Credit Evaluation School, Sacramento, CA

Credit Evaluation School Sacramento, California July 15 – 19, 2019

Monday, July 15 8:30 AM

Introduction Loan Scoping Line Sheet Review

Lunch

Noon

Loan File Review

1:00 PM

- Ln File Review Exercise

Decision Strategies Loan Narratives Hand Out/Discuss Loan Deck #1

Adjourn

4:30 PM

Tuesday, July 16 8:30 AM

Loan Deck #1

Loan Discussions - Group 1 - Group 3

10:00 AM

Lunch

Noon

Loan Discussions - Group 2 - Group 4

1:00 PM

Groups 1 & 3 to submit: - Self-Evaluations

2:30 PM

- Loan Classification Grids - 5 Ps Write-Up

Groups 2 & 4 to submit: - Self-Evaluations

4:00 PM

- Loan Classification Grids - 5 Ps Write-Up

Adjourn

4:30 PM

Wednesday, July 17 8:30 AM

Review of Discussions Loan Write-ups Red Flags Hand Out/Discuss Loan Deck #2

Lunch

Noon

Loan Deck #2 Continued

1:00 PM 4:30 PM

Adjourn

Thursday, July 18 8:30 AM

Loan Discussions - Group 2 - Group 4 Loan Discussions - Group 1 - Group 3

10:30 AM

Lunch

Noon

Groups 2 & 4 to submit: - Self-Evaluations

1:00 PM

- Loan Classification Grids - Complete Write-Up

Groups 1 & 3 to submit: - Self-Evaluations

3:00 PM

- Loan Classification Grids - Complete Write-Up

Adjourn

4:30 PM

Friday, July 19 8:30 AM

Review of Discussions Quiz General Discussion Recap of Recap Questions

Adjourn

11:30 AM

Credit Evaluation School Sacramento, California July 15 - 19, 2019

Attendees California Department of Business Oversight Jaime Faigao

jaime.faigao@dbo.ca.gov yong-tae.kim@dbo.ca.gov mohit.lama@dbo.ca.gov

213-760-3674 213-435-3836 213-219-8375 213-435-3836 213-220-6209 916-206-9970 213-247-2452 213-435-3860

Yong-Tae Kim Mohit Lama

Qi Li

qi.li@dbo.ca.gov

Nicholas Moscalink

nicholas.moscalink@dbo.ca.gov venus.sharifi@dbo.ca.gov marine.terterian@dbo.ca.gov

Venus Sharifi

Marine Terterian

Mei Zhou

mei.zhou@dbo.ca.gov

Delaware Office of the State Bank Commissioner Jenny Board

jenny.board@state.de.us stacy.galvan@state.de.us

302-739-4235 302-739-4235

Stacy Galvan

Iowa Division of Banking Erin Brown

erin.brown@idob.state.ia.us austin.estlund@idob.state.ia.us justin.lee@idob.state.ia.us cody.schmitz@idob.state.ia.us cameron.schult@idob.state.ia.us megan.wiederin@idob.state.ia.us nicholas.wiemers@idob.state.ia.us

515-281-4014 515-281-4014 515-281-4014 515-281-4014 515-281-4014 515-281-4014 515-281-4014

Austin Estlund

Justin Lee

Cody Schmitz Cameron Schult Megan Wiederin Nick Wiemers

Kansas Office of the State Bank Commissioner Kevin Kreutzer

kevin.kreutzer@osbckansas.org phil.simon@osbckansas.org

785-296-2266 785-296-1687

Phil Simon

Nebraska Department of Banking and Finance Cassidy Stork

cassidy.stork@nebraska.gov

712-790-6032

Instructors Iowa Division of Banking Marty Lamb

marty.lamb@idob.state.ia.us paula.peters@idob.state.ia.us

515-281-4014 515-281-4014

Paula Peters

Ohio Division of Financial Institutions Bob Rusbacky

robert.rusbacky@com.state.oh.us

513-869-9208

CSBS Education Foundation Staff Kim Chancy

kchancy@csbs.org

202-802-9554

CSBS Credit Evaluation School Welcome

Paula Peters Marty Lamb Bob Rusbacky

CREDIT EVALUATION SCHOOL

Teach the 5 Ps of Credit

Provide you the tools to arrive at the appropriate classification decision

Improve your comfort level in the discussion setting

Goals

Provide guidance for clear and concise write-ups

EXAMINER ROLES

• Asset Manager (sometimes done by the EIC) – Obtains the loan download, watch list, past due report, and other miscellaneous reports from management. – Uses the ETS program to generate the loan scope – Manages the loan review process between bank and examiners – Tracks noted trends, violations, policy exceptions, etc. – Collects completed linesheets from examiners – Generates portfolio classification data, compares to bank identified information, etc.

