProtectionProtection ProspectsProspects

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PEOPLEPEOPLE

Who is the borrower and what do they do?Who is the borrower and what do they do?

Type of Business/IndustryType of Business/Industry Organizational StructureOrganizational Structure Payment History Payment History

with Your Institutionwith Your Institution Credit ReportCredit Report Information from Other Information from Other

Lenders/PartiesLenders/Parties

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PURPOSEPURPOSE

What will the money be used for?What will the money be used for?

Purchase of Specific AssetsPurchase of Specific Assets General Working Capital General Working Capital Asset-Based Lending Asset-Based Lending Refinance Other DebtRefinance Other Debt Consistency with PeopleConsistency with People

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PAYMENTPAYMENT

What are the terms of the debt and the What are the terms of the debt and the borrowers ability/willingness to pay?borrowers ability/willingness to pay?

Terms of DebtTerms of Debt Source of Repayment Source of Repayment Income to Debt Income to Debt

Service RequirementsService Requirements Living/Other ExpensesLiving/Other Expenses Other Sources of IncomeOther Sources of Income Consistency with People Consistency with People

and Purposeand Purpose

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PROTECTIONPROTECTION What is the collateral, can we get it, and What is the collateral, can we get it, and

what would it be worth if we have to sell it?what would it be worth if we have to sell it?

Lien Perfection Lien Perfection Lien PositionLien Position Access/ControlAccess/Control MarketabilityMarketability Market/Market/

Liquidation ValueLiquidation Value MarketabilityMarketability

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PROSPECTSPROSPECTS

What is the likelihood of the borrower What is the likelihood of the borrower continuing to pay?continuing to pay?

Company Trends/Company Trends/Future ProspectsFuture Prospects

Industry Trends/Industry Trends/Future Prospects Future Prospects

Economic ForecastsEconomic Forecasts Succession/Succession/

Continuation PlansContinuation Plans New Developments New Developments New Laws and LegislationNew Laws and Legislation

Loan Analysis Case Loan Analysis Case StudyStudy

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Loan Analysis Case Loan Analysis Case StudyStudy

For the case, answer the following:For the case, answer the following:

Evaluate Request based on 5 Evaluate Request based on 5 “P’s”?“P’s”?

Do you have enough information to Do you have enough information to make a credit decision?make a credit decision?

If not, what questions do you have If not, what questions do you have and/or what additional information and/or what additional information do you need?do you need?

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5 “P’s” OF CREDIT5 “P’s” OF CREDIT

PeoplePeople PurposePurpose PaymentPayment ProtectionProtection ProspectsProspects

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It’s Time to Answer the It’s Time to Answer the Question:Question:

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Real Estate Appraisal Real Estate Appraisal ConceptsConcepts

3 Approaches to Value3 Approaches to Value CostCost IncomeIncome Sales ComparisonSales Comparison

Real Estate Appraisal Report requirementsReal Estate Appraisal Report requirements Must conform to USPAP guidelinesMust conform to USPAP guidelines Must provide sufficient information to support valueMust provide sufficient information to support value Must analyze and report appropriate deductions and Must analyze and report appropriate deductions and

discounts for proposed construction or renovation, discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and partially leased buildings, non-market lease terms, and tract developments with unsold unitstract developments with unsold units

Must be based on appropriate definition of market valueMust be based on appropriate definition of market value Must include “as is” valueMust include “as is” value

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Most Common Real Estate Most Common Real Estate Appraisal Problems Appraisal Problems

Exclusion of one or two approaches without appropriate Exclusion of one or two approaches without appropriate rationalerationale

Inappropriate Limiting ConditionsInappropriate Limiting Conditions Unsupported ValuesUnsupported Values

Lack of sufficient information in reportLack of sufficient information in report Inappropriate comparablesInappropriate comparables Unreasonable comparable adjustmentsUnreasonable comparable adjustments Unsupported future income projectionsUnsupported future income projections Cost estimates that materially differ from actual Cost estimates that materially differ from actual

construction projectionsconstruction projections Math errorsMath errors Not deducting cost of necessary improvementsNot deducting cost of necessary improvements

Inexperienced appraiserInexperienced appraiser Lack of quality controlLack of quality control

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Real Estate Appraisal Case Real Estate Appraisal Case StudyStudy

Review Appraisal Order Form, Report, and Review Review Appraisal Order Form, Report, and Review Form and be prepared to discuss the following Form and be prepared to discuss the following questions: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 Would you use the assigned value in your underwriting

decision-making process? decision-making process? Do you have any concerns with the appraisal review Do you have any concerns with the appraisal review

form and/or process?form and/or process? What steps can/should should be taken to improve the What steps can/should should be taken to improve the

appraisal program?appraisal program?

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Session ObjectivesSession Objectives Review and discuss responsibility of Review and discuss responsibility of

Outside Directors to review and Outside Directors to review and evaluate large and problem loansevaluate large and problem loans

Improve loan analysis and review skills Improve loan analysis and review skills by discussing the 5 “Ps” of credit and by discussing the 5 “Ps” of credit and applying learned conceptsapplying learned concepts

Discuss Real Estate Appraisal concepts Discuss Real Estate Appraisal concepts and potential concernsand potential concerns

Provide for an open forum for Provide for an open forum for questions and dialogue involving loan questions and dialogue involving loan analysisanalysis

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Questions Questions ??

Thanks for Thanks for Attending!!!Attending!!!