Asset Quality (Loans) Flashcards
What are the three ways a bank can be involved in credit card plan?
Agent Bank - receives cc applications from customers and sales drafts from merchants and forwards them to sub-licensee and licensee banks
Sub-licensee Bank: maintains accountability for cc loans and merchant accounts; may maintain its own processing center for payments and drafts
Licensee Banks: same as sub-licensee banks, but may perform transaction processing and cc embossing services for sub-licensee banks, and acts as a regional or national clearinghouse for sub-licensee banks.
What are the 4 types of LOC?
TTCS
Travelers – Generally sold for cash
Those sold for cash – not reported as a contingent liability, but rather as a demand deposit.
Commercial – issued specifically to facilitate trade or commerce. Drafts will be drawn when the underlying transaction is consummated as intended.
Standby – irrevocable commitment on the part of the issuing bank to make payment to a designated beneficiary. Not expected to be used unless the account party defaults in meetings an obligation to the beneficiary.
How can a nonaccrual loan return to accrual status?
P&I that are contractually due (including arrears) are reasonably assured of repayment within a reasonable period
There’s a sustained period of performance (6 mos.) in accordance with the contractual terms
AQ Rating?
Strong AQ and CA practices
1
What are the supervisory limits under Appendix A to Part 365?
Raw Land - 65%
Land development - 75%
Construction of commercial, MF, and other non-res.- 80%
Construction of 1-to-4 family residential - 85%
Improved property- 85%
AQ Rating?
Deficient AQ and CA
4
What is the percentage of capital for a bank to be considered a subprime lender?
25% of tier 1 capital
What is a hypothecation agreement?
An agreement whereby the owner of property grants a security interest in collateral to the bank to secure the indebtedness of a third party
AQ Rating?
Risk exposure is commensurate with C and M abilities
2
Under what circumstance would you classify an Ag loan? (suppose CF is poor)
Feeder and Grain Collateral - inspections have not been done within 90 days of the exam start date
Breeder - inspections have not been done within 180 days of the exam start date
Note: Copies of invoices are acceptable substitutes for inspection reports
When should a loan be placed on nonaccrual?
How can a nonaccrual loan by kept in accrual status?
Cash-basis interest payments are needed b/c of the borrower’s deterioration
90 days PD on P&I
Sooner than 90 days if M has reason to believe the bank won’t get all P&I
Loan can remain in accrual if its well secured and in process of collection
TDR
In an A/B note structure, when can you take the A note back to accrual?
4 criteria must be met:
Qualifies as a TDR
B note has been charged off
A note is reasonably assured of repayment and of performance in accordance with modified terms
Sustained performance (6 months) either immediately before or after the restructuring
AQ Rating?
Less than satisfactory AQ and CA
3
Loan Problems
misplaced emphasis upon loan income rather than soundness
Over emphasis on income
What makes up a concentration at 100% of TC?
TIPS
Type of Collateral
Industry
Product Line
Short-term obligations of a bank or related group - not included are obligations secured by US Agencies
For a fixed asset that is owned, can you capitalize interest? Why? How?
Interest may be capitalized as part of the historical cost of acquiring assets that need a period of time to be brought to the condition and location necessary for their intended use.
Interest costs include actual interests incurred when the construction funds are borrowers and the interest costs imputed to internal financing of a construction project.
AQ Rating?
If left unchecked may threaten its viability
4
What is the definition of doubtful?
Loans with 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 value, highly questionable and improbable
What is the definition of substandard?
Inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged
Well-defined weaknesses or weaknesses that jeopardize the liquidation of the debt
Characterized by possibility that bank will sustain some loss if the deficiencies are not corrected
What are examples of off-balance sheet contingent liabilities?
Always Be Running
Asset-backed commercial paper programs
Bankers Acceptances
Revolving underwriting Facilities
AQ Rating?
Identified weaknesses are minor
1
Loan Problems
sometimes results in the compromise of sound credit principals and acquisition of unsound loans.
