AUDIO SOLUTIONS

WRITING AN EFFECTIVE
CREDIT MEMORANDUM
Preparing Successful Loan Presentations
Jeffery W. Johnson
Bankers Insight Group, LLC
[email protected]

April
2015

Bankers Insight Group, LLC

OBJECTIVES

 To make you a better banker

 To understand the importance of good written communication

 To improve clarity, conciseness and completeness of written communications

 To increase emphasis on planning and organizing

 To identify individual strengths and weaknesses

Standards of Care

What would a reasonable and prudent banker have done under similar circumstances?

The primary purpose of loan documentation is to document your actions as being prudent and
proper

Your credit files must document a consistently applied approval process. That process should
address, at a minimum, the following points:

Essence of Credit

 Purpose and basis of the credit

 Primary and secondary source of repay

 Written repayment program

 Collateral valuations

 Conformity to credit policy

 The five C’s of credit

 Strengths and weaknesses

 Justification for exceptions to underwriting

 Makes recommendation

 Grades credits

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  Contains information to make decision
o Company financial statements
o Tax returns
o Personal financial statements
o Applications

Credit Memos

 Primary means of communication within banking industry

 Serves three functions:

1. Supports or recommends action

2. Provides information on the condition and status of a customer relationship

3. Provides a record of thoughts and actions relative to a customer relationship

 Memos are to be succinct and to the point, but we violate this idea

 Readers of credit memos are skilled bankers. Therefore, it is not necessary to state the
obvious

 Memos should present relevant material facts and writers thoughts and opinions

 The written opinions should be supported by facts

 Anything you write in a memo will become public record if you end up in court with a
customer

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ORGANIZATION

Planning
Questions to consider:

1. What is my purpose?

 To inform
 To persuade
 To get action
 To recommend
 To advise
 To identify a problem

2. Who is my audience?

 Key Audience

o Senior Credit Officer

o Loan Committee
o Manager
o Colleagues

 Secondary Audience

o Consider their needs

o Use appropriate tone
o Avoid industry language

3. How can I best convey my message?

 Logical presentation gives you credibility

 Guides the reader in the direction you want them to go

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 Positioning

 Identify your position

o The main idea of your entire report

o All statements, conclusions or recommendations should support position

 Establish your major discussion areas

o The major points that helped lead you to your position

o Begin by noting your major discussion areas early in your presentation

 Results - helps writer to focus and the reader to comprehend the ideas that follow

 Outlining

o Places topics in an orderly manner and will ultimately:

 Save time

 Improves organization and readability of your writing

 Allows a step-by-step approach

 Allows writer to avoid missing the most important facts

WRITING

 Paragraph Development

o Breaks writing into single ideas

o Keeps writing in a uniform and orderly pattern

o Should have a topic sentence

o The topic sentence represents the main idea

o Topic sentences are often the 1st sentence

o Each sentence should contribute to paragraph’s purpose

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  Transitions

o Show the relationships between ideas

o Helps the flow of your ideas: they act as signals for the reader to follow

o Rid your writing of the “choppy” sound

o Examples:

Without Transitions

o “Profits have been below average for the past three years. Asset growth has
been nearly twice that of its peer group. Net worth has decreased by 20%.”

With Transitions

o “Profits have been below average for the past three years. During the same
period, asset growth has been nearly twice that of its peer group. As a result,
net worth has decreased by 20%.”

 Summaries

o Should not introduce any new ideas

o Not always necessary, unless the situation warrants it. It may be redundant

o Summaries are helpful when:

 Your position is very controversial

 Your position may be unpopular with your reader

 The report is very long

 The structure of the report is very complex

WORD USAGE

 Always choose the right words

 Write to express, not to impress

 Avoid stuffy and vague words

 Avoid using a heavy style of writing

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 o It is improper for business communication
o Indicates unclear or illogical ideas
o Indicates lack of knowledge by bluffing with complicated and wordy writing.

 Utilize a simple writing style

o The more complex the subject, the more precise and simple the writing
o Understanding words and sentences should require little energy by the reader.

