are you prepared for the next generation of problem loans ...resources.gabankers.com/event agenda...
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Are You Prepared for the Next Generation of Problem Loans?? They May Already Reside on Your Balance Sheet!
J. Michael Allen, Senior Credit Officer State Bank and Trust-Atlanta, GA
404-266-4501 [email protected]
2017 Georgia Banking School
Troubled Assets – Course 218 May 11, 2017
ALL MATERIAL HEREIN IS WRITTEN BYTHE AUTHOR AND MAY NOT BE COPIED WITHOUT HIS OR HER WRITTEN PERMISSION. THE EXHIBITS SHOWN ARE PROPRIETARTY FORMS OF THE BANKS WHO GRACIOUSLY SUPPLIED THEM AND CANNOT BE COPIED OR USED WITHOUT THEIR EXPRESSED PERMISSION GBA AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES AS TO THE BINDING AND LEGAL EFFECT OF THE ENCLOSED EXAMPLES. PARTICIPANTS SHOULD CONSULT THEIR OWN LEGAL COUNCIL REGARDING ENFORCEMENT APPLICABILITY OF THESE DOCUMENTS.11111
Section 1 1
Section 1 2
Section 1 3
Relationship Driven Policy Governed Do You Know Your Customer Cash Flow Focused Pro-Active Ownership of Customers Healthy Skepticism Are Actions governed by Your Company’s Values Balance of advocacy & objectivity
What Is Your Institution’s Credit Culture? Is It:
Section 1 4
How does your customer make money? Use of your proceeds? How will you get paid back? What are the risks to repayment? Have I mitigated the repayment risks?
How Do You Lend Money
Section 1 5
Find a default trigger
• Loan maturity
• Payment default
• Covenant violation
Make a formal demand for payment ASAP
Take steps to find and to garnishee assets and/or sue for judgment
If you agree to waive default or re-set the loan:
• Use a forbearance agreement
• Include “waiver of claims” clause to hold harmless the bank
• Get additional collateral or guarantor support
Don’t cave in to a threat of bankruptcy
Five Practical Workout Steps and Tips
Section 2 6
Section 2 7
Request for restructure
Collateral over advances
Overdrafts
Late Payments
Tax problems - payroll taxes paid?
Conversion of trade debt to notes payable
Rapid growth in plant and equipment
What are the Troubled Signs to Look For?
Mismatched asset financing
No strategic plan or direction
High personnel turnover
Frequent accountant changes
Evasiveness of borrower
Non-compliance of loan agreement terms
Remember – The Debtor Knows More Than You!
Section 2 8
Documentation Review - What are you looking for? Do I tell all?
New lien search and collateral valuation - true liquidated value
Financial analysis
Related family debt search - why is this important?
Evaluate operational problems
Evaluate financial problems
Are there environmental concerns?
Can this borrower survive?
Decide what your plan is and execute
Analyzing the Problem Loan: A Nine Step Process
Tools to Help You Analyze the Problem
Site Visit
Section 2 9
Venue - your place or theirs? Pricing Amount Collateral Short term maturities Forbearance Agreements
Acknowledgement of debt by debtor and guarantors Release of lender liability claims Payments on the note Payment of forbearance fee Pledge of additional collateral Board approval or no
Your Weapons
FOCUS: The goal? Return OF my investment and not ON my investment!
Section 3 10
Is a workout the better path or is it better to liquidate?
Pre-work out letter
No agreements until put in writing
Go into negotiations with eyes open
No guarantees of a happy ending
Select the advisors of your choice
Workout Negotiations
Section 3 11
June 1, 2013 Ms. Ima Walker 1234 Missing Payments Road Walking, HM 22222
Re: Auto Loan 123456789 Dear Ms. Walker, Pay by Friday or walk. Sincerely, Your Banker Bankersville, USA
Section 3 12
Documentation flaws - can I fix them and in time?
Relationship history - “course of dealing” - How am I handling overdrafts?
Lender Liability Risks – Is there a basis for a claim?
Promising future or additional financing
Good faith and fair dealing - ethics
Am I obligated to additional financing
Control and interference
Breach of Fiduciary Duty
Fraud
Exercise caution in documentation – especially memos and emails
Is there anything that I should be afraid of (You do not know what you do not know!!!!)?
Use the sixth “C” – Common Sense
Participation Risk(s)
Collusion Risk
Miscellaneous Considerations
Section 4 13
Guarantor Defenses:
Release of principal guarantor
Release of co-guarantor
Change in terms and proper disclosure
Lender fails to follow loan agreement
Lender fails to dispose of collateral in commercially reasonable manner
Guarantees
Section 5 14
Construction Draw
15
Fund Control
16
Challenge: Most Construction contract defaults are payment related!
