Lending for NonLenders Mary Jo Rogers Executive Vice President South Atlantic Bank Session I Why Do We Lend And What Is The Process Why Is Lending Important Interest income from loans makes up the bulk of income for your bank ID: 1044337
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1. South Carolina Bankers School Lending for Non-LendersMary Jo RogersExecutive Vice PresidentSouth Atlantic Bank
2. Session IWhy Do We Lend And What Is The Process?
3. Why Is Lending Important?
4. Interest income from loans makes up the bulk of income for your bank.Why Is Lending Important?
5. Interest income from loans makes up the bulk of income for your bankProviding credit is an important economic function for customers served by your bank.Why Is Lending Important?
6. CommercialConsumerMortgageMajor Loan Classes
7. Commercial – Paid back from cash flow generated by a business. Quick cash flow calculation: Earnings before interest, tax, depreciation and amortization/debt serviceMajor Loan Classes
8. Commercial – Paid back from cash flow generated by a business. Consumer – Paid back from an individual’s personal cash flow.Consumer Debt to income – Monthly Debt service/Monthly Income Major Loan Classes
9. Commercial – Paid back from cash flow generated by a business. Consumer – Paid back from an individual’s personal cash flow.Mortgage – Specific form of consumer lending used for real estate.Debt to income ratios are important – monthly debt payments/monthly gross incomeMajor Loan Classes
10. Business developmentInformation gatheringCredit analysisApproval Commitment and negotiationClosingSet up and servicingLoan reviewIs There Much To It?
11. Structure is importantWritten lending policiesWritten lending proceduresWell-trained lending personnelEstablished portfolio monitoring and evaluation systemPolicies, Policies and More Policies
12. Individual AuthorityCombinationCommitteeWho Gets To Make a Loan Decision?
13. Individual AuthorityAbility of the lenderSecured vs. unsecuredBusiness vs. consumerCombinationLender plus a concurring lenderLender plus credit officerCommitteeWho Gets To Make a Loan Decision?
14. How Do You Know It’s Good?
15. We get paid back.How Do You Know It’s Good?
16. We get paid back.Economic conditionsExisting vs. new ventureCash generation potentialFall Back positionHow Do You Know It’s Good?
17. Will It Make Us Money?
18. Interest incomeFee incomeCost of fundsCost of servicingHow Do You Know It Will Make Us Money?
19. Interest income minus interest paid on deposits.Spread
20. Interest incomeFee incomeCost of fundsCost of servicingDeposit balancesAdditional Bank businessReferralsHow Do You Know It Will Make Us Money?
21. Regulatory Environment is changing dailyDodd FrankTRIDHMDACRACDDBeneficial OwnershipConsumer vs. Business RegulationsIt is up to the lender to complyMonetary penalties for non-complianceDid We Do it Right?
22. Quantity ConsiderationsRegulationConcentrationDiversificationRisk MitigationIs Our Glass Half Full or Half Empty?
23. Loan ReviewAddress credit qualityMonitor lending activityKeep lenders focused on bank’s policies and proceduresReport Card Time
24. Session IIHow Do You Do It?
25. Working CapitalTerm LoansLetters of CreditTypes of Loans
26. Working CapitalShort term loan for temporary cash needs. Less than one year maturityCan be revolving or non-revolvingUsually rely on asset conversion for repaymentTypes of Loans
27. Working CapitalShort term loan for temporary cash needs. Less than one year maturityCan be revolving or non-revolvingUsually rely on asset conversion for repaymentTerm LoansFinance permanent assets or long term growthUsually longer than one year maturityCan include capitalized leasesRepaid from cash flowTypes of Loans
28. Letters of CreditFacilitate tradeTransfer riskStandby or DocumentaryRepaid by specific eventTypes of Loans
29. Unsecured lending is only for the best risksCollateral is importantOften arises out of the transactionReduces risk of loss to the bankKeeps the Borrower engagedSecured or Unsecured?
30. Types of Collateral
31. Good Stuff Cash and liquid assetsCertificates of DepositBrokerage accountsStockOwner occupied real estateIncome producing real estatePrimary residenceTypes of Collateral
32. Iffy StuffAccounts Receivable InventorySpecialized equipmentNon income producing real estateToysTypes of Collateral
33. Bad StuffIntangible assetsContractsPatentsFranchise rightsClosely held assetsAgricultural ProductsDoes it walk and eat?Does it spoil?Types of Collateral
34. What Do Lenders Do Besides Play Golf and Take People to Lunch?
35. Develop BusinessGather InformationAnalyze financialsMake credit decisionsCommunicate with customersPrepare documentsFollow upMonitorWhat Do Lenders Do Besides Play Golf and Take People to Lunch?
