Environmental Survey

Wow, this is going to be a tough year in the instruction venue!  The nearly simultaneous introduction of Higher Priced Mortgages (TILA) and guaranteed GFE’s (RESPA) make this challenging enough for the Compliance Institute attendees, Annual Conference participants and the many audio/video listeners and viewers.
 

But one program that I am looking forward to is the ICBA Lending Conference May 17-18 in Minneapolis for senior management and lenders.  I have the opportunity to be part of a four person instruction team trying to make some sense of the current credit crisis and the opportunity it may represent.  I’ll be speaking fourth, similar to my usual position on the golf tee, behind some real heavy weights.  Here is a quick summary of my portion of the panel’s message.   I don’t gamble in Las Vegas but I would share with you my tactics at the credit table as follows:

Know your bets – Lock up expectations about your current borrowers for management, regulators and auditors.  This means clearing as many doubts about borrower capacity and covenant compliance as is possible.  Last year’s regulators didn’t question assumptions about tenant levels and actual cash flow but this year’s examination could see classification of borrowers without current leases, quarterly statements and frequent site inspections.  Don’t have time for all borrowers, then focus on your marginal credits, rehabbers and chattel secured lines.  Consider these minimums:

• Site inspections with current costs to finish and pictures for all rehab or construction real estate over a threshold.
• Update those balance sheet based valuations of equipment with current evaluations from a third party or reliable pricing source
• Monthly site inspections for dealer financing lines.  Establish curtailments and stick to it, either requiring payoff or separate amortization for non-qualifying assets. 

Pass – Don’t hesitate to make the critical determination, push the marginal credits to Watch or Substandard and conduct your FAS 114 analysis conservatively.  This allows you to recognize your exposure, measure it timely and proceed with the development of action plans to monitor monthly or quarterly.

• Be aggressive with labeling credits FAS 114 Impaired.  It could be to your advantage because once analyzed for impairment, there should be no further general allowance for that credit under the FAS 5 portion of your ALLL.
• But be realistic with your FAS 114 impairment analysis.  That 2006 appraisal is likely overvalued so consider the average market decline since that period, apply that margin and then apply a factor for a distressed sale (10%) and cost of sale (7% - 10%).

Double Down – Sure, while the dentist turned real estate developer is a certain adverse classification, many of your borrowers are likely seasoned property managers, business professionals or long-term borrowers who have managed through a number of economic cycles.  Continue to bank these winners with prudent underwriting and terms. 
 

Best regards,

David Bequeaith