Credit Evaluation School Instructor eBook - Oct 2023

Credit Evaluation School

October 3-12 , 2023 Live Virtual

@ www.csbs.org ε @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1 , Street NW / 6XLWH / Washington, DC 20 / (202) 296-2840

Credit Evaluation School Live Virtual October 3-12, 2023

Week 1 Tuesday, October 3, 2023 1:00 pm – 1:30 pm

Introduction & Goals for the Week

Pre-Course Recap

1:30 pm – 1:45 pm

Break

1:45 pm –2:00 pm

Credit Evaluation Examiner Roles & Responsibilities: Asset Manager and Loan Reviewer

2:00 pm – 2:45 pm

Identifying the 6Ps & Their Documents

2:45 pm – 3:30 pm

Classified Definitions Loan Ratings and Special Mention

3:30 pm – 3:45 pm

Hand Out Line Decks & Review

3:45 pm – 4:00 pm

Wednesday, October 4, 2023 1:00 pm – 1:15 pm

What I Learned Yesterday

Decision Strategies & Loan Classification

1:15 pm – 2:15 pm 2:15 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:15 pm 3:15 pm – 3:45 pm 3:45 pm – 4:00 pm 1:20 pm – 1:45 pm 1:45 pm – 2:15 pm 2:15 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:20 pm 3:20 pm – 4:00 pm

Break

Quick Hitters

Loan Writeups Quick Hitters End of Day Q&A

Thursday, October 5, 2023 1:00 pm – 1:20 pm

What I Learned Yesterday

Quick Hitters

Red Flags

Break

Quick Hitters

Mock Discussions Instructor Q&A

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Week 2 Tuesday, October 10, 2023 1:00 pm – 1:20 pm

Best Thing I Learned Last Week

Week 1 Recap Instructor Q&A

1:20 pm – 1:45 pm 1:45 pm – 2:00 pm 2:00 pm – 2:15 pm 2:15 pm – 3:00 pm

Break

Red Flags

Small Group Loan Discussion Planning

3:00 pm – 4:00 pm

Wednesday, October 11, 2023 1:00 pm – 1:10 pm

What I Learned Yesterday

Instructor Q&A

1:10 pm – 1:25 pm 1:25 pm – 4:00 pm

Small Group Loan Discussions

Thursday, October 12, 2023 1:00 pm – 1:15 pm

Best Thing I Learned

Review & Discuss Line Decks Asset Quality Discussion

1:15 pm – 1:45 pm 1:45 pm – 2:15 pm 2:15 pm – 2:30 pm 2:30 pm – 2:50 pm 2:50 pm – 3:30 pm 3:30 pm – 4:00 pm

Break

AQ Quick Hitters Instructor Q&A

Final Quiz & End of Class

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Credit Evaluation School October 3-12, 2023

• Introduce instructors, including job duties, as well as any personal interest type items. • Instructor Note: At this point, we are wanting to get an idea as to the level of prior knowledge existing within class. Will likely have a mix – some with little experience and some from the industry where they may have lots of experience.

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Instructors

Marcus Andrews

Zac Smith

Bank Examinations Coordinator Alabama State Banking Department

Senior Bank Examiner Iowa Division of Banking

Curtis Larsen

Senior Financial Institutions Examiner California Department of Financial Protection & Innovation Roberto Chavez

Bank Examinations Specialist, Sr. Alabama State Banking Department

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Introductions

SOMETHING YOU HOPE TO LEARN DURING THIS CLASS

NAME AGENCY AND STATE

YEARS OF EXPERIENCE AS EXAMINER AND LENGTH OF TIME WORKING CREDIT FILES

FUN FACT ABOUT YOURSELF

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Class Demographics - States

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Goals for the School

Discuss with you the 6 Ps method of credit evaluation 1

Give you the tools and tips to assist you in arriving at the appropriate classification decision 2

Improve your comfort level in the discussion setting 3

Provide guidance for clear and concise writeups 4

• We are happy to be here. • This school is specifically for examiners to aid in your role in reviewing credit. • This class is NOT ratio driven (such as the role of a bank’s credit analyst that performs financial statement and tax return spreads).

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Questions?

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Credit Evaluation Examiner Roles & Responsibilities Asset Manager vs Loan Reviewer

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Asset Manager and/or Examiner-In-Charge Obtains the loan download and various reports from management • Watch List • Past Due report • Concentration reports • Other miscellaneous reports Uses the ETS program to generate the loan scope, identifying loans to review based on items such as:

• Previously Classified Loans • Large Lending Relationships

• New Loans • Loan Type • Insider Loans

• Our focus this week is primarily on the role of the individual loan reviewer; however, later in the week, we will discuss the asset manager and the asset quality rating. • Inquire if everyone in class is familiar with ETS (Examination Tools Suite).

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Asset Manager (Examiner-In-Charge in ETS)

Manages the loan review process between bank and examiners

Tracks noted trends, violations, policy and technical exceptions, etc.

Generates portfolio classification data, compares to bank identified information, etc.

Collects completed line sheets from examiners

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Loan Selection

Loan Scoping

• This is the process of determining which loans will be subject to review during the examination. • There are several factors to consider.

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Loan Selection • Which loans do we look at and why? • Which loans generally have more risk? • Which loans tend to have less risk? • Why is it important to look at insider loans?