 Wordiness – say what you need to say with the fewest words possible

Instead of Why not write

At the present time Now / Currently

In the near future Soon
A majority of Most
A number of Several / Many / Some
In the amount of For / Of
With reference to About
First of all First
On an annual basis Annually

FORM AND APPEARANCE

o Avoid producing a page of solid print. Readers like short, skim-able writing.

o Visual appearance should aid understanding, not hinder it.

o Make reports eye catching with headings, bold face, underlining, italics or
bullets. This method calls attention to areas that are important.

o Paragraphs should average 7-10 lines

o Use repetition for emphasis in long reports

o Graphics can add variety and professionalism to reports

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 ALLISON WRIGHT BANK COMMERCIAL LOANS
GUIDELINES FOR PREPARATION OF CREDIT APPROVAL DOCUMENTS
July 25, 2012
Credit Approval Document Overview

The purpose of a standard Credit Approval Document is to promote a consistent approach towards preparing
credit approval presentations. The Credit Approval Document format is intended to convey to others the
lending officer's analysis and understanding of the inherent credit risk and strategies for the management of
that risk.

The three cornerstones of a successful credit portfolio are Soundness, Profitability and Growth, in that order.
Profitability and growth are meaningless if the underlying portfolio is not sound. This does not mean that a
sound portfolio has no credit risk. Rather, the underlying credit risk must first be understood and, once
understood, then managed.

Other purposes of the Credit Approval Document format are to present and document the following topics in
a consistent manner:
 Credit approval rationale.
 Purpose of proposed credit presentation.
 Proposed loan quality rating rationale.
 Key risks and structural issues.
 Strengths and weaknesses (i.e. cash flow, collateral, guarantor) of the borrower and the credit facilities.
 Sources of repayment and plans for monitoring.
 Comparison of the proposed credit presentation with approved credit policies, underwriting standards and
underwriting guidelines.
 Total ALLISON WRIGHT BANK relationship and relationship strategy, including a risk management
strategy for the subject credit exposure.

The Credit Approval Document is an internal document used primarily to clearly communicate conclusions
of the lender. The reader should not be left to hunt for or ascertain the author's conclusions. Conclusions
should be clearly stated and logically supported by the rationale for the conclusions.

The Credit Approval Document is intended to be a self-contained, stand-alone document which a

knowledgeable, experienced lender who is not a specialist in the specific industry being addressed
should be able to understand. The Credit Approval Document should fully support and explain the credit
request without the need for verbal explanation or reference to external documents. All lenders should
remember that it is in their best interest to convey their message and conclusions in an easy-to-read format.
The audience will include the following readers:
 Chain of authority required to approve or concur with the transaction (e.g. Approval Matrix)
 Credit examiners, including the ALLISON WRIGHT BANK Credit Review Officers, FDIC, State,
external auditors, etc.
Other lending personnel who need to brief themselves on the relationship, e.g. as account
management responsibilities change
 Counsel representing ALLISON WRIGHT BANK and others responsible for preparing loan
documentation

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Objectives of Credit Approval Document
Focus on Objective Analysis Supported by Facts and Data
The analysis included in the Credit Approval Document should allow the reader to completely understand the
transaction, the financial and operating condition of the customer, and the ALLISON WRIGHT BANK
relationship goals with the customer. It is important to keep the analysis based on facts and data. Use
exhibits to clarify important topics such as projections, proposed covenants and so forth. All terms referring
to financial calculations should be defined because not every reader may use the term in the same way. For
example, the terms Debt Service Coverage and Balance Sheet Leverage have been used to refer to a variety
of different calculations.

It is ALLISON WRIGHT BANK credit policy that Credit Approval Documents and quality assessment
ratings (QAR) will not be made available to anyone outside ALLISON WRIGHT BANK (except those
identified above) unless subpoenaed by proper court order. This prohibition applies as well to the borrower
or its principals, representatives, etc. If subpoenaed by proper court order, Credit Approval Documents are
discoverable in litigation and certain administrative proceedings. Because their contents will be read to a
judge or jury if subpoenaed, Credit Approval Documents should be written with such third-party review in
mind. Credit Approval Documents generally should not contain legal opinions obtained in connection with
the lending relationship.

Credit Approval Documents Reflect Your Standard of Excellence

The Credit Approval Document should reflect the lending officer’s best work. Based on the data contained in
the Credit Approval Document, signers in the approval process are asked to join with the lending officer in
being held accountable for putting the bank’s capital at risk. Accordingly, individuals involved in the
approval process need to understand exactly how the lending officer really feels about the overall credit and
the substantive risk issues. All relevant facts, assessments, conclusions, etc.etc must be put out in the open
for the benefit of everyone involved in the approval process. Full, complete and balanced disclosure is a
fundamental requirement in writing a Credit Approval Document.

