Chuck Nwokocha is a senior risk management consultant presenting on enhancing credit quality at financial institutions. He discusses the importance of strong policies, processes, and lending staff (the 3 P's). He then covers various credit analysis tools like the 5 C's of lending and global cash flow analysis to standardize underwriting. Nwokocha notes examiner concerns around commercial and industrial lending include risk rating systems, asset quality, and thorough documentation. He emphasizes policies, ongoing reviews, and global cash flow analysis for managing credit risk.

1. Presented by:
Chuck Nwokocha
Senior Risk Management Consultant

2. 


Financial information company that provides credit
and risk management solutions to financial
institutions
Data and applications used by thousands of
financial institutions, corporations and accounting
firms across North America
Awards
 Named to Inc. 500 list of fastest growing privately held
companies in the U.S.
 Named to Deloitte’s Technology Fast 500

3. Chuck is a graduate of Harvard University, with a
B.A. in Psychology with a focus in Organizations
and Economics. He began his professional career
with Guardsmark, a private security services
company where he held various positions and
responsibilities – in operations, human resources,
and sales, and management. He has founded two
e-commerce sites, Ndekanyi.com – a social
networking site for the Igbo people and SwapU.com
– a college classifieds network. Additionally, he has
consulted on marketing, social media, and usergenerated content.
Chuck Nwokocha
Senior Risk Management
Consultant
At Sageworks, Mr. Nwokocha is an expert credit &
risk management consultant helping financial
institutions manage their loan portfolio , focusing
on the Allowance for Loan and Lease Losses (ALLL),
Stress Testing, Credit Analysis, Risk Rating, , and
Loan Administration management. With subjectmatter expertise, he helps financial institutions
understand and comply with federal accounting
guidance.

4. Enhancing Your Credit Quality
1. 3 P’s: Policies, Process, People
2. 5 C’s
a. 5 C’s of Credit
b. 5 C’s of Data Collection
c. Credit Risk Modeling
3. Considerations for Underwriting
a.
b.
c.
Documentation for Underwriting
Considerations for Underwriting
Tools for Analysis
a.
b.
c.
d.
e.
Loan Portfolio Composition
Loan Growth by Loan Type
Survey Results
Emerging Trends
Important Ratios in C&I
a.
Examination concerns with C&I
4. Lending Environment
5. Examinations
6. Bankers’ Advice
4

5.  Policies
 Sound underwriting
 Process
 An efficient, balanced approval process
 People
 A competent lending staff

6. 
Refers to a particular way in which something is done
Certified mail
must be delivered
to X-person.
Mail/delivery requiring
signatures must be
signed by a VP
Outgoing mail to IRS
must be delivered with
a confirmation receipt
 Provide the framework for the bank’s lending activities
 Set the standards for portfolio composition, individual credit
decisions, fair lending, and compliance management
 Supplemented by more detailed underwriting standards,
guidelines, and procedures

7. 
Refers to a way of doing something
Mail gets delivered
every day.
When the mail is
delivered, it is sorted.
The sorting is determined
by dept and purpose for
each piece
 Establishes the lending process
 Assigns accountability and establishes the responsibilities of
the people involved

8. 
Refers to the individuals executing the process
A competent lending staff

9. Tools
Policy
Provide the framework for
the bank’s lending
activities. Sets the
underwriting standards for
the credit decisions
Process
Policy establishes the
lending process and
the responsibilities of
the people
People
The individuals
executing the
process
The Tools used in
the execution of the
process
Training
Knowledge/ skills
required to execute
the process and use a
procedure
The lending staff, with the knowledge and skills, utilizing various tools, arrive at
quality loan decisions.

10. 
Capacity
 Measures a borrower’s ability to repay a loan by comparing
income against recurring debts
 Can the borrower generate adequate cash to repay the loan?

Capital
 Refers to the net worth, or equity, of a business
 Is the borrower adequately capitalized within industry standards
to withstand unexpected loss?

Conditions
 The economic, industry, and market environment can and will
change; the state of the borrower or the state of the economy
 Is the borrower flexible enough to adapt?

