Credit Evaluation School Dec 2022

MATCH THE RED FLAGS TO THE EXAMPLES PROVIDED

Unauthorized Capitalization of Accrued Interest

• Smalltown Bank, a small community bank located in the southeastern United States, financed the construction of seven multi ‐ family properties located on the west coast. The loans total 92 percent of Total Capital. • John knows his builder/developer borrower Susan is a good person; she’s just fallen on hard times and can’t catch a break. John wants to help. John approves an advance off the line of credit to pay the past due accrued interest so the line of credit can be renewed. His credit officer is on vacation, but John is sure his credit officer won’t mind.

Loan Concentrations

• Midtown Bank’s ADC portfolio has historically hovered around 90 percent of Total Capital; however, the ADC portfolio has increased over the last three quarters and is now 114 percent of Total Capital.

Excessive Out of Territory Loans

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MATCH THE RED FLAGS TO THE EXAMPLES PROVIDED

• Smalltown Bank has a large portfolio of unsecured evergreen letters of credit related to its ADC portfolio. The economy and local development has been slowing. Smalltown Bank’s liquidity rating changed from a 2 to 3 at the most recent examination. • Smalltown Bank approved funding the construction of a high ‐ end hotel. The hotel will be located across the street from a local amusement park. Projections based upon surrounding hotel performance is reassuring. However, the company which owns the amusement park was sued late last year. One local reporter claims the amusement park is going to close. • Smalltown Bank increased its loan portfolio by 100 percent due to an 18 ‐ month lucrative incentive program which rewarded its lenders to produce.

High Loan Growth

Excess Off ‐ Balance Sheet Items, i.e. Loan Commitments and Letters of Credit

Trends in Local and Regional Economies

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