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In a town hall meeting last month, I asked Ken Parsons, Chairman of the holding company for Venture Bank and Director of the Independent Community Bankers of America if he thought the regulators needed to revise their guidelines for our current conditions in deciding what loans need to be ‘rated’ and for how long.

While Parsons said he did not have a problem with the way regulators were approaching challenging loans, I am guessing he and other bankers are happy to see the guidance coming out (for bankers and examiners) regarding loan restructures.

Loan workouts can take a variety of forms:

  • Simple renewal or extension of the loan terms
  • Extension of additional credit
  • Formal restructuring of the loan terms with or without concessions
  • Foreclosure on underlying collateral

Bank management should not be criticized…

Here is the part I think will be helpful. “Bank management should not be criticized for continuing to carry workout loans as long as they have:

  • A well-conceived and effective workout plan for the borrower;
  • Effective internal controls to manage the level of such loans;
  • Properly risk-rated the loan; and,
  • Properly considered such loans when determining the level of the ALLL.”

The guidance includes:

  • Elements of an effective Workout/Restructure Program
    • Collateral Valuation
    • Financial Information
    • Curtailment/Re-Margin
    • Loan Tenor and Maximum Amortization
    • Legal Documentation
  • Effects of Restructuring on Risk Rating Considerations

Financial Information

Of course this is what I keyed in on. I am going to include this section word-for-word.

“In most restructure loans, increased reliance will be placed on the guarantor for repayment. The bank’s analysis of the guarantor’s cash flow and liquidity needs to consider both actual and contingent liabilities.

Further, an analysis of the guarantor’s global cash flow should consider inflows, as well as both required and discretionary outflows from all activities. This may involved integrating multiple corporate and partnership tax returns, business financial statements, K-1 schedules and individual tax filings.

The analysis needs to specifically focus on “recurring’ ” cash flow, including projections of anticipated capital gains income when historical data reflects income to be capital-gain dependent. Anything short of a comprehensive global cash flow analysis diminishes confidence in the assessment of guarantor strength.

Global debt service analysis needs to include realistic projections of borrower/guarantor living expenses, including personal mortgage debt payments, real estate property taxes, state and federal income tax payments, other consumer debt payments and normal living expenses.”

A tool for Global Cash Flow

We have just issued our updated Global Cash Flow Analysis of Tax Returns Excel-based worksheets. If you need to handle complicated borrowers with multiple returns, this tool helps. Rich Shulmistra, a Commercial Underwriter with RBC Bank said “I used your Worksheet this week on a real estate developer with about 10 entities and am thrilled with the results!”

What do you think?

  • Is this guidance sufficient to bring clarity for the bankers and the examiners?
  • Did it go far enough?
  • Did it go too far?

Read the full article: Examiner Guidance for Appropriate Restructure and Risk Rating of Problem Real Estate Loans.pdf

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.