BANKING EXAM 4
Loan delinquency rates have remained _____ historical norms for real estate and consumer loans with high single-family residential mortgage charge-offs.
Above
Loan performance varies
Amongst types of loans
Loans to individuals are greatest for banks with more than ____ in assets
$1 billion
Real estate loans:
- Construction and Development Loans - Commercial Real Estate - Multi-Family Residential Real Estate - 1-4 Family Residential - Home Equity - Farmland -Other Real Estate Loans
Loan Commitment or Line of Credit
- Formal agreement between a bank and borrower to provide a fixed amount of credit for a specified period - Customer determines the timing of actual borrowing.
UBPR Classifications:
- Real Estate Loans - Commercial Loans - Individual Loans - Agricultural Loans - Other Loans and Leases in Domestic Offices - Loans and Leases in Foreign Offices
Measuring Aggregate Asset Quality
1. Ability to repay debts varies with changes in employment and net worth. 2. Concentration risk 3. Country risk
Credit Analysis Practices
1. Collect information for the credit file. 2. Evaluate management, the company, and the industry in which it operates. 3. Conduct a financial statement analysis. 4. Project the borrower's cash flow and its ability to service the debt. 5. Evaluate collateral or the secondary source of repayment. 6. Write a summary analysis and make a recommendation.
largest single loan category for all banks
real estate loans
The loan is self-liquidating if:
repayment derives from sales of the finished goods that are financed
Land development loans finance
road and public utility construction in areas where developers plan to build houses which are typically repaid as lots or homes are sold
when determining working capital financing needs, firms should assess
seasonal patterns in inventory, production, sales and receivables collection
Centralized underwriting uses a relationship manager (RM) who
sources new business and manages existing relationships
A positive (affirmative) loan covenant indicates
specific provisions to which the borrower must adhere
Construction loan is ____ when builder does not have a commitment.
speculative
Regulators want banks to engage in ______ activities only through separate subsidiaries.
speculative real estate
The internet has led to smaller spreads for
standardized loan products
Credit analysis procedure includes a
subjective evaluation of borrower's request and detailed review of all financial statements
Seasonal working capital loans finance a _____ _____ in net current assets above the permanent requirement.
temporary increase
Mortgages can be conventional or insured by
the Federal Housing Authority (FHA) or Veterans Administration (VA).
Historical charge-offs and past-due loans might understate (or overstate) future losses depending on
the future economic and operational conditions of the borrower
When bank's claim is superior to that of other creditors and the borrower
the security interest is perfected (requires borrower to sign security agreement assigning collateral to the bank OR bank obtains title to asset)
Gramm-Leach-Bliley Act (1999)
allowed for commercial banks and savings institutions to enter into the merchant banking business
Regulators define a loan concentration as
any exposure that exceeds 25% of capital
Since 2013, both credit card charge-offs and foreclosures from bankruptcy filings
appear to have fallen to their long-run historical averages.
Position limits are
maximum allowable credit exposures to a single borrower, industry, or geographic local
Permanent working capital need =
minimum level of current assets - minimum level of current liabilities.
The loan is seasonal if:
need arises on a regular basis and cycle completes itself within one year
As their primary source of revenue, many large institutions focus on
noncredit products and services
Late 1980's and early 1990's saw dramatic increases in
noncurrent loans in all categories
noncurrent loans
past due 90 days or more and still accruing interest
Interim loans provide financing for a limited time until
permanent financing is arranged
Secondary mortgage market involves trading
previously originated residential mortgages
Bank should effectively market and
make customers aware of products and services
Today's use of credit scoring and loan securitization puts
additional pressure on interest rates
Loan agreement formalizes
loan purpose, terms, repayment schedule, collateral, covenants and conditions for default
Relative to smaller banks, larger banks have on average reduced their dependency on
loans
Net losses (net charge-offs) are
loans charged off minus dollar amount of recovery
Commercial risk anaylsis:
1. What risks are inherent in the operations of the business? 2. What have managers done or failed to do in mitigating those risks? 3. How can a lender structure and control its own risks in supplying funds?
Credit card banks reported the highest ROAs and charge-off rates in
2013 (due to high credit risk and interest rates average ROA of 250 and 150 basis points higher than commercial and consumer lenders)
One measure of working capital loan needs =
= (number of days' deficiency between cycles) * (the firm's average daily cost of goods sold)
Seasonal working capital needs =
= the difference in total current assets and adjusted current liabilities less permanent working capital needs
Loans, including problem loans, vary with the
Business cycle
the process of marketing bank services to existing and potential customers
Business development
Five C's of Good Credit
Character Capital Capacity Conditions Collateral
Five C's of Bad Credit
Complacency Carelessness Communication ineffectiveness Contingencies Competition
Banks perform ____ on each loan request
Credit analysis
Loans typically exhibit the greatest
Credit risk
Businesses must invest in _____ to operate.
