Credit Evaluation School Dec 2022

MATCH THE RED FLAGS TO THE EXAMPLES PROVIDED

• Since the Cycles R Us line of credit has been fully advanced for the last 11 months, John allows Cycles R Us to overdraw their checking account for a short period of time each month. A deposit on the 20 th of the month usually covers the negative balance. • Smalltown Bank does not complete a global debt service coverage analysis on its complex commercial relationships because it always lacks complete financial information. • Smalltown Bank President Smith is also a lender, performs his own underwriting, and gets approval from the Board for larger loans. Some larger loans have been made to friends of President Smith. Details in underwriting of loans to friends are vague and President Smith is defensive and uncooperative when asked about these loans.

Ineffective or Lax Credit Underwriting on New or Existing Loans Borrower is Frequently Overdrawn or Experiencing Cash Flow Difficulties

Evergreen Loans

Insider Transactions

• Midtown Bank issues a letter of credit on behalf of Better Boat Sales. There is no expiration date on the letter of credit.

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MATCH THE RED FLAGS TO THE EXAMPLES PROVIDED

Over ‐ Lending To Individuals And Industries

• “Since hiring Felicia and giving her loan authority, our loan growth has skyrocketed. Despite this economy, Felicia has been able to increase our loan portfolio 40 percent! She has the highest loan production of anyone and customers are lining up to meet with her. Go Felicia!”

Inexperienced Loan Officers

• “Cashy McCash ‐ Face has total exposure of 28 percent of Total Capital, but this is not of concern due to high levels of liquidity Cashy has in a trust. We’ve always leant him money and he’s always paid.”

Inadequate Staffing

• Smalltown Bank performs a document review of all newly originated loans within tweleve months of their origination.

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