Competition
AQ Rating?
Critically deficient AQ or CA practices
5
AQ Rating?
Level and severity of classified assets, other weaknesses, and risks require elevated level of concern
3
AQ Rating?
Level and severity warrant a limited level of supervisory attention
2
How are fixed assets that are owned reported?
Original costs and are depreciated over useful life
Except for land which is not a depreciable asset
What are the 7 risk elements for an effective CRE risk management program? (2006 CRE Guidance)
Board Please Monitor Mgmt’s Usage Per Call
Board and management oversight Portfolio Management MIS Market Analysis U/W Portfolio stress testing/sensitivity analysis Credit risk review
What is the definition of Special Mention?
Asset which 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.
Weak origination and/or servicing policies are the cause for the SM designation.
When can an express determination letter be issued?
An express determination letter should be issued to a bank only if:
Consistent Application - bank maintains and applies loan loss classification standards that are consistent with the FDIC’s standards regarding the identification and charge off such loans, and
No Material Deviations - there are no material deviations from FDIC standards.
Loan Review System is designed to address the following
4P AIE
Promptly identify loans with well-defined credit weaknesses
Provide information for determining the adequacy of the ALL
Assess adherences to loan policies and laws/regulations
Identify relevant trends affecting the collectability of the loan portfolio
Evaluate activities of lending personnel
Provide BOD an assessment of the portfolio
Provide management with info related to credit quality that can be used for financial and regulatory reporting purposes
AQ Rating?
Generally a need to improve CA and RM practices
3
What is a collateral dependent loan?
Repayment of the loan is expected to be provided solely by the underlying collateral. i.e. sale of the collateral and operation of the collateral (for example non-owner occupied CRE loan).
What are the AQ evaluation factors?
ULA-SOD-PAT-IE
Underwriting, credit admin, and risk identification
Level and trend of problems assets
ALLL
Securities underwriting and exposure to counter parties
Off-Balance Sheet Items - credit risk
Diversification - loans and securities
Policies, procedures, and practices
Asset Concentrations
Timely identification and collection of problem assets
Internal Controls and MIS
Exceptions
What is the definition of an impaired loan?
Based on current information, it is probable that the creditor will be unable to collect all P&I payments due according to the contractual terms of the loan agreement
What are the 9 Q-factors for the ALLL?
Changes in (LENEQ +VV) + CE
Lending policies/procedures
Economic and business conditions
Nature and volume of the portfolio
Experience, ability, and depth in lending management
Quality of loan review system
Volume and severity of problem assets
Value of collateral
Concentrations of credit
External factors such as competition and legal and regulatory requirements.
What is leveraged financing?
Obligor’s post-financing leverage as measured by debt to assets, debt to equity, cash flow to total debt significantly exceed industry norms.
i.e. Business recaps, equity buyouts, M&A
What are the 3 exceptions to the rule of priority?
(1) Dealers inventory (Car)
(2) When liens perfected by doing nothing are sold to a buyer buying in good faith (TV)
(3) When a second creditor supplies replacements or additions to the collateral (contractor who performed remodeling work would get paid before the bank)
What are the sales criteria so that a loan can be accounted for as a sale?
Seller may not retain effective control of the asset - no right to repurchase
Cash flows must be provided proportionally
No recourse provision
Interagency Retail Credit Classification Policy
When do you classify 1 to 4 SFR and home equity loans Sub?
1-4 SFR: delinquent 90 days or more and LTV greater than 60 percent
Home Equity: delinquent 90 days or more and LTV greater than 60 percent. Also, home equity loans where the institution does not hold the senior mortgage, that are past due 90 days or more, should be classified Sub no matter the LTV.
Interagency Retail
When would a residential real estate loan not be classified based on delinquency status?
Properly secured
LTV equal to or less than 60 percent
However, home equity loans where the bank does not hold the senior mortgage, that are past due 90 days or more, should be classified Sub, even if the LTV is equal to, or less than, 60 percent.
