Dimension 7 - Identify and Develop Strategies for Problem Loans

Question 1

What’s the most important tool in detecting a problem loan?

Answer 1

Ongoing monitoring of the credit.

Question 2

Some early warning signs of company problems based on financial causes

Answer 2

• Late Statements
• Frequent Overdrafts
• Covenant Violations
• Late Payments
• Overadvances
• Deteriorating Trends

Question 3

Some early warning signs of company problems based on non-financial causes

Answer 3

• Deteriorating Supplier Relationships - late payments or partial payments to suppliers
• Management Issues
• Ownership Issues
• Industry Problems
• Economic Cycles

Question 4

Four basic methods for dealing with a problem loan once it has been identified:

Answer 4

1) Workout specialist or special assets group
2) Shared responsibility
3) Account manager - account manager stays with the account “no matter what” with no special assistance. This is the least desirable approach
4) Task force approach.

Question 5

What’s the first thing you should do at the sign of a problem

Answer 5

Do a complete documentation review

Question 6

You must review the following types of documents after recognizing a problem loan:

Answer 6

• Authority Documents - include borrowing certificates or resolutions and incumbency certificates. These documents tell you who is legally qualified to borrow and under what circumstances
• Security Agreements and Financing Statements
• Mortgages/Trust Deeds
• Assignments (Leases/Rents); Landlord Waivers
• Entity Verification
• Guaranties
• Loan Agreements

Question 7

Break-even Analysis

Answer 7

Step 1. Classify costs as fixed or variable.
Step 2. Determine variable costs (VC) as a percentage of sales.
Step 3. Determine contribution margin ratio (CMR).
CMR = 100% - Variable Costs
Step 4. Calculate break-even sales.

Fixed Costs / CMR = Break-even / Sales $

Break-even Units = Fixed costs / (Price per unit) - (Variable Costs per unit)

Question 8

Example of Break-Even Analysis

Answer 8

Example:
Break-Even Level:
$970,000 (Fixed Costs) divided by $3,000 ((P/Unit) – (VC/Unit)) = 323 Units.
$970,000 (Fixed Costs) divided by .30 (CMR) = $3,233,333 Sales Level.

Sales Level to Make a Profit:
$970,000 (Fixed Costs) + $50,000 (Profit) = $1,020,000 (Fixed Cost & Profit)
$1,020,000 (Fixed Cost & Profit) divided by $3,000 ((P/Unit) – (VC/Unit)) = 340 Units.
$1,020,000 (Fixed Cost & Profit) divided by .30 (CMR) = 3,400,000 Sales Level