• These are the questions we will try to answer in this segment. • Don’t try to start out by answering all as we go. • Look at this as more of an overview.

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Loan Selection Condition of the bank • Previous Examination Reports • Uniform Bank Performance Report • Correspondence Risk Focus • Commercial loans

• Real Estate • Consumer

• The condition of the bank is one of the most important considerations in loan scoping. • Review the prior exam reports, UBPR, and correspondence specifically for loan related issues. • If the prior exam indicated that the loan department was not proactive in identifying problem credits, we would want to take that into consideration in determining scope. If UBPR shows a spike in past due ratios, we would want to investigate further. If correspondence indicated that there has been a change in loan department management, we would want to consider any pending changes. • We may also want to focus our risks in areas of known risks such as ADC loans, or ag loans, or whatever the current focal point may be.

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Loan Selection Coverage • Loan volume or particular area of the loan trial • History can dictate how much to review • Confidence in management also lends to coverage Resources • Number of employees assigned to examination • Length of time allowed on site/scheduling

• Coverage is usually referenced as a percentage of the dollar volume of either all loans or of a specific type of loan. • Many states have their own standards. In Iowa, we have a minimum of 20% of the entire portfolio; however, on average, we end up looking at 30 ‐ 40% once the typical review items are included (will be covered in coming slides). • If management does not have a strong track record of self ‐ identifying loan problems and issues, we would generally review more of the portfolio. Or, if bank has suddenly increased a segment of the portfolio, i.e. hotel loans, we would likely take a sample of this new segment.

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Standard Review Items  Previously Classified  Internal Watch List  External Loan Review  Past Dues • Delinquency Threshold • Files worked or discussed only  Nonaccrual  Restructured  Insider and Related-Interest  Participations

 Loans above the “cut”  Letters of credit  Unfunded Loan Commitments  Financed Sales of Other Real Estate  Unusual Loans • Capitalized Interest • Out-of-Territory • Long-term Unsecured • Evergreen  New Loan Sampling  New Loan Officer Sample

• This is not an all ‐ inclusive list. Try to briefly touch on these, especially those that have specific terminology (Evergreen, above the cut, etc.). • Ask students if they can think of any other examples.

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Additional Line Sheet Information • Charge Off Amounts • Overdrafts • Rejects/ Insufficient Items • Unadvanced funds to which bank is committed

• These are typically items that are manually added because they are not on the loan download. Important to know these items because they are generally included in the legal lending limit and could be overlooked. • Your notebooks contain a loan scoping checklist – can be used as a reference.

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Individual Loan Reviewer • Obtains the ETS Distribution package from the Asset Manager (or EIC).

• Gains familiarity with loan products, policies and procedures.

• Reviews assigned files. • Examine loan and credit files for necessary documents • Completes 6 P and Financial Analysis

• Completes a writeup on sizable downgrades or when management does not agree • Discusses lines with loan officer and/or management designee as needed.

• Communicates findings with Asset Manager.

This is just an overview and will be discussed in greater depth tomorrow morning. • Files may be assigned or they may just be in order of the lead sheet. • As files are worked, questions should be directed to the servicing officer or in some cases, the chief credit officer or designee. • Any findings should be communicated to the Asset Manager (or EIC if applicable). This may be as simple as including within ETS or may require a discussion with the AM/EIC. • As you go thru your training, your mentors should provide additional guidance and review.

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Let’s take a swing at Identifying the 6 P’s

In this section we are going to identify the Ps in the sample writeup you have been provided.

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What are the 6 P’s?

Method of evaluating the asset quality of a loan.

First, let's talk about for what the 6 P's are used. Anyone want to take a guess?

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Take a moment and review the Sample Writeup included in your eBook.

First, let's talk about for what the 6 P's are used. Anyone want to take a guess?

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The 6 P’s Are…. 1. Person (People) • Borrower • Co-Borrower • Guarantor • Related Entity 2. Purpose • What, why, and how? 3. Payment

4. Protection

• Collateral

5. Problem

• What went wrong?

6. Prospects

• Potential remedies?

• Primary, Secondary, Tertiary

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Person

The 19 TH Hole, INC. • By: Tiger Woods, President • Gty: Tiger Woods Business operates as a local bar/restaurant/indoor golf simulation.

Person

The beginning of the writeup is where you typically find Person. What other information might be included on the linesheet under Person? Corporation type; Ownership Percentages; State of Incorporation; Date Founded; Borrower Background & Experience; Type of Guaranty Offered; Brief Summary of Worth & Liquidity Who can tell me where to find Purpose?

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Indebtedness is the balance of a 1,100M note originated 10-5-16 with principal and interest payable at $7,567 per month for 20 years. Purpose of the loan was to purchase an existing restaurant and add an indoor golf simulation bay. Source of repayment is from the operation of the bar. Loan was 78 days past due and payments have been extended five times since origination. A payment was made during the examination bringing the note current.

Purpose

Purpose is usually next and the entire first paragraph is Purpose related. What other information might be on the linesheet for Purpose? Purchase price and % financed; Cost of Improvements. Who can tell me which paragraph covers Payment?