What are the 3 appraisal methods?
Cost approach
Direct Sales Comparison Approach
Income approach
What are some characteristics of sub-prime borrowers?
Bankruptcy in the last 5 years
FICO less than 660
DTI greater than 50 percent
2 or more 30-day delinquencies in the last 12 month, or 1 or more 60-day delinquency in the last 24 months
Judgment, foreclosure, repossession, or charge-off in the prior 24 months
Loan Problems
overextensions of unsound credit to insiders, or their interests, who have improperly used their positions to obtain justified loans.
Self-dealing
To perfect an AG lien, what must be filed?
A financial statement
AQ Rating?
Satisfactory AQ and CA
2
Loan Problems
loans beyond the reasonable capacity of the borrower to repay
Over-lending
How do you classify oil and gas loans with total support of debt provided solely by the value of the pledged collateral?
Substandard: 65% of discounted present worth of future net income (PWFNI)
Doubtful: 65-100%of discounted PWFNI
Loss: any remaining deficiency
Note: 65% should be used when the discounted PWFNI is determined using historical production.
When less than 75% of the reserve estimate is determined using historical production data, or discounted PWFNI predicated on engineering estimates, the collateral value assigned to Sub should be reduced accordingly.
What happens when a debtor defaults on a secured loan?
Secured party has the right to repossess w/o going to court, as long as the peach isn’t breached.
Loan problems
documents that may aid the examiner in identifying potential problem loans
Potential problem indicators by document
Loan Problems
management’s inability to obtain and evaluate credit information or put together a well-conceived loan package. Also, management can be technically sounds in some forms or lending, but becomes involved in specialized types of credit in which it lacks expertise and experience.
technical incompetence
When is an evaluation required?
1.Transaction value of $250M or less
- Transaction is a business loan that:
(1) has a transaction value of $1MM or less, and
(2) is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment - The transaction involves an existing extension of credit at the lending institution, provided that
(1) there have been no obvious and material change in the market conditions or physical aspects of the property that threatened the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies;
(2) or there is no advancement of new monies, other than the funds necessary to cover reasonable closing costs
What are the standards for safe and sound merchant credit card activities?
- Scrutinize Prospective Merchants - A clearing institution should scrutinize prospective merchants with the same care and diligence used in evaluating perspective borrowers
- Closely Monitor - Financial institutions engaging in credit card clearing operations must closely monitor their merchants.
- Periodic Reviews - Create an account administration program that incorporates periodic reviews of the merchants financial statements and business activities
- Periodic Reporting System - Establish a periodic reporting system of merchant account activities regardless of the amount or number of transactions cleared
- Follow Network Guidelines - Clearing institutions should follow the guidelines established by the card issuing networks.
What are characteristics of Ch. 7 BK?
Liquidation
Trustee converts all assets to cash and distributes proceeds. All debts are discharged
What are the terms commonly encountered with direct leasing and what are there characteristics?
NFL Rentals
Net Lease: the bank isn’t obligated to assume the expenses of maintaining the equipment
Full Payout Lease: bank expects to be fully-repaid for its investment in the property and the cost of financing the property over the term of the lease
Leveraged Lease: bank (as lessor) purchases and becomes the equipment owner by providing a small % of the capital needed (20-40%); bank gets long-term financing for the rest of it. Usually done as a tax shelter. The bank should only get involved with lessees it would make an unsecured loan to.
Rentals: include only the payments reasonably anticipated by the bank at the time
How is OREO booked?
Booked at time of foreclosure at the FV less costs to sell. This becomes the “cost” of the OREO parcel.
Any loss should be charged to the ALLL at time of foreclosure
However, if an asset is sold shortly after it is received in a foreclosure, it may be appropriate to substitute the value received in the sale (net of the cost to sell the property) for the fair value, with any adjustments made to losses previously charged against the ALLL.