Following are some points of advice to the lending officer/author of the Credit Approval Document:

 Question and challenge the data, don't just "report" it. Talk about "missing" information, not just that
which was provided.
 Be concise. Use salient facts to support conclusions and structure.
 Use all available resources.
 Create order and understanding out of the "data". Everything written should point toward a conclusion
necessary to reach a decision. Don't make the reader wade through unnecessary material that does not
lead to a conclusion or is not essential to the decision.
 Do not state conclusions without showing the logic that leads from the data to the conclusion. One
overused conclusion, which is often totally unsupported, is "The quality of management is excellent".
 Be balanced. Be totally honest. "Tell it like it is". Discuss the bad and the ugly, not just the good -- i.e..
discuss concerns you have about the borrower or the debt and the objective basis for your concern; don’t
just discuss the good aspects of the credit.
 Identify the real issues that make a difference to us.

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 View everything from the perspective that we are putting ALLISON WRIGHT BANK capital at risk.
Do not assume the impartial perspective of an external rating agency that has no capital directly at risk in
the transaction.
 Be reader-friendly. Act as a guide to lead your reader through your data and logic to reach your
conclusions. Use charts when needed.
Be consistent. Check your Credit Approval Document to make sure that the facts and opinions you state
are consistent throughout all portions of the Credit Approval Document.

These points of advice are always subject to the general rule that facts and data must support conclusions.
All documented opinions, but especially those that are negative, must be based on facts you know

Credit Approval Document Narrative “Highlights of Key Findings”

Information presented should be precise but complete. Objective analysis is of primary importance. The
analysis is expected to be balanced. Balanced means to reveal all relevant data, good and bad, and arrive at
an objective analysis of the risks. The focus should be driven by the facts and data, with emphasis on why
and how the facts impact the customer and credit facilities made available by Allison Wright Bank.

1. Transaction Description:
The three cornerstones of a successful credit portfolio are Soundness, Profitability and Growth, in that order.
This does not mean that credit risk is to be avoided; rather, the underlying credit risk must be understood and
managed.

Summary (Reason for Request and Nature of Business)

Describe the transaction being considered. The Summary could be as simple as a new term loan for
equipment purchases or could be a complete description of a vertically integrated operation. Use exhibits to
further clarify discussions and refer the reader to separate exhibits as appropriate. Be detailed.

Credit Approval Rationale

This section should include a succinct rationale why the proposed credit action is being recommended from a
credit risk management perspective. Explain the critical credit factors that support the recommendation for
approval. Any approval rationale based on relationship, profitability or business growth factors, although
important, should be clearly identified as such and discussed separately. In essence, discuss why the proposed
action makes sense.

Rate/Term
This section should discuss the rate and terms, and thoroughly explain any concessions made on either rate or
term. Consistency with Bank objectives should also be discussed.

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Sources and Uses

For all construction projects, a complete Source and Use of Funds analysis should take place in this section.
Owner equity in projects should be thoroughly explained.
The three cornerstones of a successful credit portfolio are Soundness, Profitability and Growth, in that order.
This does not mean that credit risk is to be avoided; rather, the underlying credit risk must be understood and
managed.

2. Economic and Competitive Environment:

The purpose for analyzing the economic and competitive environment is to assess the factors that have an
impact on the industry and borrower. This section should be divided into two areas.

 The Industry subsection should discuss macro factors such as environmental forces, government
regulation, demographic changes and technology. It should also include information on the structure and
profile of the industry. Industry data should include any recent developments, especially in volatile
industries.
 The Borrower subsection should include the entity's competitive position, as well as strengths and
weaknesses that are critical to the future success of the business. This may include an analysis of core or
major product lines as reflected by the borrower's business plan or competitive position.

3. Management:
Objectively evaluate the management of the company. Avoid the use of adjectives as they tend to be
subjective. Comments should be based on facts. Unsupported phrases such as “John is an excellent
manager", etc. are subjective in nature and provide no support to the analysis. Instead, refer to industry
experience, references from others in the industry and the depth of experience of management. This may
include the number of years in the industry, prior positions, professional background, professional
certification, and so forth.

Lastly, discuss substantive investors as well as the use of outside advisors such as tax and legal counsel,
accounting firms, outside directors, investment bankers, etc.