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Paym ent

The business continues to struggle financially. CPA-compiled financials as of 12-31-18 indicate a highly leveraged operation and reflect TA of 1,490M, TL of 1,610M, for a deficit NW of 120M. Assets are concentrated in net FA of 1,395M including various F&F and M&E. Liquidity is tight and was (14M). Operating income for 2018 shows a net loss of 100M on gross sales of 750M. Cash flow from operations available to service debt totals (35M). An unsigned and stale personal statement on the guarantor dated 11-15-17 adds minimal support and little liquidity with TA of 542M and NW of 145M. Cash was only 2M.

Payment

Payment information is found in the next paragraph. Payment information includes a summary of pertinent financial information, not just a payment amount or debt service coverage ratio. Who can tell me about Protection?

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Protection

Collateral consists of a first REM on the commercial building located in Iowa City, Iowa along with a blanket security agreement covering general business assets. An appraisal performed on 9-2-16 indicates an “as is” value of 950M and an “as completed” value of 1,350M.

Protection

The collateral paragraph covers Protection. What else might some Examiners include on their linesheets for Protection? Flood zone status; Environmental Issues;

Insurance; Ingress & Egress; Changes in value Let's talk Problem; where is this discussed?

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78 Days PD

The business was a new venture for Mr. Woods, who previously worked as a semi-professional golfer. The golf simulation bay closed last winter as Mr. Woods lost his contract with operator/servicer of the golf simulator. The entity struggles with employee turnover, unreliable suppliers, and pressure from existing competition. The operation continues to be unprofitable on a monthly basis and some suppliers are demanding cash upon delivery further limiting liquidity. President Mickelson now estimates the value of the property at 1,200M based on sales of similar properties. Due the to the apparent cash flow and liquidity issues, unprofitable operations, leveraged position, and marginal collateral coverage, the loan is classified Substandard. This is a downgrade from management’s internal Pass rating.

Problem

Problem is well ‐ covered in the writeup. How about Prospects; where is this?

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We are going to go through the sample writeup and review the Ps. Let's start with Person. Who can tell me where we find Person in this sample writeup?

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Reviewing and Classifying Loans

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INDIVIDUAL LOAN FILE REVIEW As we work through the files and identify the 6 P’s of credit, we are looking for:

• Problem credits (may not yet be identified) • Past due loans (is management manipulating) •Credit documentation exceptions • Violations of laws/regulations/policies •Concentrations of credit • Evidence of self-dealing loan transactions

• Again, this is not an all ‐ inclusive list, but definitely hits the more prevalent items. • Bankers do not like to have examiners downgrade credits as it casts doubt on their ability to objectively self ‐ identify problems. • Management can manipulate the past due status by doing things like extending without the full collection of interest.

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ASSET MANAGER DUTIES • Collect data from examiners working files to aid in identifying trends • Compare examiner classification to internal classification • Determine if adequate risk controls exist • Adequacy of policies, practices, controls, procedures, servicing, etc. • Nonaccrual guidelines • Risk rating system-early identification of risk

• Files are worked individually. • As issues are identified, they should be brought to the attention of the AM/EIC.

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LOAN CLASSIFICATION DEFINITIONS Substandard Substandard loans 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.

• This is the regulatory definition. • Examples of loans which could be classified Substandard include:

• A small business loan with a balance of 150M that is 60 days past due, secured by equipment with a value (verified) of 200M. • A 50M loan that is current but secured by collateral worth 30M and financials that include unverifiable repayments sources.

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LOAN CLASSIFICATION DEFINITIONS Doubtful Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

• Again, this is the regulatory definition. • Doubtful is usually used on a temporary basis while awaiting some event to move it to Loss or to Substandard or Pass. • An example: A farmer is past due on his equipment debt and has decided to hold an auction and quit farming. Collateral value is believed to be close to the loan amount, but unknown. Auction to be held in 60 days. May call this doubtful until auction is held and outcome is known. In today’s examining world, doubtful loans are usually impaired and with impairment analysis and specific allocation, we more often see a substandard classification.

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LOAN CLASSIFICATION DEFINITIONS Loss Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

• Loss is loss. When/if bankers try and argue against Loss, remind them that they can collect on nonledger basis.

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LOAN CLASSIFICATION DEFINITIONS Listed for Special Mention A asset listed for Special Mention 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 an institution to sufficient risk to warrant adverse classification.

• Special Mention assets are usually described as Management Correctable, possibly for something such as not knowing/documenting a lien position. • If bank is in a junior position, the loan is undersecured and may be classified; if bank is in first position, loan is Pass. • Until bank obtains the title insurance or title opinion, it may be listed for special mention. Like Doubtful, Special Mention is generally a more temporary listing.

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UNACCEPTABLE OR HIGH-RISK LOANS • Illegal or illegal purpose • Speculative • Finance changing business ownership • Construction loans without firm takeout • Loans for new business ventures/venture capital loans • Non-amortizing term loans • Loan where source of repayment is not firmly committed • Loans on unmarketable securities • Unsecured loans for real estate purposes

• This is again not an all ‐ inclusive list, but when working loan files, examiners should be alert to these type of loans or characteristics.