11. 
Collateral
 Helps secure the debt.
 Is there an alternative source of repayment in case the primary
source fails?

Character
 Personal integrity of business owners and officers
 Is management willing to repay the loan and will it attempt to do
so under adverse conditions?

12. Credit Risk




Determining risk factors
Understanding credit quality (risk grading/risk
rating)
Likelihood that a business/borrower/relationship
may default on its financial obligations
Model should account for different types of loans
as well as industries (diff industries require diff
capital structures)

13. Global Cash Flow Analysis

A complete picture of the
financial condition of a
small business requires a
careful review of income
statement and balance
sheet information for
both the guarantor and
the business. Personal
assets are often pledged
against the debt of the
business, and business
and guarantor financial
assets occasionally are
intertwined.

14. 


It’s common for owners to
lend personal funds to, or
borrow funds from, their
businesses.
It’s common for the business
(for tax advantages,
primarily) to rent its
office/warehouse/production
facilities from a real estate
holding company or
partnership controlled by the
business owners.
It’s common for owners to
control their own levels of
salaries, bonuses, benefits,
and dividends to the extent
allowed by prudence and tax
regulations.

15. Annual Reviews


Set a minimum review period that allows continual and
regular monitoring and reassessing of risk
The reviews will lead to early identification of deteriorating
conditions
Trend Analysis



Companies rarely remain in a static condition
Cash flow cannot be the only determinant
Credit analysis is much too complex to rely on just a single
indicator

16. 700
600
500
400
Growing Business
Deteriorating Business
300
200
100
0
2007
2008
2009
2010
2011
2012
A look at the trend is critical in determining if the business in growing or deteriorating.

17. Caliber
 Refers to the quality of the financials provided. What types of
financials?
- Audits
- Tax Returns
- Reviews
- Company prepared
- Compilations
Complete
 Are all of the forms/ schedules present? Did the borrower provide
debt schedules?
Consistent
 Are the financials consistent? Did the borrower provide
compilations one year and tax returns another year?

18. 
Current
 Did the borrower provide the most recent financials?

Conversation
 Conversations with the borrower(s) help to cover those
gaps in information as well as provide supplemental
explanation or lend additional insight

19. 1. Financial information – used to establish repayment capacity
A. Business financials
-Current and historical income data, balance sheet
-Balance sheet, income and cash flow projections
-Comparative industry data when appropriate
B. Guarantor financials
-Guarantor support and related financial information
-Summary of borrower and affiliated credit relationships
2. Collateral identification and valuation
-Collateral agreements and appraisals

20. 3. Loan structure information
 Loan terms, including tenor and repayment structure
 Pricing information, including relationship profitability data
4. Loan agreement
 Covenants and requirements for future submission of financial data
 Exceptions to policy and underwriting guidelines
 Promissory notes, note guarantees
5. Supplemental Information
 Information fields to capture data for concentration reporting, identifying
SNCs (Shared national credits) etc.
 Risk rating or recommended risk rating

21. 





Understanding financial statements and the significance of
the ratios requires both skill and time
Translate financial numbers into meaningful assessments of
company’s financial performance
Tackle these complex sets of information, condense the
information into digestible chunks
Utilize software, such as the Sageworks Analyst solution
To input the information, to spread it into a consistent and
standard format, and generate an analysis of the ratios
Concentrate on the key aspects of liquidity, leverage, and
cash flow, using ratios, trends, and industry analysis to study
them

22. Business(es)
Personal
Guarantor(s)
Real Estate
Real Estate
Eliminate Double-Counting
Sageworks Analyst™
Global Cash Flow
22
TruGlobal™ Credit Analysis
• Standardize cash flow analysis
• Improve accuracy