In case of foreclosure, what is the priority for multiple creditors to get paid?
PUG
(1) Perfected SI in the order of perfection
(2) Unperfected creditors
(3) General creditors
What are the four phases in a loan syndication?
Pre-Launch Phase: syndicators identify the borrower’s needs and perform their initial dd
Launch Phase: banks are sent information on the syndication. Negotiations with the banks and the borrower occur over pricing, collateral, covenants, and other terms
Post-Launch Phase: Credit approval. Projection models, stress tests, industry research is completed.
Post-Closing: ongoing dialogue with the borrower about financial/operating performance
Loan Problems
failure to obtain and properly evaluate credit information (PFS, purpose of borrowing, source of repayment, progress reports, inspections, etc).
Inaccurate credit info
Loan Problems
loans granted without a well-defined repayment program
failure to implement liquidation agreements
Loan Problems
economic conditions, both national and local, are continuously changing, management must be responsive to these changes
lack of attention to economic conditions
What are the 3 methods to measure impairment?
(1) PV of the expected future cash flows discounted at the loan’s effective interest rate (creates a reserve)
(2) Fair value of the collateral less costs to sell if the loan is collateral dependent (if fair value less costs to sell is less than the book value then charge off that amount)
(3) Observable market value (creates a reserve)
AQ Rating?
Minimal supervisory concern
1
What are the indicators of loan problems?
COSTIFLLOPP
Competition Over-lending Self-dealing Technical incompetence Inadequate credit info Failure to enforce liquidation agreements Lack of supervision Lack of attention to changing economic conditions Over-emphasis on loan income Poor Selection of risks Potential problem indicators by document
What is the definition of loss?
loans that 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.
When should comprehensive of oil/gas loan take place?
4 instances:
Loan balances exceeds 65% of the discounted present worth of future net income (PWFNI) of proved developed properties (PDP)
Loan does not amortize over 4 to 5 years
Credit is not performing
Credit is identified as problem credit
What are the minimum appraisal standards?
SCUM WADD
- State licensed or certified appraisers
- USPAP – conform to USPAP standards
- Market Value - Be based on the definition of market value
- Written and contain sufficient information to support the institutions decision
- Appropriate deductions and discounts – analyze and review for proposed improvements, non-market terms, etc
Which transactions requires a state certified appraiser?
- All transactions of $1MM or more
- Non-residential transactions of $250M or more, other than those involving 1-to-4 family residential properties
- Complex residential transactions of $250M or more.
When should examiners not issue an express determination letter?
Significant criticism - the bank’s loan review process relating to charge-offs is subject to significant criticism;
Overstated/Understated Charge-Offs - loan charge-offs reported in the Call Reports are consistently overstated or understated; or
Pattern of Unrecognized Charge-Offs - there is a pattern of loan charge-offs not being recognized in the appropriate year.
Loan Problems
(1) absence of effective active management supervision of loans and (2) failure of the B/M to properly oversee subordinates to determine that sound policies are being carried out.
Lack of supervision
What are the limits of loans that exceed supervisory LTV limits?
Aggregate amount of loans that in excess of supervisory LTV limits should not exceed TC.
Total loans for commercial, AG, and MF (CAM) and other non 1 to 4 family residential should not exceed 30% of TC
AQ Rating?
Inadequately controlled and subject the FI to potential losses
4
Liens on aircrafts must be filed to who?
Federal Aviation Administration in Oklahoma City, OK
After foreclosure, how must each OREO parcel be carried?
The lower of
(1) the fair value less costs to sell, or
(2) the “cost” of the OREO parcel
AQ Rating?
Present an imminent threat to viability
5
How are capitalized leases reported in the Call report?
Premises and fixed assets
What are the steps to perfect a security interest?
(1) Attachment - point where the creditor’s legal rights in the debtor’s property come into existence
(2) Security agreement - debtor authenticates and provides a description of the collateral
(3) Security interest - SI not protected against a debtor’s other creditors unless it has been perfected.