EXAMINER ROLES

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

EXAMINER ROLES

Questions

LOAN SELECTION

Loan Scoping

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?

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

– Real Estate – Consumer

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

STANDARD REVIEW ITEMS • Previously Classified • Internal Watch List • External Loan Review • Past Dues – Delinquency Threshold – Files worked or discussed only • 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 • Nonaccrual • Restructured • Insider and Related- Interest • Participations

ADDITIONAL LINE SHEETS INFO • Charge Off Amounts • Overdrafts • Rejects/ Insufficient Items • Unadvanced funds to which bank is committed

LOAN SELECTION

QUESTIONS?

LINE SHEET REVIEW

LINE SHEET REVIEW • What does the line sheet contain? – The 6 “P”s of Credit: Remember • Person

• Purpose • Payment • Protection • Problem • Prospects

LINE SHEET REVIEW

• Bring old information forward –Has anything changed since last exam? –Same loans and collateral? –Any comments from old line sheet to bring forward? –How does old performance compare to new performance?

LINE SHEET REVIEW

• Any new loans? • New purposes? • Payment structure or sources different? • Collateral changed? • How has loan performed since last exam? –Check 30/60/90 days delinquency on alert! –Check for renewals, deferrals, extensions.

LINE SHEET REVIEW

QUESTIONS?

Loan File Review

What to look for in the File

THE 6 P’S OF CREDIT

• What are they? – P erson

– P urpose – P ayment – P rotection – P roblem – P rospects

PERSON • Name of borrower – who is responsible for debt – Individual – Partnership – General, Limited…. – Corporation – do individuals sign also, gty... • Occupation – match purpose of loan • Address – trade area or outside lending boundaries • Understand source of relationship if new

PURPOSE

• Legitimate • Permitted by board policy • Within the abilities of management • Where did proceeds go? – Boarding data sheets or closing statements? • Review any modifications or extensions for changes to the original purpose

PAYMENT

• Determine amortization – Do terms match the purpose? – Reasonable? • Do terms match the repayment source or cashflow of the borrower? • Primary and secondary sources of repayment should be identified – Guarantors, cosigners • Assess financial/operating needs, debt service capacity, performance, etc.

PROTECTION – Is the loan secured with collateral? – If so, what documentation perfects the collateral to our loan? –What is the value of our collateral, who valued it, how recently, and how did they value the collateral? –How often does management inspect the collateral?

PROBLEM –Has debtor performed as agreed –Any extensions, with or without collection of interest – Financial information –Personal or corporate statement – Tax returns, not proforma statements or projections

PROSPECTS

– Likelihood of continued performance via delinquency history – Financial information, including projections or proforma statements –Use all available information to make a risk rating decision on the credit

CREDIT MEMORANDUMS

Credit Memorandums Loan Presentations Annual Reviews

Serves as a roadmap to the loan file, indicates what is inside the file

CREDIT MEMORANDUMS • Listing and purpose of each loan • Terms of each loan • Repayment source of each loan • Detailed description of all collateral by note with valuation source and date • General comments about borrower’s current operation and any pending changes

CREDIT MEMORANDUMS • How debt conforms to policy parameters, if not, is it noted as an exception? • Strengths and weaknesses of borrower and operation including collateral coverage • Repayment capacity related to debt here and overall leverage

IDENTIFICATION OF BORROWER • Articles of Incorporation • Borrowing Authority (Resolution) • Certificate of Good Standing • Credit Report • Scoring Rating – Internal or External review. • Guarantys

PROMISSORY NOTES • Signed by all individuals who are and can be responsible – Individual, Comakers, Gty’s • Original balance • Purpose • Terms

SECURITY AGREEMENTS • Describe collateral and any proceeds of collateral • Location of collateral in detail • Gives lender right to dispose of collateral if default occurs • May contain loan covenants (agreements)

LOAN AGREEMENTS • Specifies exactly what the bank expects the borrower to perform • Specifies exactly when the bank expects the borrower to perform • Clarifies expectations of both parties, less gray area • Allows for negative covenants

PERFECTION OF SECURITY INTEREST 1. Financing Statements (UCC’s) for lien searches and perfection of... a. Inventory b. Accounts Receivables c. Machinery and Equipment d. Personal Property

PERFECTION OF SECURITY INTEREST

2. Real Estate / Oil and Gas Mortgages/Deeds of Trust a. Description of property b. Date filed. c. Name of Borrower matches promissory note. d. Title work/ insurance evidencing position in property.

