Credit Evaluation School Dec 2022

CRITICIZED AND CLASSIFIED LOAN RATING DEFINITIONS

SPECIAL MENTION A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the institution sufficient risk to warrant adverse classification. Key Characteristics: • Improper loan structure • Inadequate loan agreements or covenants • Incomplete or inadequate documentation to adequately monitor the loan • Lack of control over collateral SUBSTANDARD Loans classified Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Key Characteristics: • Negative trends in – Cash Flow; Profitability; Net Worth; Liquidity; Leverage • Significant deviation from the original repayment source • Numerous extensions and/or renewals • Diversion of repayment funds • Delinquency • Failure to clean up a short-term operating line • Whenever debt is carried over without sufficient reason