What are the two methods for advancing funds under an accounts receivable financing arrangement?
Blanket Assignment - more hands off; bank gets periodic BB info
Ledgering - bank micro-manages the process; receives duplicate copies of invoices prior to advancement. Borrower’s customers remit payment directly to bank.
When combining potentially volatile funding sources, at what threshold does it make a concentration?
25% of TA
What are the 4 criteria to account as a capitalized lease?
Note: only need to meet one
Ownership of the property is transferred to the lessee at the end of the lease term
Lease contains a bargain purchase option
Lease terms represents at least 75% of the estimated economic life of the leased property
PV of the min lease payments at the beginning of the lease term is 90 percent or more of the fair value of the leased property to the lessor at the inception date.
AQ Rating?
Levels and problem assets are significant
4
What transactions are exempt from an appraisal?
1.Transaction value of $250M or less
2.Lien has been taken as an abundance of caution
3.Transaction not secured by real estate
4.Lien on real estate has been taken for purposes other than the real estate’s value
5.Transaction is a business loan that:
(1) has a transaction value of $1MM or less, and
(2) is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
6.A lease of real estate is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased real estate
• Capital lease = appraisal.
• Operating lease = no appraisal if it is not the economic equivalent of the purchase or sale of the lease property
7.The transaction involves an existing extension of credit at the lending institution, provided that
1. there have been no obvious and material change in the market conditions or physical aspects of the property that threatened the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies;
2.or there is no advancement of new monies, other than the funds necessary to cover reasonable closing costs
8.Transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by a loan or interest in a loan, pooled loans, or interest in real property, including MBS and each loan or interest in a loan, pooled loan, or real property interest met FDIC regulatory requirements at the time of origination
9.Transaction is wholly or partially insured or guaranteed by a US government agency or US government sponsored agency
10.The transaction either
1.Qualifies for sale to a US government agency or US government sponsored agency, or
2.Involves a residential real estate transaction in which the appraisal conforms to the FNMA or FHLMC appraisal standards applicable to that category of real estate
11.The regulated institution is acting in a fiduciary capacity and it not required to obtain an appraisal under other law; or
12.The FDIC determined that the services of an appraiser are not necessary
What is a SNC?
Any loan, formal commitment, ORE, repossession, stock, or bond that:
Adds up to $20MM or more (if adversely classified at prior exam then with a balance of at least $10MM)
Shared by 3 or more unaffiliated banks
Purchasing bank assuming its pro-rate share of credit risk
What are the five methods that may be used to account for the disposition of Real Estate?
First, I Come Ready, Dear
Full Accrual Method - Sale/Accrual
Installment Method - Sale/Accrual/ Small down pymt/profits recognized as bank receives pymt.
Cost Recovery - Sale/Nonaccrual/Weak borrower that doesn’t qualify for full accrual or installment/no profit or accrual until the aggregate payments exceed the recorded loan amount.
Reduced Profit - Sale, Ok down pymt, odd amortization/profits recognized as payments received/nonaccrual
Deposit Method - no sale, rent to own/stays ORE/no profit/nonaccrual/pymts reported as liability
What makes up a concentration at 25% of TC?
Individual borrower
Single repayment source
Individual project
Small interrelated groups of individuals
What are the cause of carryover lending in an Ag loan?
(1) Unforeseen circumstances due to weather and/or drop in commodity prices
(2) Existing term debt that needs to be rescheduled bc of CF problems
How much more capital should a bank hold for a sub-prime portfolio?
1.5 to 3 times more
AQ Rating?
Risk exposure is modest in relation to C and M abilities
1
Loan Problems
absence of sound lending policies, and/or management’s lack of sound credit judgment.
Poor selection of risk
Interagency Retail Credit Classification Policy
Loan is substandard when?
Chargeoff closed end retail loans when?
Chargeoff open-end retail loans when?
What happens when accounts is in BK?