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UNACCEPTABLE OR HIGH-RISK LOANS Other Considerations • Loans where management has no expertise • Loans that require special handling or controls • Abnormal amount of loans involving out of territory borrowers • Loans involving brokered deposits or link financing

• As a reminder, bank should not be making loans that require specialized expertise, handling, or controls. • It should be a red flag if there are a lot of out of territory loans – how many banks did these customers pass to do business at this bank? Generally, if a bank starts taking some marginal borrowers, they all seem to find their way to this bank. • Brokered deposit/linked financing – interest rate risk concerns with potential term mismatches.

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ITEMS NEEDED TO REVIEW FILE

• Credit File Information • Financial Analysis

• Review and consideration of six “Ps” • Historical financial data and trends • Nature and degree of collateral • Capacity to retire debt in accordance with specified terms • Financial responsibility • Credit reports

• Good review of things to consider when reviewing a file.

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ITEMS NEEDED TO REVIEW PORTFOLIO • External Credit File Information • Aware of bank’s service area and regional economy • Trend in the business’ industry • Bank management • Previous reports of examination • Prior examination loan decks • Loan committee minutes • Board reports and management information systems

• Individual file vs. entire portfolio. Loan reviewer vs. Asset Manager or EIC.

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COMMON RISKS IN LOAN PORTFOLIO • Self dealing loans • Anxiety for income or growth • Weak servicing • Incomplete credit information • Poor supervision • Complacency • Poor risk evaluation • Concentrations of credit • Subprime Lending

• Like other lists, this is again not all ‐ inclusive. Go over each of these and explain and give examples, if possible.

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SOURCES OF REPAYMENT

• Conversion of current assets to cash • Sale of non-current assets • Replacing debt with debt - refinancing • Equity injection

• Conversion of current assets into cash – like a factory makes a product, sells the product, and uses the cash to pay down on the line. As more orders are received, borrow funds to manufacture product, and cycle starts over again. • Sale of non ‐ current assets – business sells off a machine and pays off the debt. Business sells off an unneeded piece of real estate and pays off the debt. • Replacing debt with debt – business refinances its existing debt with lower payment or more favorable terms • Equity injection.

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SOURCES OF REPAYMENT

CASH IS KING!

• This is an old saying, but holds true.

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People:

Borrower: Dunder Mifflin Paper Company Guarantor: David Wallace Regional paper, printing and office supply company; been in business since 1949 and a bank customer for 10+ years Purchase office building: 15 ‐ year fully amortizing term note 1st lien mortgage on office property @ 80% loan to value (LTV) Blanket lien on all business assets Non ‐ real estate collateral largely consists of paper products and office supplies No late history; full repayment from borrower anticipated at end of term 202x debt service coverage ratio (DSCR) of 1.50

Purpose: Payment: Protection:

Problem:

Prospects:

Introductory Commercial Credit Quick Hitter ‐ Pass Ask students to identify the 6 ‐ Ps Ask students to review and consider what most important fact are Ask who can explain how to calculate a DSCR Ask who can explain how to calculate a LTV Ask students to rate the loan: Pass, Criticize or Classify? Ask students to identify what information was used to arrive at determination.

People:

Borrower: Dunder Mifflin Paper Company Guarantor: David Wallace Regional paper, printing and office supply company; been in business since 1949 and a bank customer for 10+ years Purchase office building: 15 ‐ year fully amortizing term note 1st lien mortgage on office property @ 80% loan to value (LTV) Blanket lien on all business assets Non ‐ real estate collateral largely consists of paper products and office supplies No late history; full repayment from borrower anticipated at end of term 202x debt service coverage ratio (DSCR) of 1.50

Purpose: Payment: Protection:

Problem:

Prospects:

Review of Introductory Commercial Quick Hitter ‐ Pass pertinent facts enabling you to evaluate loan: term; debt service coverage ratio; collateral; loan to value Loan is considered to be a Pass based upon 1.5x DSCR and 70% LTV; 15 ‐ year term is shorter than normal for commercial property leading to a lower DSCR than if term had been longer.

People:

Borrower: Dunder Mifflin Paper Company Guarantor: David Wallace Regional paper, printing and office supply company; been in business since 1949 and a bank customer for 10+ years 8 years remaining on a 15 ‐ year fully amortizing term note used to purchase office building 202x debt service coverage ratio (DSCR) of 0.56x, but loan has never been past due as borrower has been using cash reserves to support cash flow shortfall. • 1st lien mortgage on office property @ 77% loan to value (LTV) • Blanket lien on all business assets

Purpose:

Payment:

Protection:

Problem:

• Revenue declined due to loss of large contract. • Cash reserves are declining.

Prospects:

Management has reduced staff and other expenses to improve DSCR to a projected 0.88x based upon current debt schedule.

Introductory Commercial Credit Quick Hitter ‐ Classified Ask students to rate the loan: Pass, Criticize or Classify? Ask students to identify what information was used to arrive at determination.

Discuss difference between substandard, doubtful, and loss. Ask students what workout strategies might be offered:

Interest only period? Pros & Cons Extend term or loan? Pros & Cons Discuss TDR

People:

Borrower: Dexter Morgan Forensic Technician at Miami ‐ Metro PD W ‐ 2 income: $78M (at origination)

Purpose:

Purchase personal residence for $300M 27 years remaining on 30 ‐ year fully amortizing term loan

Payment: Protection: Problem: Prospects:

Debt ‐ to ‐ income ratio: 34% @ origination

First lien on residence LTV: 88% (at origination) Late history: 03/00/00 Monitor for slow payment

Introductory Consumer Credit Quick Hitter ‐ Pass Ask students to identify the 6 ‐ Ps Ask and discuss with students why there is no current income, debt to income ratio, or LTV. Ask students to review and consider what most important facts are Ask students to rate the loan: Pass, Criticize or Classify?