36. Is There A Lot To Think About When You Make A Loan Decision?
37. Amount of loan requestedPurpose of loan fundsRepayment sourceTerm of the loanCollateralHistory of the borrowerFinancial conditionOther CreditorsSuccess in the marketplaceBusiness PlanIs There A Lot To Think About When You Make A Loan Decision?
38. What Happens When You Sit On A Two Legged Stool?
39. The Three Legged Stool of LendingCredit/CharacterCash flow/CapacityCollateralWhat Do A Three Legged Stool And 5 C’s Have In Common?
40. The 5 C’s of CreditCharacter – Credit Report, Payment History, Civil/Criminal historyCapacity/Cash Flow – Does the business or individual make enough money to pay back creditors?Capital – Do they have skin in the game?Conditions/Cycle – How will the outside world affect the borrower?Collateral – What do we fall back on if they can’t pay?What Do A Three Legged Stool And 5 C’s Have In Common?
41. Analyzing a borrower’s ability to repay is the most important step in the loan process Look at past, present, future Utilize tools available Shore up the deal What Do A Three Legged Stool And 5 C’s Have In Common?
42. Tools lenders useCredit reportsOver 700 = good credit scoreQuickest way to determine a declineSpread programsUsed with business requestsCompare with industryCredit Scoring modelsUsed with consumer requestsDetermines probability of defaultWhat Do A Three Legged Stool And 5 C’s Have In Common?
43. Options to make a weak deal stronger Federal loan guarantee programsSBA USDAHomebuyer AssistanceFHAVAWhat Do A Three Legged Stool And 5 C’s Have In Common?
44. It’s A Risky Business
45. Most Common RisksEconomicPoliticalManagementEnvironmentalOperationalLiquidityCounterpartyDisasterIt’s A Risky Business
46. ApproachAsk open ended questionsListen more than you speakSpeak plain EnglishDiscussionUnderstand the business fullyCreate a realistic expectation of response timeExplain that follow up info may be necessary Talking To Potential Borrowers
47. General PrincipalsBe prepared Ask for additional information in writingFollow UpMake a site visitGive them a timely answer – especially if it is “NO” Talking To Potential Borrowers
48. Session IIIWhat Happens Next?
49. What constitutes a commitment?Verbal – Saying “Yep. We can do that”Written – Wording is importantTerm sheet versus commitment letterTerm Sheet -Written outline of the terms and conditionsCommitment letter – Binds the BankNot Afraid of Commitment?
50. What should be in a commitment letter?Specific terms and conditionsLists documents necessary for closingTells Borrower what must happen in order to closeBe sure borrower understands terms Clear with simple languageAllow them to ask questionsGive them an expectation of how much it will costNot Afraid of Commitment?
51. Its all about the paperwork Correct document preparation is crucial to the Bank’s repayment.Loan compliance is getting a lot of attention from regulators and politicians.Let’s Seal The Deal
52. Documents that may be used in a loan closingApplicationDisclosuresWaiver of appraisal rightsNotice of flood determinationAttorney/Insurance preferenceAppraisalBorrowing resolutionNoteSecurity agreementMortgageLoan agreementUCC – 1Guarantee AgreementSettlement StatementLet’s Seal The Deal
53. Portfolio Management is a critical function for any lenderCall on customer Monitor payment progressCollect regular financial informationCorrect documentation exceptionsLook for other opportunitiesAsk for referralsKeeping The Relationship Alive
54. Identify the problemPast dueCollateral value deteriorationProblems with other BanksReact to the problemCommunicate, communicate, communicateDocument your communicationsVerify the value of your collateralMake sure your paperwork is in orderWork it outLoan modificationsAdditional collateralSupport from a third partyMake sure your paperwork is in orderWhen A Breakup Is Inevitable
55. CollectionStart earlyGet in front of the customerYou made the mess. You clean it up.Short term issues require temporary solutionsBe creativeMake sure your paperwork is in orderWhen A Breakup Is Inevitable