Bankers do to mitigate risk and potential losses Balanced performance eg growth profitability and quality is outofbalance Excessive risk at the time of underwriting Poor evaluation of repayment sources ID: 221248
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Slide1
What can
Bankers do to mitigate risk and potential losses…
Balanced performance (e.g. growth, profitability, and quality) is out-of-balance.
Excessive risk at the time of underwriting;
Poor evaluation of repayment sources;
Improper loan servicing; and
Documentation deficiencies or errors.Slide2
What can
Bankers do to mitigate risk and potential losses…
2. Close the loan as approved (surprisingly).
Include all conditions of co-approval in the loan documents, and in particular covenants within the loan agreement
Use appropriate Schedules
as part of the loan agreement at
the time of closing;
Do not make any amendments to promissory notes, deeds of trust, security agreements, loan agreements, etc., and in particular deletion of default language and remedies thereof, without co-approval and advice from bank counsel.
3. Use bank counsel (not the borrower's lawyer!)Slide3
What can
Bankers do
to mitigate risk and potential losses…
4
. Know Thy Borrower (not only upon extension of new credit but renewals as well!!)
Read the articles of incorporation, LLC organizational documents, operating agreements, partnership agreements, etc.;
Fully understand the organizational structure and ownership interest by principal/member. Particularly important as it relates to guaranties;
Be sure that the correct authorized officers/members of the borrower are duly reflected and included on the borrowing resolution.
How are shareholder/member capital calls handled per the above documents?;
Lending money to borrowers and/or prospects whose financial affairs are too complex to understand and/or too unpredictable should be
avoided.
Stated simply, if we don’t understand the borrower, how can we understand how the bank will be repaid?Slide4
What can
Bankers do
to mitigate risk and potential losses…
What is the capital structure (e.g. equity, shareholder debt, etc.) of the Borrowing entity? Generally shareholder debt should always be subordinated to the bank. However, there are varying degrees to any Subordination Agreements that should be clearly spelled out as part of the co-approval and the loan documents. To be considered “equity”, the Subordination Agreement needs to fully subordinate shareowner debt to bank
and
include a standstill provision restricting any and all principal and interest payments;
Is the borrower in good standing with the Secretary of State office?Slide5
What can
Bankers do to mitigate risk and potential losses…
5. Know Thy Sources of Repayment!!
How is the borrower going to pay the loan back? (e.g. primary source of repayment);
How is the borrower going to pay the loan back if the primary source of repayment is insufficient? In other words, a secondary source of repayment needs to be clearly identified during the underwriting process;
Fully understand borrower’s contingent debt (including any capital call provisions) and global cash flow position. Analyze the borrower’s financial condition including all related interests;
Do those repayment answers make sense?
Does the proposed covenants and loan structure make sense?Slide6
What
Bankers do to mitigate risk and potential losses…
6. Know Thy Collateral!
Inspect as part of the underwriting process
and
prior to submitting loan package for co-approval;
Include digital pictures of the collateral as part of write-up package;
Continue to systematically inspect the collateral as part of on-going portfolio management and servicing thereafter.Slide7
What can
Bankers do to mitigate risk and potential losses…
7. At the time of renewals and modifications, lack of verification of the bank’s lien position including any delinquent payroll and/or property taxes as well as any subordinate debt, liens, judgments, etc. No documentation due-diligence conducted as part of the renewal/modification process :
Updated borrowing resolution:
Update to title (search);
Title Policy endorsements;
UCC extensions
Amendment(s) to Deed of
Trust/Mortgage,
Security Agreement, Loan Agreement, etc.;
Guarantor notification; and
No Bank counsel involvement.Slide8
What can
Bankers do to mitigate risk and potential losses…
8. Act!
After documenting loan covenant compliance, deal with any violations immediately with written notifications to clients;
Don’t wait for year-end numbers or tax returns if you see alarming trends. Discuss what you see with your client so you can answer the “why’s” when you talk to your co-approver;
TELL YOUR CLIENT WHEN YOU ARE CONCERNED.
It is unfair for a borrower to
figure out the bank thinks they are a problem only when they are transferred to
Problem Loan Administration.
Early discussions might prevent them from ever getting to PLA;
Act very fast particularly if it is
ABL and CRE Construction Loans;
Always be mindful of potential “Course of Dealing” issues.Slide9
What can
Bankers do to mitigate risk and potential losses…
9. Continue to service and monitor the loan after booking:
Particularly important on construction related projects and ABL lending;
For CRE Construction projects always use AIA form documents , read the inspection reports and act immediately if the project gets sideways (e.g. cost over-runs, lack of equity, over-advancing funds compared to the balance to finish, etc.)
Utmost importance on residential A&D (e.g. avg. sales price, unit absorption trends, release fees, principal curtailment, adherence to approved pay-out ratio, etc.);
Readily obtain current financial statements, tax returns, loan base reports, etc.
AND
analyze them upon receipt (just don't send to file);
Adhere to loan covenants compliance and document accordingly. If not, it could potentially create a course of dealing issue for the bank; and
Bubble up any risk migration to your co-approver on an on-going basis.Slide10
What can
Bankers do to mitigate risk and potential losses…
10. Maintain continuous and open dialogue, particularly in terms of financial performance, between the bank and client:
Be curious and ask questions. If the answers lead to other questions, ask them too. Your co-approver will and you don’t want to go back and forth with your client. You are ready when you can understand it, it makes sense and you can explain it fully.
Be Honest. PCE does not mean you dance around legitimate issues. Clients may not like what they hear sometimes, but they will later and gain respect for you (e.g. added value).