People:

Borrower: Dexter Morgan Forensic Technician at Miami ‐ Metro PD W ‐ 2 income: $78M (at origination)

Purpose:

Purchase personal residence for $300M 27 years remaining on 30 ‐ year fully amortizing term loan

Payment: Protection: Problem: Prospects:

Debt ‐ to ‐ income ratio: 34% @ origination

First lien on residence LTV: 88% (at origination) Late history: 03/00/00 Monitor for slow payment

Review of Introductory Consumer Credit Quick Hitter – Pass Loan is considered to be a Pass based upon 34% debt ‐ to ‐ income ratio at origination, acceptable LTV, slow pay not serious delinquency. Ask class who is familiar with Uniform Retail Credit Classification and discuss.

People:

Borrower: Dexter Morgan Forensic Technician at Miami ‐ Metro PD W ‐ 2 income: $78M (at origination)

Purpose:

Purchase personal residence for $300M 27 years remaining on 30 ‐ year fully amortizing term loan

Payment: Protection: Problem: Prospects:

Debt ‐ to ‐ income ratio: 34% @ origination

First lien on residence LTV: 88% (at origination) Late history: 19/08/01

Loan is currently 92 days past due.

Introductory Consumer Credit Quick Hitter ‐ Classified Ask students what changed: Late history & currently 92 days past due. Ask class: Pass, Criticize, Classify? And why?

People:

Borrower: Dexter Morgan Forensic Technician at Miami ‐ Metro PD W ‐ 2 income: $78M (at origination)

Purpose:

Purchase personal residence for $300M 27 years remaining on 30 ‐ year fully amortizing term loan

Payment: Protection: Problem: Prospects:

Debt ‐ to ‐ income ratio: 34% @ origination

First lien on residence LTV: 88% (at origination) Late history: 03/02/00

Loan reviewer identified several documentation issues: 1. Deed of Trust recorded in wrong county. 2. Deed of Trust signed in the wrong place by the borrower. 3. Lender is not listed as loss payee on insurance.

Introductory Consumer Credit Quick Hitter ‐ Criticized Ask students what changed: Late history & currently 92 days past due. Ask class: Pass, Criticize, Classify? And why? Preferred answer: Special Mention due to correctable documentation issues. Special Mention Key Points: • 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 an institution to sufficient risk to warrant adverse classification. • The Special Mention category is not to be used as a means of avoiding a clear decision to classify a loan or pass it without criticism . Neither should it include loans listed merely "for the record" when uncertainties and complexities, perhaps coupled with large size, create some reservations about the loan. If weaknesses or evidence of imprudent handling cannot be identified, inclusion of such loans in Special Mention is not justified. • Ordinarily, Special Mention credits have characteristics which corrective

management action would remedy. Often weak origination and/or servicing policies are the cause for the Special Mention designation. • Comments on loans listed for Special Mention in the Report of Examination should be drafted in a fashion similar to those for adversely classified loans. • The major thrust of the comments should be towards achieving correction of the deficiencies identified.

People:

Borrower: Medical Associates of San Helena, LLC (MASH) Guarantor: Hawkeye Pierce, MD (100% owner) Fully amortizing 15 ‐ year term note to buy out retiring partner • 1st lien on medical practice real estate @ 80% LTV • Closely held shares of business • Dr. Pierce's Guaranty New customer who only banked with this bank due to the low rate offered 202x debt service coverage ratio (DSCR) of 1.35x

Purpose: Payment: Protection:

Problem:

Prospects:

Potentially a very profitable relationship for the bank

Commercial Credit Quick Hitter ‐ Pass Ask student to review key points on this Ask students to rate: Pass, Criticize or Classify. Should be a pass rating: 1.35x DSCR; 80% LTV; no delinquency issues.

People:

Borrower: Medical Associates of San Helena, LLC (MASH) Guarantor: Hawkeye Pierce, MD (100% owner) Fully amortizing 25 ‐ year term note to buy out retiring partner • 1st lien on medical practice real estate @ 95% LTV • Closely held shares of business • Dr. Pierce's Guaranty New customer who only banked with this bank due to the low rate offered 202x debt service coverage ratio (DSCR) of 2.75x

Purpose: Payment: Protection:

Problem:

Prospects:

Potentially a very profitable relationship for the bank

Commercial Credit Quick Hitter – Pass with high LTV Ask students what has changed since the previous slide: Term increased from 15 ‐ year to 25 ‐ year

DSCR increased from 1.35 to 2.75 LTV increased from 80% to 95% Is this still a pass? Why or why not? Discuss LTV restrictions and reporting.