4. Critical Financial Developments/Trends:

This section should thoroughly explain and support the historical and current financial numbers and ratios as
summarized on the Executive Summary page of the Credit Display. Report the nature and quality of the
financial statements on which the financial analysis is based (e.g. annual CPA audit {clean or qualified
opinion}, unaudited annual/interim statement, 10Q report, consolidated, combined, income tax returns, etc.
State the source of the financial statement, e.g. name of CPA firm, company prepared, etc. An unaudited
statement reduces the quality of the information. If the financial statement is not audited, the lending officer
should address the reasons why the company is not providing audited statements. How is the bank assured of
the integrity of the information and how is the risk of an unaudited statement mitigated?

This Section should have three distinct sub-sections: Balance Sheet, Income Statement, and Cash Flow.

Describe the historical financial performance of the company with specific emphasis on the most recent fiscal
year and current interim period. For complex ownership structures, consolidating financial statements may
need to be included. Comment on key performance targets such as sales, margins, and balance sheet trends.

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Highlight any specific accounting techniques that are important in analyzing the company (e.g. FIFO vs.
LIFO inventory valuation, etc.) If appropriate, compare company with industry standards or comparable
companies. When possible, briefly summarize the borrower's performance during the last recession. Discuss
the capital structure of the borrower (e.g., senior debt, subordinated debt and equity components).

Analyze the trends as opposed to simply reporting the numbers. Get behind the numbers; for example,
provide your best analysis of the factors that caused a decline in sales and management's response, as
opposed to simply stating that sales declined.

Address historical fixed charge coverage or debt service coverage as applicable. Discuss cash flow adequacy
historically.

5. Evaluation of Repayment Sources/Projections:

This section is used to describe future repayment ability and should pick up where the above historical
analysis left off. This section should analyze the adequacy of stated repayment sources in quantitative terms.
Again, this Section could include three distinct sub-sections: Balance Sheet, Income Statement, Cash Flow.

A “Bank Base Case” (Most Likely) projection is expected when maturities exceed one year. Additionally, a
“Management Case” and a “Downside Case” are strongly encouraged in larger transactions when maturities
exceed one year. Please label each page of the projections (e.g. Management Case, Bank Base Case,
Downside Case.) Use exhibits to fully document the assumptions used to construct each “case” or scenario.
Depending upon the financial stability of the proposed credit, sensitivity analyses should also be presented.

If practical, present a "Break-Even" scenario showing the level of cash flow necessary to meet debt service,
mandatory capital expenditures and other fixed charges. It should be noted that Allison Wright Bank’s
official definition of fixed charge coverage (FCC) is (EBITDA  cash taxes cash dividends – maintenance
capital expenditures) (mandatory debt retirement + cash interest). Use MOODYS spread sheet format for
historical and projected cases, where MOODYS is available. Maintenance capex should be thoroughly
explained.

Analyze the projections either in the body of the report or in an exhibit. Refer the reader to exhibits for
clarification. Use footnotes on the MOODYS spreads for further clarifications and refer the reader to the
footnotes. Discuss the impact of any sensitivity cases and why the credit risk remains acceptable.

A downside sensitivity analysis should not usually be based on growth assumptions resulting in improving
performance (e.g., increasing EBITDA, cash flow available for debt service, etc.). If a "Break-Even"
scenario is used for the Downside Case (e.g., holding fixed charge coverage or debt service coverage equal to
1.0x), it would probably be helpful for the analysis to include a comparison of the "Break-Even" EBITDA to
both historic and Management Case EBITDA. For example, this comparison could illustrate the amount of
deterioration that could occur before operating cash flow would be insufficient to cover debt service
requirements and other defined fixed charges (or the amount of cash flow growth required to cover debt
service requirements).

If sale of assets is a material source of repayment, document what assets will be sold, the book value, the
estimated net proceeds, the source of the valuation, potential buyers, and the expected timing of the sale. If

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refinancing is a source of repayment, provide an analysis of the expected source and scope of refinancing or
information on the most recent public debt and/or equity offering for the borrower.

Sections 4 and 5 may at times have some overlap. The important thing to remember is that these sections
should thoroughly address and analyze the historical, present and future cash flows and/or other relevant
repayment sources.

Detailed financial analysis of the guarantor(s) should also be included in this section, as appropriate.

6. Collateral Evaluation/Survey Results:

Describe in detail the value, valuation method, advance rate and an appraisal date for all collateral.
Collateral should be described in enough detail so that the reader can determine what documentation should
be included in files. Also disclose required insurance protections, as appropriate (e.g. hazard insurance).
This information can be summarized in an exhibit.

