1. 2013 RMA School of Commercial Lending

2. • Classifying Problem Loans
• Facts About Problem Loans
• Major Causes of Business Failures
• Troubled Industries
• Primary Cause of Loan Loss
• Financial Warning Signs
• Analyzing Problem Loans
• Objectives of the Workout Process

3. • Watch
• Special Mention (OAEM)
• Substandard
• Doubtful
• Loss
• Other Real Estate Owned (ORE or OREO)
• Non-accrual loans

4. • Incompetent Management (6th
“C” of credit)
• Lack of Managerial or Technical Expertise
• Ineffective/Inadequate Systems and Controls
• Neglect
• Lack of Performance Oriented Goals
• Failure to Consider Capital Requirements
• Product/Service “Life-cycle” Impact
• Disaster
• Regulatory Environment

5. • Residential Real Estate
• Mortgage warehousing/Hard money
• Look at Your Bank’s “Undesirable” Loan List
• Second and Third Tier Industries to RE
• Airline/Transportation
• Restaurants
• Hospitality/Golf/ Reliant of excess disposable
income
• Always be careful of the “bullet” loan

6. • Poor Initial Assessment of Risk
• Timidity
• Over lending
• Documentation Flaws
• Failure to Implement Approval Terms and Conditions
• Loans Granted to Bailout Other Lenders (Greater Fool
Theory)
• Failure to Obtain and Analyze Interim Financial
Statements
• Fraud

7. • Deterioration in the Borrower’s Cash Position
• Dramatic Change in the Mix of Accounts
Receivable and Inventory (watch your days on
hand)
• Revaluation of Assets on the Financial Statement
• Multiple Liens on the same bundle of assets
• Increased Sales and Decreasing Margins
• High Dividend Payout

8. • Request for Credit Restructures
• Debt Servicing Difficulties (late pays/ODs)
• Conversion of Trade Debt to Notes Payable
• COD
• Unpaid Taxes or Insurance (personal and
corporate)
• Rapid Growth in Plant or Equipment
• Mismatch in Asset Funding

9. 1. Document Review (including insurance)
2. Lien Search and Collateral Valuation (appraisal?)
3. Financial Analysis
*Does the core business generate positive cash flow before debt
service?
4. Related Debt Search
*Dealing with secured and senior position creditors
5. Evaluation of Operations
6. Evaluation of Financial Problems
7. Evaluation of Environmental Issues
8. Survivability Analysis
*Why is the company in financial difficulty and can that be resolved?
9. Initial Workout Plan
*Three basic options: 1) out of court “workout”; 2)Chapter 11
restructure; 3) liquidation

10.  Borrower Objectives
◦ Sale of Business or Project
◦ Maintain Control
◦ Survival
◦ Fending Off Creditors
◦ Recapitalization and Turnaround

11. • Lender’s Objectives
– Improve Collateral Position
– Improve Documentation
*Assignments *Jury Trial
*Doc Stamps and intangible tax *Insurance
*Covenant Compliance *Trusts
*Guarantor Consent *UCC’S
*Current Corporate Structure *Trusts
*Forbearance Agreements
– Elimination of Debtor Defenses
– Improve Pricing

12.  Consideration of All Available Options
 Must Be Able to Monitor the Plan
 Clearly Defined Objectives and Goals
 Flexible
 Based on Complete, Current and Accurate Data
 Should Allow for Re-documentation Prepared by
Legal Counsel

13. • Prejudgment Remedies
– Right of Offset
– Replevin (the recovery of collateral upon default; requires a
court order writ of replevin)
– Injunction (a writ granted by a court whereby one is required to
do or to refrain from doing a specified act)
– Attachment (allows creditors to seize personal property pre-
judgment ; generally used if debtor is in the process of or
about to fraudulently transfer or conceal property)
• Loan Sale
• Bankruptcy Considerations
• Foreclosure/ Repossession
– Deed in Lieu
– Assignment of Rents