People:

Borrower: Medical Associates of San Helena, LLC (MASH) Guarantor: Hawkeye Pierce, MD (100% owner) Fully amortizing 25 ‐ year term note to buy out retiring partner • 1st lien on medical practice real estate @ 95% LTV • Closely held shares of business • Dr. Pierce's Guaranty New customer who only banked with this bank due to the low rate offered 202x debt service coverage ratio (DSCR) of 1.05x

Purpose: Payment: Protection:

Problem:

Prospects:

Potentially a very profitable relationship for the bank

Commercial Credit Quick Hitter – Higher LTV & Lower DSC Ask students what changed from previous slide:

DSCR declined from 2.75 to 1.05 Is this still a pass? Why or why not? Loan is intended to be a pass, but is marginal; mitigating factors may warrant such low initial DSCR, but higher level should be required by policies.

People:

Borrower: Medical Associates of San Helena, LLC (MASH) Guarantor: Hawkeye Pierce, MD (100% owner) 16 ‐ years remaining on 25 ‐ year term note to buy out retiring partner

Purpose: Payment: Protection:

202x debt service coverage ratio (DSCR) of 0.76x • 1st lien on medical practice real estate @ 95% LTV • Closely held shares of business • Dr. Pierce's Guaranty Practice revenue declined due to loss of partner Monitor for improvement; consider restructure of loan.

Problem: Prospects:

Commercial Credit Quick Hitter – Classified Ask students what changed: debt service coverage declined to 0.76 Is this a pass? Why or why not? Loan is intended to be classified due to decline in revenue which lead to decrease in cash flow and a less than 1:1 debt service coverage ratio.

People:

Borrower: Paul Senior Cycles, Inc. Guarantor: Paul Senior Local motorcycle mechanic who owns own shop.

Purpose:

4 ‐ year fully amortizing note to fund 80% of the cost of equipment being purchase

Payment:

Annual debt service requirements: $25M Annual debt service available: $15M DSCR: 0.60x

Protection:

Secured by all borrower’s business assets valued at roughly $125M LTV: 80%

Problem:

Late history: 10/06/00 Loan is currently 74 days past due Overdraft on checking of $5M

Prospects:

Borrower said he will be in to pay loan and make deposit within three days as large customer just paid outstanding invoices.

Commercial Credit Quick Hitter – Classified DSCR 0.60x Late history Currently 74 days late 80% LTV Has not gone 90 ‐ days past due Borrower reports will be in to make payment, but DSCR still low and late history.

People:

Borrower: Oil Be Back, LLC Guarantor: Terry Mennaughter Local oil change shop located on busy street

Purpose:

$250,000 term note to purchase property and inventory; loan originated years ago and note has been paid down to $150,000

Protection:

1st lien on commercial property Blanket lien on all business assets Income from business operations only. No additional guarantor income. Monthly P&I over fully amortizing term.

Payment:

Problem:

Three months ago business dropped off significantly as the street was closed for repairs. Loan has been paid 30 ‐ 60 days delinquent. Road is set to reopen next month with all repairs and improvements completed.

Prospects:

Commercial Credit Quick Hitter – Missing information Main issues here 1. The issue impacting the borrower appears to be temporary – how does that impact your decision process? 2. You may want more information than what is provided: DSCR; LTV, etc. What question might you ask to help in your decision.

People:

Borrower: Stop, C&L, LLC Guarantor: Robert Van Winkle Retired musician turned home improver and (now) real estate developer Loan to fund a mixed ‐ use commercial building which has stalled. Building is 2/3 finished and contractors and borrower have both walked away from the project

Purpose:

Payment:

Loan is now 101 days past due Loan is on internal watchlist.

Protection:

Funded 100% of construction costs with minimal equity from borrower Current loan balance of $1,000M and accrued interest of $55M

Problem:

Loan is fully funded and construction is not complete. Work has stopped and all parties are non ‐ responsive. Foreclosure proceedings in process.

Prospects:

Property is in a good location. Bank has updated appraisal and believes it is worth $755M, net of fees, etc.

Commercial Credit Quick Hitter – Nonaccrual & Split Rating Who can tell me what a split rating is? Possible split rating: $755 Substandard; $300 loss

Why would split rating not be substandard and doubtful? Because value of property has been determined and collection is not highly questionable; the amount of loss is known. Nonaccrual: Loan should be on nonaccrual because it is over 90 days past due; borrower has walked away.

People:

Borrower: Stop, C&L, LLC Guarantor: Robert Van Winkle Retired musician turned home improver and (now) real estate developer Loan to fund a mixed ‐ use commercial building which has stalled. Building is 2/3 finished

Purpose:

Payment:

Loan is now 101 days past due Loan is on internal watchlist.

Protection:

Funded 100% of construction costs with minimal equity from borrower Current loan balance of $1,000M and accrued interest of $55M

Problem:

Loan is fully funded and construction is not complete. Foreclosure being considered.

Prospects:

Property is valued at $755M. Management reports borrower intends to sell project for $1.2MM and has provided copy of contract; sale closes next month.

Commercial Credit Quick Hitter – Nonaccrual & Split Rating Who can tell me what a split rating is? Possible split rating: $755 Substandard; $300 doubtful Why would split rating not be substandard and loss? Because we do not know the amount of loss yet, if any, and will know with a short amount of time. Nonaccrual: Loan should be on nonaccrual because it is over 90 days past due; borrower has walked away.

