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