Current assets
Secondary mortgages can be sold
Directly or packaged into mortgage goods
Loan Review
Effort directed at reducing credit risk, problem loans, and liquidating assets of failed borrowers
Ability to repay debts varies with changes in
Employment Net worth
Risk Rating Loans
Evaluating borrower and loan characteristics to assess likelihood of default and loss in the event of default
Concentration Risk
Exists when banks lend in a narrow geographic area or concentrate their loans in a certain industry.
Prior to the financial crisis, many loans were
made to borrowers who were unable to repay them
make up a significant portion of the smallest banks' loans
Farm-related
Working capital tends to _____ over time.
Fluctuate
Loan policy
Formalizes lending guidelines that employees follow to conduct bank business
As more lenders originate these loans, credit ____ and interest rates _____.
Increase, decrease
Other loans and leases are only significant at the
Largest banks
Residential Mortgage Loans:
Legal document through which borrower gives lender a lien on real property as collateral against a debt.
formally review larger loans
Loan committee of bank's senior loan officers
In most industries, cash-to-cash asset cycle takes _____ than the comparable current liability cycle.
Longer
Credit philosophy
Management's philosophy that determines how much risk the bank will take and in what form.
the normal starting point for any business development effort
Market research
Commercial real estate is highest for
Mid-sized banks
Banks sell most fixed-rate ____ they make and prefer to hold ______ on their books.
Mortgages, adjustable-rate (ARM) loans
Historically, commercial banks have been prevented from owning ______ except for their corporate offices or property involved in foreclosure
Real estate
Country Risk
Refers to the potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments
_____ contribute the largest amount of real estate loans for largest and smallest banks
Residential 1-4 family homes
Commercial real estate loans are generally ____ loans
Short term
Problem loans require special treatment
Terms may need to be modified and additional collateral and or guarantees may be required.
Credit culture
The fundamental principles that drive lending activity and how management analyzes risk
Home equity loans are
Usually shorter-term than first mortgages and have a subordinated claim to first mortgage.
If financing needs are short-term, _____ loan is appropriate.
Working capital
a takeout commitment is an agreement where
a different lender agrees to provide long-term financing after construction is finished
HELOC
a home equity line of credit that are similar to direct credit lines and borrower can access funds up to the limit for any purpose
Home equity loan
a second mortgage secured by real estate so interest payments are tax deductible
second highest concentration of loans at commercial banks
commercial and industrial loans
Construction loans are interim financing on
commercial, industrial, and multi-family residential property
During a loan review,
committee audits loans to verify acceptability. if problems are found, corrective action is initiated.
Commercial real estate loans:
construction and real estate development, land development, and commercial building construction and land development loans
Loan review should be kept separate from
credit analysis, execution, and administration
Seasonal loans often open
credit lines where lender makes funds available for a set period of time (often used to fund build-up to new level of permanent working capital or seasonal needs found to be permanent)
Company's net working capital =
current assets - current liabilities
Different types of assets and off-balance sheet activities have
different default probabilities
Firms should try to raise these funds with
equity or long-term debt with excess working capital, requirements financed with short-term credit.
Credit analysis
essentially default risk analysis in an attempt to evaluate borrower's ability and willingness to repay.
Business development is the responsibility of
every bank employee
using aggregate quality data it is
extremely difficult to assess individual asset quality
Credit specialists make the
final loan decision
A negative loan covenant indicates
financial limitations and prohibited events
_____ loans create negative funding GAP for most institutions.
fixed rate 1-4 family residential mortgage loans
Quality borrowers have access to
funding sources other than depository institutions
Cash-to-cash liability cycle measures
how long a firm obtains interest-free financing from suppliers in the form of accounts payable and accrued expenses to help finance the asset cycle
Cash-to-cash asset cycle measures
how long firm must finance operating cash, inventory and accounts receivables from the day of first sale.
Credit card charge-offs and foreclosures from bankruptcy filings tend to
increase during economic downturns decrease when economic conditions are strong
Informal credit lines not
legally binding but represent a promise the lender will advance credit
Formal credit lines are
legally binding even though no written agreement is signed
second step in business development
train employees on products and communication with customers