The A-Zs of participations—from buying and selling to all things participation in between. Attendees joined speakers as they discussed topics of increasing your loan portfolio through participations, the risks of participations, servicing of participations, and all other things participations.

1. Didi, Frohardt, Baker Hill
Gus Staahl, Bank of North Dakota
Lindsay Wagner, Bank of North Dakota
Participations: The What, Why & How

2. What is a participation?
“An instrument which allows multiple lenders to participate or share
in the funding of a loan. The originating (lead) lender underwrites
and closes the loan, and [then] sells portions of the loan to other
participants...”
Callahan & Associates, “Loan Participation Program Manual,” June 2013.

3. Who is a participant?
“Participating institutions share in the funding of a loan, becoming
an ‘owner’ of a portion of the loan with all benefits of full
performance and, if non-recourse, all associated risks of loss—as if
the participant had originated the loan itself.”
Callahan & Associates, “Loan Participation Program Manual,” June 2013.

4. Bank of North Dakota
• The only state-owned bank in the nation
• Asset size as of 2018: $7B, with loans approx. $4.5B
• BND does not provide direct loans to borrowers other than a few
exceptions (student loans, some agriculture loans)

5. Why buy or sell participations?
• Buy
– Pricing strategy
– Increase loan volume
– Portfolio concentration
• Sell
– Bank exposure
– Liquidity
– Portfolio concentration

6. Participation risk management
• Participant in due diligence prior to approval
– Due diligence on the bank you are thinking about working with
• Meet with senior lending management
• Discuss credit culture
• Lending and administrative processes
– Due diligence on the specific credit request
• Borrower
• Credit request

7. Participation risk management
• Separate risk analysis
– Lead bank risks
• Multiple participants
• Approval process
• Managing credit and portfolios
– Loan policy guidelines
– Underwriting and credit quality
• Financial analysis
• Collateral valuation and position
• Ongoing loan performance

8. Participation risk management
• Loan loss reserve
– As if it’s your own debt
• Servicing fees
• Fees income sharing
• Costs sharing
– Typically workout situations

9. Participation risk management
• Loan servicing
– Sellers perspective
• Payments and fees
• Collateral
• Understand responsibilities for ongoing monitoring requirements
– Buyers perspective
• Pre-funding review
– All documentation
• Ongoing review
• Must be agreed to with lead bank
• Tracking of required documentation

10. Participation agreement
• Standard participation agreement
– Periodic buying or selling to institutions
• Master participation agreement
– Regular buying or selling to specific institutions

11. Participation agreement
• Participation agreement
– Parties involved
– Total loan amount and amount purchased
– Recourse provisions
– Pro rata
– Collateral position
– Rights and remedies for a breach of contract
– Servicing responsibilities
– Basis of revenue and expense distribution
– Loan documentation responsibilities

12. Baker Hill and risk mitigation
• Opportunities
– Credit request structure
– Attach key documents
– Approval
• Credit analysis
– Statement spreading
• Maintain statement spreads
• Reporting
• Exception tracking
– Documentation
• Documentation required for origination and ongoing analysis

13. Baker Hill and risk mitigation
• Loan accounting
– Mirrors the core accounting system for reporting and analysis
• Reporting
– Portfolio concentrations
– Exposures
– Documentation tracking
– CECL

14. Next steps to think about
• Participation appetite
• Specific participation credit policy
– Lender
– Credit underwriting
– Documentation
– Servicing
• Participation specific processes

15. Questions??

16. Thank you!
Didi.Frohardt@bakerhill.com