PERFECTION OF SECURITY INTEREST

3. Titled Property

a. Lien Entry Form b. Vehicle Title c. Serial Number d. VIN Number

4. Possession a. certificates of deposits (assignment) b. bonds, stocks c. jewelry, artwork

COLLATERAL AND VALUATION

1. Timely Appraisal and/or Valuation a. Signed by individual b. Dated c. Basis of 2. Qualifications of Evaluator 3. Originating Officer disallowed from both 4. Meet Regulatory mandates

INSURANCE

1. In place / non-expired or continuing coverage 2. Sufficient to cover value of collateral 3. Bank named as Loss Payee 4. Management may require vendor single interest (VSI) – blanket policy

FINANCIAL INFORMATION

1. Timely 2. Audited / signed and dated by individuals 3. Include individual and affiliated operations 4. Tax returns rather than proformas by individuals/corporations 5. Should evidence the capacity to repay all indebtedness, not just the bank’s (cashflow) 6. Check for increasing amounts of credit card indebtedness (credit report)

OTHER DOCUMENTS • Payment history –PAA or delinquency problems • Extension documents –was interest capitalized or new debt added • Renewal forms – Normal amortization or restructured debt • File comment sheet by loan officer

LOAN FILE REVIEW

QUESTIONS?

DECISION STRATEGIES & LOAN CLASSIFICATION

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

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

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.

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. 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. 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. LOAN CLASSIFICATION DEFINITIONS

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

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 UNACCEPTABLE OR HIGH RISK LOANS

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

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

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

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

SOURCES OF REPAYMENT

CASH IS KING!

LOAN DISCUSSION

QUESTIONS?

LOAN WRITE-UPS

CRITICIZED VS. CLASSIFIED LOANS: • All four categories are considered as Criticized. • All but Special Mention are considered as Classified. – Special Mention – Substandard – Doubtful – Loss

LOAN WRITEUPS

• Rules for including a loan writeup in an examination report vary amongst regulators. – Management disagrees with examiner – Dollar amount represents a significant percentage of assets or capital – EIC discretion – Others

LOAN WRITEUPS

• The writeup format should cover the 6 Ps – Person

– Purpose – Payment – Protection – Problem – Prospects

IDENTIFICATION OF BORROWER • Name and/or title of borrower - Note if the borrower is an insider or related interest of an insider as defined by Regulation O, or state code if appropriate. • Nature of borrower (Individual, partnership, corporation, etc.)

• Nature of business or employment • Capacity in which individuals sign • Identify Cosigners, Endorsers, and Guarantors

• Note: The identification of the obligor can be in the heading of the write-up or in the written comments. It is also standard procedure to include the total balance of the debt above the heading, in thousands of dollars.

IDENTIFICATION OF BORROWER EXAMPLES:

1,200 ABC Corporation End: Alfred B. Cook, President/Owner Textile Manufacturer OR 1,200 ABC Corporation

– The corporation is in manufacturing and operated by the owner. All notes are signed and endorsed by Mr. Alfred B. Cook, president and owner.

DESCRIPTION OF DEBT • Original amount borrowed (per note or with notation of total original if renewals with reductions or combination of various notes) • Original Date (of note or line if renewals involved) • Original Due date/terms • Purpose of loan • Repayment source • Present balance

DESCRIPTION OF DEBT • Note: If any portion of the debt was previously charged-off or paid from liquidation of the collateral, this should be noted. • Past due status is applicable • Tie-ins -- Related debt/related interests • Note any specific reserve balances, if applicable

DESCRIPTION OF DEBT

EXAMPLES: • Debt consists of a $150,000 note

originating 1-20-x8 at the same amount due 1-20-x9. The purpose of the loan was to purchase the collateral to be repaid from maker’s income.

DESCRIPTION OF DEBT • Debt consists of two installment notes totaling $100M, due $500 each monthly, past due two payments each. The notes originated at $50M and $75M respectively. The purpose of both loans was for working capital and repayment was to come from income. The secondary source of repayment was from the guarantor, Mr. Johnson who has a NW of $1,300M as reflected in 6-30-x8 financial statement.