People:

Borrowers: Jack & Jill Farmer Cash Crop Farming Supported by Off Farm Income

Purpose:

Renew $450,000 Operating Line of Credit Purchase a tractor

Protection:

All Assets of Debtor Real Estate taken as Abundance of Caution Collateral Coverage on current statement 1.60, if line fully extended 1.09 Income from Operations as well as Jennifer’s outside employment. Liquidation of Collateral

Payment:

Problem: Prospects:

Long term asset financed with short term debt

Continues to pay as agreed. Farm and outside employment income remain stable.

Commercial Credit Quick Hitter ‐ Farming

People:

Borrowers: Abode Developers and Builders, LLC. Guarantors: Bob D. Builder; Candy Fixist; Jesse Can Real estate developers, builders and property flippers

Purpose: Payment:

Adding commercial building to existing real estate development loan

Interest repayment will be from voluntary guarantor support. Principal repayment will be from sales of the condo lots or finished condos. The secondary source of repayment is from voluntary cash injections from the guarantors. 1 st Mortgage on 16 condo lots and three finished condos, located on approximately 2.20 acres. 2nd Mortgage on commercial building; overall LTV is 90% Guarantors have pledged additional collateral and applied sales proceeds from other real esate sales to make principal reduction payment. Continue to monitor and reduce the note balance when possible. Rental income is still being generated, but not sufficient yet to meet DSC requirements by itself. Condo development did not go as planned.

Protection:

Problem: Prospects:

Commercial Credit Quick Hitter – Workout Loan What is a workout loan? What would you rate this loan: Pass, Criticize or Classify? And why? Would this loan be on nonaccrual?

People:

Borrowers ‐ The Fishery Restaurant, Guarantor ‐ John F Business operated as a local family ‐ style seafood restaurant

Purpose: Payment:

2 notes used to purchase land, construct a restaurant and purchase a new delivery truck. Repayment for both notes is cash flow from the restaurant. OS for the nine month period shows a net loss of $78M. Net cash flow from operations is ($23M). 1st RE Mtge on a lot and building, along with all ABA. Appraisal value equates to 80% LTV. Bank holds the title to the van. Loan (1) is 76 days past due and has been extended three times. Loan (2) is 75 days past due. The business is a new venture for Mr. F and has not been successful to date and some suppliers are demanding cash on delivery. Bank now estimates the value of the restaurant represents an LTV of 95%. Bank stated that the restaurant is gradually gaining in popularity and believes that the enterprise will be successful. Bank believes that the relatives who initially loaned funds will provide additional financing if necessary to finance daily operations.

Protection:

Problem:

Prospects:

People:

Borrowers ‐ ATOM BRUSH COMPANY, INC. Guarantor ‐ Joshua H Borrower is a broom and brush manufacturer. Loan (1) is term note to purchase equipment. Loan (2) is a revolving line of credit (aka: RLOC) Loan (3) term note to refinance the manufacturing plant. Repayment comes from cashflow generated by the borrowers operations.

Purpose:

Payment: Protection:

Equipment, A/R, Inventory, and Real Estate CLTV result in an aggregate LTV of approximately 82%.

Problem:

Severe decline in sales, profits, and cash flows due to loss of large customer. FYE operations showed a net loss, cash flows were short of DSC requirements. Guarantor is not seen as a source of support. Based on review of audited statements, loan modifications may be in order.

Prospects:

People: Purpose:

Borrower(s) – JTK 248, LLC. Guarantor(s) – Oppi, Inc., Oppi Investment Co., and Joseph H. Purchase a participation to provide construction/mini ‐ perm financing for 42 market rent apartments. I/O for six month construction term, monthly P&I for the 54 month mini ‐ perm based on a 10 year amortization, balloon at maturity. Loan modified to increase interest rate and extend maturity 48 months. Payment will remain same and will result in the loan being paid in full at maturity.

Payment:

Protection:

First lien DOT, Assignment of Leases/Rent, excess ground for phases 2 & 3.

Problem:

A downturn in oil prices has resulted in the project not reaching proforma rents or occupancy levels.

Rent roll indicates 92% of units are leased. Actual rents are 62% BELOW Proforma rents The loan was modified due to rents and occupancy being below projections.

Guarantor agreed to increase the monthly payment, make quarterly $100,000 principal curtailments, provide additional collateral of $1,000,000, and Assignment of Sales Proceeds on another property $1,000,000 less any quarterly curtailments. Guarantor paid down the loan by $1 million, pledged additional collateral to cover the shortfall in NOI due to reduced market rents. LTV is at 71% and note is on a fully amortizing basis now

Prospects:

People: Purpose:

Borrower(s) – Shoal, LLC, Guarantor(s) – Mohammad XX

Loan A: Refinance of current real estate loan. Loan B: New convertible draw note. The loan is to provide cash that will be used as equity for the new hotel that is to be constructed. The loan will have an 18 ‐ month draw period that will then convert to a perm loan for a term and amortization of 20 years. With the proposed cash ‐ out debt refinance average DSCR of 1.36X. Occupancy rates have been below its peers, but able to maintain a higher average daily rate (ADR) compared to its peers. Guarantor is the sole owner and operator of the hotel, net worth is currently $5MM, liquidity has dropped to $110M mainly because of the $1MM investment of his own cash to improve the hotel. Loan A & B: Title insured first mortgage lien and priority assignment of rents and leases on commercial real estate. The subject property has an LTV of 67%.

