Pub. 1 2012 Issue 3

22 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s F OR MANY OF US, THE NUMBER OF BORROWERS keeping us up at night has stabilized or begun to trend posi- tively. With this framework in mind, we turn our attention to existing borrowers and new commercial lending opportuni- ties. Now is a good time to look at several easy-to-implement practices that can help more quickly identify a potential credit problem and offer better understanding of existing borrowers. Real Estate Borrowers Often the only information received from many real estate bor- rowers is their tax returns. While often adequate for general monitoring purposes, with more and more borrowers filing tax return extensions, the need for updated financial information prior to receiving the tax return can be critical—and we have found that many real estate borrowers don’t prepare interim financial statements. For this reason, you should consider the following: Rent rolls – A detailed rent roll can provide good information regarding current revenue being generated by the property, pending va- cancies, occupancy trends, etc. When we review rent rolls, we compare the rents to previous periods and the levels used in the appraisals, and we use the information to provide an indicator regarding occupancy stability with the property. Property portfolio worksheet – This worksheet provides a com- prehensive list of properties owned by the borrower with information on property type, market value, mortgage balance, monthly payment amount, insurance, real estate taxes and net operating income for each property, as well as debt service coverage. The worksheet provides information regarding which properties are performing well and can facilitate a global repayment analysis on the borrower. Property inspections – Lenders should visit properties routinely to observe their condition and take pictures for that property’s file. Items identified during property inspections, including deferred maintenance, general condition of the property and grounds and activity at the property, all are helpful in monitoring the current condition of the bank’s collateral and can be an early warning sign of issues with the property. Commercial & Industrial Borrowers Spreading of financial statements & review – Banks often require frequent interim financial statements that can be found in the credit file; however, this is where the monitoring process can break down. The financial statements often are not spread on the financial statements’ spreading software, and there may be little evidence the statements have been reviewed. By spreading the statements, a ready comparison can be made to previous periods’ results and current year projections. A review can prompt questions for the borrower to understand the drivers behind the numbers before a payment issue is apparent. Review of loan covenants & their compliance – Borrowers often are required to maintain a specific level of debt service coverage, work - ing capital or net worth or have limits on the level of capital. While the use of covenants is encouraged for many borrowers, strong monitoring and testing for compliance of those covenants is often lacking in many banks. We recommend the covenants be included in a tickler system with dates and specific triggers for monitoring the covenant compliance. Farm & Agricultural Borrowers Crop & livestock inspections – Similar to property inspections for real estate borrowers, regularly inspecting crops and livestock can provide valuable information regarding the number of acres planted with certain crops, the number of animals in a specific pasture, etc. Comparisons can be made to the current farming projections to assess whether the plan remains on track. Any crop or livestock concerns can be addressed with the borrower sooner if this information is available. Review and understand borrower’s marketing plans – Farming operations benefit from a thorough marketing plan for the farm products being sold. Lenders often are aware their borrower has contracted a certain number of bushels at a certain price for delivery at a specified date, but this can be where the information regarding the borrower’s marketing plan stops. We recommend regular discussions with the borrower regard- ing all facets of the marketing plan, including all crops and livestock. Understanding who borrowers are working with to facilitate their plan also is recommended. You might include a section on your borrower’s marketing plan in their loan presentations. This, along with a robust financial analysis, conveys a thorough understanding of your borrower. As you move into the spring and summer seasons, consider these practices to provide improved awareness and an early warning system for your borrowers. As performance from your borrowers improves, these straight-forward practices can improve monitoring and understanding of your borrowers. Increased awareness can help mitigate risk and improve your bottom line. For more information, contact your BKD advisor. Article reprinted with permission from BKD, LLP, bkd.com . All rights reserved. NOW IS A GOOD TIME FOR CREDIT & LOAN ADMINISTRATION SPRING HOUSEKEEPING Mark Janson | mrjanson@bkd.com