24. Sageworks Analyst™
TruGlobal™ Credit Analysis
• Standardize cash flow analysis
• Improve accuracy

25. Sageworks Analyst™
TruGlobal™ Credit Analysis
• Standardize cash flow analysis
• Improve accuracy

26. Sageworks Analyst™
TruGlobal™ Credit Analysis
• Standardize cash flow analysis
• Improve accuracy

27. Sageworks Analyst™
TruGlobal™ Credit Analysis
• Standardize cash flow analysis
• Improve accuracy
Combines multiple businesses,
people and properties to view global
cash flow and debt service numbers
Eliminates double-counting
Accurately
assesses impact
to Debt Service
Coverage Ratio

29. 
C&I loan competition intense and increasing

C&I and loan underwriting standards easing

Net easing for 8 consecutive quarters.
CRE lending standards easing, but credit supply
relatively tightened in 2012
 C&I loan rate spreads decreasing




60% of bankers surveyed report ↓ spreads for loans to larger
businesses.
46% of bankers surveyed report ↓ spreads for loans to small
businesses.
Regulatory authorities increasing exam scrutiny of
C&I lending practices

32. Source: Federal Reserve Board “Senior Loan Officer Opinion Survey on Bank Lending Practices,” May 2013.

33. 
Longer terms with lower payments
 15, 20, 25, & 30 Year Amortizations
 3, 5, 10, 15 Year Fixed Rates



Fully amortizing; no balloons or calls
Preference for Owner-Occupied Properties or
Investor Properties
Full collateral coverage not required
 Preference for up to 75% Loan to Value (LTV)

Minimum 1.25 DSCR

Personal Guarantees
 Full and unlimited personal guarantees from all owners of 20%+

34. 
Key Drivers of cash flow
Sales (Revenue Growth)
Gross Margin
Accounts Receivables
Accounts Payables
Inventory Days
S, G & A (Selling, General, & Administrative Costs) – better
known as overhead.
 Capital Expenditure







35. 
Liquidity ratios




Current ratio
Quick ratio
Working capital
Leverage ratios



Debt service coverage
Interest coverage ratio
Debt to Equity Ratio
Efficiency ratios





Accounts Receivables days
Accounts Payables days
Inventory days
Profitability ratio

Gross Profit and Gross Profit Margin

36. 
Inexperience with business entities



Global cash flow analysis methodology



Financial data: what to collect, when
Industry specifications: what is normal for a particular industry
Move from collateral to cash flow analysis
Avoid double-counting, while recognizing intermingled income
and debt
Inadequate strategic planning


Policies & procedures account for C&I
New risk appetites

37. 1.
Re-evaluate concentration limits and risk appetite
2.
Review Underwriting Policies
3.
Train personnel, the board
4.
Invest in technologies
5.
Hire appropriately
6.
Look outside the institution (potentially)

38. 
Asset quality is a huge area of focus by examiners

Main criticism areas included:

Risk rating systems

Higher rates of delinquent and non-performing loans

Loan reviews that weren’t completed annually or were inconsistent

Quality issues related to the financial institution’s growing pains,
the overall economy or continued real estate devaluation

39. 
Many comments relate to documentation of loan
files, tracking information and global cash flow
analyses:

“Document everything, even if you think it’s trivial.”

“Make sure all info is current.”

“Be on top of flood insurance and exceptions.”

“Document EVERYTHING.”

“Calculate twice, print once.”

“Focus on global cash flow and asset verification.”

“Policies should be written and followed.”

40. 
Bankers mentioned thorough documentation as a
benefit. Among some other pieces:



“Our exam did have some former OTS examiners, and there was
definitely a different approach taken by them. The lead reviewer
had to focus them on the areas that really needed evaluated. They
were picking on things in the file that were five years or older that
were irrelevant to the credit risk today.”
“Need to remain patient and carefully explain Bank’s position.
Prudently point out differences of opinions. Ask for clarification of
criticisms.”
“Dinged for little things; need more documentation; did not like
missing documents in loan files; better analysis.”

41. Presenter Contact Information:
Chuck Nwokocha, Sageworks
(919) 851-7474 ext. 637
chuck.nwokocha@sageworks.com
www.sageworksanalyst.com
Next Webinar:
Loan Workout 101 for Financial Institutions
Thursday, September 12, 2:00 PM EDT
http://web.sageworks.com/loan-workout-cooley/