Payment:

Protection:

Problem: Prospects:

None noted, loans continue to pay as agreed. DSCR and LTV are acceptable

Continue to monitor payments and financial condition through collection of annual tax returns.

People:

Borrower ‐ Spring, LLC, Guarantor(s) ‐ Josh X, Howard Holdings, LLC, Thom X Spring , LLC is a local family ‐ owned, 4 th generation commercial printing company. Loan A: Working capital line of credit. Loan B: Refinance/consolidate current term debt. Loan C: A convertible term loan for future capital expenditures. 12 months I/O, then convert to a fully amortizing term of 60 months. Loan A: Monthly Interest Only payments required. Loan B: Monthly Principal & Interest payments required, amortized over 60 months. Loan C: 12 month Interest Only payments, followed by Fixed monthly Principal & Interest payments, amortized over 60 months. Loan A: 80% of eligible Accounts Receivables and 50% of eligible Inventory, to be defined and monitored monthly by a Borrowing Base Certificate. Loan B: First lien UCC filing on ABA. Loan C: Will lend up to 90% on any new tangible equipment. First lien UCC filing on ABA to be substantiated with equipment invoices as equipment is purchased.

Purpose:

Payment:

Protection:

Problem: Prospects:

Clean up the balance sheet and current cashflow

Continue to monitor, borrowing base, payments and financial trends

People: Purpose:

Borrower ‐ BELT PARTNERS, LLC, Guarantor(s) ‐ JOHN AND STEVE SAIL Renew balance of A&D Note, Originated 11/19/2017 for $13 million, matures 11/19/2020 1st Lien on remaining developed residential lots on Belt Hills Rd. Updated appraisal indicates collateral has lost significant value due to limited activity in the market and very few investors. Appraisal also notes significant value loss could occur if this is sold in distress. Marketing period lists 12 to 24 months. Sales have slowed, outlook not good, updated appraisal has LTV at 100%, guarantors have limited liquidity New industry entering area could spur activity, obtain additional collateral from guarantors, revise lot sale prices and percentages. Based on 80% of lot sales price

Payment: Protection:

Problem:

Prospects:

People:

Elliott Anderson Senior network engineer of a local cybersecurity firm, Allsafe. W ‐ 2 Income of $50M

Purpose: Payment:

Purchase 24 ‐ unit apartment complex

Monthly payments required: $10,000 Monthly cash flow available from apartment complex: $7,500

Protection: Problem: Prospects:

Loan ‐ to ‐ value: 97%

30/60/90 day past due status: 10/7/3

Prime location for commercial enterprise or further real estate development

People:

Babe Ruth Development Co. Land development company

Purpose: Payment:

Purchase and resell land for investment purposes

Note is due at maturity from the sale of the commercial land Currently, 65 days past due

Protection:

Bank funded 100% purchase price one year ago at $1,000M Current balance: $1,000M City Council to vote on whether land is to be annexed into city limits in 6 months If council approves annexation AV: $2,500M If city council denies annexation AV: $500M Awaiting decision from city council Borrower intends to sell the commercial land immediately after council’s decision Borrower has no other means to repay debt except from sale of the land

Problem:

Prospects:

People:

Mark McGwire Inc. Real estate holding company Holds five hotels within local trade territory 100% owned by Mark McGwire Rental income paid to holding company from hotels Hotel income derived from operation of hotel DSCR of 0.92x 30/60/90 past due status 4/3/1 ‐ All within the past 12 months Term note to purchase fifth hotel

Purpose: Payment:

Protection:

Unlimited and unsecured personal guaranty Mark McGwire Guarantor’s financial statement shows limited liquidity and declining financial wherewithal Hotel is unprofitable and does not cash flow for second consecutive year

Problem: Prospects:

Proven history with borrower in hotel industry Hotel in prime location

People:

Kristina Tarik Beginning house flipper

Purpose:

Purchase property to fix up and rent Original loan amount; $1,000M Current loan amount: $900M

Payment:

Six months interest ‐ only, then monthly payment required, amortized over 15 years Payment derived from rental income DSCR: 1.45x Currently, 92 days past due

Protection:

First lien real estate mortgage on rental property Property appraised for $750M Unsecured and unlimited guaranty from Kristina

Problem:

Borrower did not properly complete renovations. Unoccupied for 6 months Not expected to receive any more payments as communication with borrower has ceased Bank in process of foreclosure; likely to take possession within next three months Once title is obtained, will work with realtor to sell the property “as is”

Prospects:

People:

O. Mack Donald Local grain farmer who owns 2,000+ acres Long time customer and excellent credit score

Purpose:

Fund current year’s ag operating line of credit for inputs, rents, etc. One year note due at maturity with semi ‐ annual interest only payments Repayment from profitable sales of grain once harvested Cash flow projection shows 1.02x DSCR Debt ‐ to ‐ assets ratio of 26% Positive earned net worth trend for three of previous four years

Payment:

Protection:

First lien real estate mortgage on 2,000 acres Blanket farm assets security agreement ‐ first position Loan ‐ to ‐ value at 59%

Problem:

Ag economy is struggling Grain prices have further declined from cash flow projections Borrower will likely have minor carryover debt to term out next year

Prospects:

Ability to term out carryover debt against real estate Solid financial position