DESCRIPTION OF COLLATERAL • Type of Collateral – Example: Real Estate, Inventory, Accounts Receivable, Automobiles, etc.... • Location of Collateral if applicable (especially if out of trade area) • Appraised value or estimated value

DESCRIPTION OF COLLATERAL • Note if loan officer estimates the value higher or lower than the appraised value • Note if internal or external appraisal and date of valuation if it is pertinent to the classification • Specialized collateral or work in progress may need special consideration • Appraisal violations should be noted only, not restated

DESCRIPTION OF COLLATERAL EXAMPLE – APPRAISAL VIOLATION NOTED WITHIN WRITEUP • The appraisal does not meet the requirements for a Certified Appraisal. Refer to Schedule of Violations of Laws and Regulations elsewhere in this report of examination.

DESCRIPTION OF COLLATERAL

EXAMPLE – COLLATERAL DESCRIPTION

• Collateral consists of 2 AL with an AV of $100M (internal appraisal). The property is unimproved and zoned commercial.

DESCRIPTION OF COLLATERAL EXAMPLE - COLLATERAL DESCRIPTION • Collateral is listed as inventory and AR valued at $125M on the makers audited 12-31-x8 financial statement. Management indicated that the liquidation value would probably be $100M.

FINANCIAL EXHIBITS • Preparer - Internal, CPA (type), Other. • Term –Annual (Fiscal Year) – Interim • List major categories only –Note: Depreciation and Amortization should be footnoted on the operating statement

FINANCIAL EXHIBITS

12-31-x9 ABC Corporation (CPAAudited) Cash 100 AP

300 GP 4,000 200 COGS 3,000 500 NP 1,000 1,000 Op Exp 500

AR

1,000 CPLTD

Inventory 90 CL

CA FA NR TA RE

1,190 LTD 1,700 TL

2,000 NI

500

290 Capital 3,180 Surplus 980 Op Exp

100 Taxes 190 100 NIAT 310

NW 1,180 includes TL & NW 3,180 50 M in depreciation

FINANCIAL EXHIBITS Note Abbreviations: (CHECK INSIDE OF REPORT COVER) BALANCE SHEET AR - Accounts Receivable AP - Accounts Payable CA - Current Assets CPLTD - Current Portion of Long-Term Debt FA - Fixed Assets CL - Current Liabilities NR - Notes Receivable LTD - Long-term debt CSVLI-Cash surrender TL - Total Liabilities value life insurance UP/RE- Undivided Profits NW - Net Worth INCOME STATEMENT GP - Gross Profit COGS - Cost of Goods Sold NP – Net Profit NI - Net Income NIAT - Net Income After Taxes

CLASSIFICATION • Point out all of the reasons for classification – Marginal or Insufficient collateral – Poor or weak financial condition – Lack of a repayment plan – Past due status – Others?

CLASSIFICATION EXAMPLE – POOR OR WEAK FINANCIAL CONDITION • ABC Corporation’s 12-31-x9 audited financial statements reflected TA of $1,200M, TL of $2,000M, and negative NW of $800M. Also reflected was GP of $2,000M, COGS of $1,000M, Operating Expenses of $1,200M, and Net Loss of $200M.

CLASSIFICATION • Clear and concise reasons for classification • Accurate • Include management's response including any commitments • If the debt was classified at the previous examination, include the information - how classified, and at what amount.

CLASSIFICATION EXAMPLE – PREVIOUSLY CLASSIFIED • Debt classified Substandard at the previous examination in the amount of $150,000. Collateral remains the same.

CLASSIFICATION • Amounts secured by cash collateral not classified IF completely documented. – Assigned Certificates of Deposit – Assigned savings accounts with holds on the account – Listed securities with adequate documentation.

CLASSIFICATION EXAMPLE – CASH COLLATERAL EXCLUDED

• The $10,000 CD (certificate of deposit) assigned as collateral is deleted from classification, with the remaining balance classified Substandard.

CLASSIFICATION

• Government guarantys are also deleted from classification – Small Business Administration (SBA) – Farm Service Agency (FSA) – Others?

CLASSIFICATION EXAMPLE – GOVERNMENT GUARNATYS EXCLUDED • The $200M note is 90% guaranteed by the Small Business Administration. The guaranty is deleted from classification and the remaining $20M is classified Loss.

• Add a notation if any violations are noted and refer to that section of the report of examination. CLASSIFICATION

CLASSIFICATION

EXAMPLE – VIOLATION CITED ELSEWHERE

• This line is in excess of the bank’s legal lending limit. Refer to Violations of Law and Regulations section of this report.