What happens for fraudulent loan?
Substandard = 90 days past due
Closed-end loan 120 days past due = chargeoff
Open-end loan 180 days past due = chargeoff
Bk = chargeoff account within 60 days unless can demonstrate that repayment is likely to occur
Fraud = charge-off within 90 days of discovery
What are the elements of a loan policy?
GIRL CALL UP PLEA O-L
General fields of lending and types of loans
Interest rate and terms
Responsibility of BOD, in reviewing, ratifying, or approving loans
Lending authority
Collections
Appraisals
Loan files
Loans/asset ratio
Unsecured guidelines
Primary lending areas
Portfolio mix and diversification
LTV Limits
Environmental
ALLL
ODs
Loan Review
What is mezzanine financing in a leverage deal?
Represents those parts of a leveraged financing package that are neither equity nor senior debt.
It’s generally subordinated to debt provided by senior lenders.
What are the general guidelines for re-aging delinquent retail credit accounts?
Renewed willingness and ability to repay the loan
Account should be at least 9 months old before re-aging
3 consecutive monthly payments are required before an account is re-aged, or the lump sum
No loan should be re-aged more than once in 12 months, or twice in 5 years
What are additional underwriting standards and credit analysis are performed for a leveraged deal?
U/S should also establish covenant requirements such as minimum interest and fixed charge coverage ratios and max leverage ratios
Credit Analysis
Cash flow analysis do not rely on over optimistic projections
Projections are stress tested
Transactions reviewed quarterly
What is included in an Engineering Report for Oil and Gas based lending
PDT
Price
Discount factors
Timing
What are the added risks associated with floor plan lending?
Involved loan advances against a specific piece of collateral the bank can’t exercise full control over. Also most dealers have minimal capital.
Curtailments and frequent inspections are necessary
Fixed Assets-Owned
What rate is used to determine amount of capitalized interest on internally financed projects?
Rate applicable to the bank’s borrowings outstanding during the period.
Bank’s borrowings include IBB and other IB liabilities.
Interest capitalized shall not exceed the total amount of interest cost incurred by the bank during the reporting period.
What does Article 9 of the UCC govern?
Secured transactions. Transactions that create a security interest in personal property or fixtures.
What are the characteristics of Ch. 11BK?
Reorganization
Debtor retains assets, submits a plan that needs to be approved by a majority of creditors.
Creditors must receive at least as much as they would have in Ch 7
Available to all debtors
AQ Rating?
Trends may be stable or indicate deterioration in AQ or increase in risk exposure
3
What are the most important aspects of the exam process related to AQ?
Evaluation of a bank’s lending policies
Credit Administration
Quality of the loan portfolio
What are the types of plans available for construction lending?
Standard payment plan - pre-established schedule of fixed payments, get money (draws) at each stage based on completion
Progress payment plan - monthly disbursements totaling 90% of indicated completion value, with 10% held back.
What is the threshold for a single source to be considered a funding concentration?
10% of TA
Interagency Retail Credit Classification Policy
What happens when a residential or home-equity loan is 180 days past due?
Obtain current assessment of value. Any loan balance in excess of fair value less cost to sell = loss
How do you rate/classify a leverage deal?
Incorporate both the PD and LGD
Substandard if borrower’s condition of future prospects have significantly weakened
If loan placed on non-accrual will likely have a doubtful component
When portion of loan is not protected by pledged assets or well supported EV, then classify the unprotected portion as doubtful or loss
TDR
When can the A note not be disclosed as a TDR?
If market rate and performing in accordance with the restructured terms
TDR disclosure can be eliminated in the year following the restructuring.
What long is a UCC good for? When are continuations filed?
UCC are good for 5 years
A continuation can be filed during the last 6 months of the 5 years.
What are the characteristics of Ch. 13 Bk?
Like Ch 11, but only available to individuals with regular incomes when their secured debts are under $350K and unsecured debts under $100K.
Only secured creditors vote on plan