Funds Control Continued…
17
Program should include: Review of monthly GC pay application request
The collection of invoice support
Audit of each line item of the draw request, matching the percentage completion to the appropriate invoice
Rapid and accurate distribution of draw proceeds upon approval
Change order tracking
Lien waiver collection
Maintenance of records
Audit support
Don’t let this…..
18
Reflecting on Recent Times Today
SO….ARE THE BEST TIMES BEHIND US?
WILL OUR PORTFOLIOS SEE MORE QUALITY EROSION?
IF SO….HOW HIGH WILL THE NEGATIVE STATICS GO?
IS IT POSSIBLE TO REPEAT THE PAST??????
Section 6 19
Reality Check – Are We Repeating the Past
Past Lessons Learned/Credit Management
Due Diligence is key and must be commensurate with the credit size and risk. We must be independent and not rely on the deal sponsor or other parties to the transaction. Financial modeling is not due diligence
Our Analysis and Focus must go beyond the Financial aspects and into Operating and Industry issues
Historical performance is far more important in making an underwriting decision. Projections while appropriate, should not drive the credit decision, and can be misleading
Yield cannot compensate or justify excessive Credit Risk
Valuation/Values are not static and therefore our analysis should take into account all scenarios (good or bad). Since we rely on value for fallback, the valuation assumptions should be from a “buyers” point of view and presume and unplanned sale
Analysis of Financial Risk and Debt Service capability must take into account the whole debt/capital structure not just our position in the credit
Section 6 20
Past Lessons Learned/Credit Management Continued
While Lack of Syndication ability may mean that the credit risk is potentially unwarranted, Subscription demand does not always mean that the credit is a prudent one
Micro management of credit and the loan Portfolios cannot save us from inordinate loan losses. Overall Portfolio Management including limits in size, diversification, concentration, exceptions, RR profile, etc. are necessary to long term success in credit
Excellent Credit Administrative and Loan Review processes are limited in terms of risk of loss reduction where Fallback/Alternatives at the outset were weak
In the long run, Excessively Large Credit Exposures cannot be justified, particularly in cases where Fallback, Asset Coverage and Cash Flow are variable and out control of risk is limited
There is not substitute for Real Equity
Understanding the total liability/creditor exposure is mandatory (off balance sheet debt)
Getting Secured and acting early is key to loss avoidance, most likely when beliefs are positive
Reality Check – Are We Repeating the Past
Section 6 21
Past Lessons Learned/Credit Management Continued
Cash Flow is King…Covenants and Structure don’t repay the loan
Over-reliance on “Relationship” can lead to imprudent credit risk, and loss of loan dollars and the relationship
The 4C’s of Management (capacity, character, competence, cooperativeness) are essential and as critical as the primary source of payment
Reality Check – Are We Repeating the Past
Section 6 22
Past Lessons Learned/People Management
Credit Risk Taking needs to be balanced and measured against our Lenders – their skills, capabilities and limitations. Training and communication is essential
Independent & Objective Credit thinking is unbeatable over time Incentives should not be based solely on loan production, but also include credit quality and
risk management activities
Portfolio Growth & Officer Growth must be in harmony
Ignorance and Lack of Action are the biggest enemy in PLM
Accountability for Pro-Active Risk Management needs to be at the individual and corporate level
The repatriation of SAD/Credit Officers to Line and vice versa has great benefit over the long run
A Strong Problem Loan Management Function Capability should not be viewed as optional or secondary
Reality Check – Are We Repeating the Past
Section 6 23
Clearly, We Are Smarter & Better than Yesteryears
BUT
Looks Like We Have Made Some of the Same and Maybe Some New Mistakes
WHY?
Reality Check – Are We Repeating the Past
Section 6 24
Outlook and Avoiding the Past
Being A Winning Lending Institution
The Winners are those that will: Have Culture and Discipline to Apply the Risk Management Tools & Lessons Learned, (particularly
the Portfolio Management Level)
Read the Warning Signs Early – At the Individual and Portfolio Level
Cull out the Winners from the Losers Early – Migration Analysis
Be Pro-Active in Managing High Risk Assets – Sense of Urgency
Think like “Traders” and not be afraid to Sell Risky or Known Problem Assets
Be Brutally Honest and Thorough on the Origination and Review of Credit (DO NOT “SELL” CREDIT TO APPROVAL AUTHORITY) Stay within their Lending Capacity and Competencies Staff Properly and Arm their Officers with the Knowledge, Tools and Support
Section 6 25
LET US REMEMBER……………
“Those who Forget and Fail to Learn from the Past are Condemned to Repeat It”
and
“It’s a Person’s Ignorance that gets Them Into Trouble and Their Arrogance that Keeps Them There
Bad Loans – Have We Really Learned From Our Past Mistakes?
Section 6 26