GENERAL WRITEUP TIPS • Use the 6 P’s as a guide • Detailed vs. short form • Outline key points – keep it simple • Break up paragraphs (not one huge one) • Include management’s comments and any commitments made • Questions????

Credit Evaluation School RED FLAGS

Red Flags

Lack of a Structured Lending Format

Poor Oversight of Lending

Numerous Federal and State Violations Pertaining to Lending

Non-Compliance With Loan Policies and Procedures

Inadequate Credit Analysis

Red Flags

Failure to Detect Existing and Emerging Loan Problems

Collection Difficulties Reduces Quality Time in Servicing Remaining Loan Portfolio

Failure of Early Recognition of Losses

Borrower Delays in Providing Financial Information

Unauthorized Capitalization of Accrued Interest

Red Flags Loan Concentrations Excess Out of Territory Loans High Loan Growth Excess Off-Balance Sheet Items, i.e. Loan Commitments and Letters of Credit Trends in Local and Regional Economies

Red Flags

Ineffective or Lax Credit Underwriting on New or Existing Loans

Borrower is Frequently Overdrawn or Experiencing Cash Flow Difficulties

Evergreen Loans

Insider Transactions

Over-Lending To Individuals And Industries

• Lessons learned from the financial crisis showed that institutions that did not monitor concentrations and did not have limits in place suffered the most losses.

Inexperienced Loan Officers

• Ag loans, asset based lending and complex CRE loans require a certain skill set. • Loan officers who do not have the experience to properly manage their portfolio are at risk to make mistakes that could cause losses. • The AQ lead should obtain bios on new lenders. • A sample of an inexperienced lenders portfolio should be reviewed.

• Could be a red flag under several scenarios. • Institutions with understaffed lending may not have the time to adequately serve the needs of the existing borrowing customers and possibly agreeing to unprudent terms in order to retain customers. • Inadequate staffing of lending support functions could lead to inadequate credit underwriting or processing errors which could lead to losses.

Inadequate Staffing

• While all loans have inherent risk, certain loan types and/or structures have more risk than others and pricing should reflect such. • If an institution does not price loans based on risk it raises questions on the adequacy of the loan administration function of the institution and how well asset quality is managed

Loan Pricing May Not Reflect Risk

Incomplete Loan Documentation

• Not necessarily a problem if the loan pays as agreed. • If the borrower runs into problems and the bank wants to pursue legal action there could be problems in the courts if the documentation is not complete.

Numerous Instances of Lien Imperfections

• Not if a problem if loan pays as agreed, but if the bank needs to take legal action to get repaid the courts may not grant them the collateral if liens are not perfected.

Loan Officer Unfamiliar With Lending Policies and Procedures

• Typically we see this when there is an acquisition. • The loan officers from the acquired institution are not yet familiar with the lending policies and procedures of there new employer. • Always a good idea to pull a loan sample of the new loan officers to review their structure/underwriting practices.

• Typically seen when there has been some loan officer turnover and loan portfolios have been redistributed. • The new loan officer does not understand the relationship, an event occurs, and the institution is not prepared to deal with it properly. • To correct this, loan officer memos or other notes be kept available with the loan files so a new loan officer manager can be quickly informed on the relationship.

Lending Staff Do Not Understand Loan

Inadequate Loan Review Process

• Without an adequate independent loan review there are many loan related problems that can be ignored or missed by the lenders that could cause the institution losses.

• The addition of new loan products by an institution is not by itself a red flag. • The addition of new loan products without the expertise to properly underwrite and monitor the new products is a problem. • Specialized loan require the proper expertise to manage the risk inherent in those loans. This is a loan administration red flag.

New Loan Products

Lack of Collateral Inspections

• With certain types of lending, such as asset-based lending or where borrowing base guidelines are in place, there is a need to have regular collateral inspections. • Borrowing availability under the line of credit is tied directly to the value of the collateral. • In order to ensure proper collateral coverage ratios, the collateral must be periodically inspected and validated.

Annual Clean-up of Operating Lines of Credit

• This requirement is no longer typically seen in community banks offering lines of credit. • May still see this in larger more complex credits or with Ag lending. • It’s a problem in a situation where a portion of the line of credit balance becomes permanent working capital and is unable to be paid off with operating cashflow. • Banks many time will analyze the businesses cashflow and pull out a portion of the line of credit balance to term out over a longer time period to free up the line of credit availability.