Liquidation costs, if not incorporated in the advance rate, are the costs incurred to gain control of and
liquidate the collateral under "quick sale" conditions (e.g. transportation, insurance, commissions, delivery,
legal fees, etc.). While these costs may not be explicitly known, please estimate based on your knowledge of
the borrower and nature of the collateral. Also, specify the date of the last collateral audit/appraisal and
frequency of future collateral audits/appraisals. If liquid assets are held as collateral, discuss the valuation in
light of the instructions in the ALLISON WRIGHT BANK Credit Policy Manual. If fixed assets including
equipment are held, show support for determination of fair market value. The appraisal source and date
should be well documented. If cap rates are low for a specific market area, sensitize the collateral value to an
average cap rate.

For fully monitored trading asset lines, a borrowing base format should be provided showing recent
receivable agings, concentrations, delinquencies, dilution, charge-off history, bad debt reserves, inventory
breakdowns, and so forth. Clearly specify what types of collateral will be eligible and ineligible for
borrowing base calculations.

Clarify whether all or some of the facilities are cross-collateralized. Keep in mind that "surplus" real estate
value is typically not available as collateral for other facilities (ask counsel if uncertainty exists or
clarification is desired). Furthermore, when analyzing junior liens, make specific allowances for discounts
for the costs of obtaining title and liquidating the collateral.

Address environmental due diligence performed or to be performed.

On real estate transactions address the site and demographics of the project. Additionally, this section should
address tenants, leases and pre-leasing if a construction project.

7. Primary Risks In Order of Priority and Mitigators:

List the major risks of the transaction. Also cite applicable and relevant factors which mitigate those risks.
Be sure to specify those critical risks, which, if not mitigated, would cause you to reconsider the transaction
(e.g., “Deal Breakers"). To the extent the risks are quantifiable (e.g. sensitive to commodity prices/margins,

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or to interest rate volatility), use these sensitivities in the "Downside" case in the Repayment Sources
analysis. If the likelihood of an occurrence is quantifiable, this should be included. Remember, not every
risk has a specific mitigator. Discussion of a specific risk is not a mathematical equation that requires a
specific mitigator. The important point is that the risk must be acknowledged and a plan articulated to
manage the identified risk.

8. Covenants:
In this section the lender should identify and define the key or controlling covenants and analyze their
capacity to serve as tools for managing the proposed credit accommodation. The discussion should make
clear why the covenants are considered to be key or controlling. In table form with narrative comments,
indicate the flexibility inherent in the covenants. For example, "the company could only lose $1 hundred
thousand before the net worth covenant would trip," or "cash flow could decline by $300,000 before the debt
service coverage ratio would be in default," and so forth.

Continue to include the Loan Approval Requirements form in the package as a concise recap of all
covenants. Perform additional sensitivity tests here in Section 8 as appropriate.

A covenant compliance sensitivity analysis of "cash flow based" covenants should calculate the projected
cash flow trigger point (e.g., EBITDA or other defined cash flow level at which the subject covenant
defaults). This projected cash flow "trigger" could then be compared to the Management Case, as well as the
Break-Even Case, for purposes of assessing the effectiveness of the subject cash flow covenant.

Changes from previously approved covenants require re-approval as discussed in the ALLISON WRIGHT
BANK Credit Policy

All terms referring to financial calculations should be defined because not every reader may use the term in
the same way. For example, the terms Cash Flow and Balance Sheet Leverage have been used to refer to a
variety of different calculations.

Provide details of past covenant waivers and defaults, if relevant to the current situation, to allow the reader
to gain a historical perspective.

All term loan transactions over $100,000 should include at least a covenant for adequacy of debt coverage.

9. Plan for Monitoring:

List the steps to be taken to monitor the credit relationship, including such items as listed below and in each
case when delivery to the Bank is required:

 Audited annual financial information

 Interim reporting (monthly, quarterly)
 Loan agreement compliance
 Personal guaranty compliance
 Covenant compliance
 Borrower compliance certificate frequency
 Borrowing base certificate frequency
 Borrowing base audit frequency
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 Frequency of collateral appraisals
 Use of other specialists ( i.e. meetings with other professionals, internal specialists, etc.)
 Frequency of lender regular calls on the borrower/borrower (including dates for Ag Field Inspections
when appropriate).
 Construction loans should have a detailed breakdown of monitoring that will take place

Attempts should be made to ensure that our covenants are at least as stringent as the most restrictive credit
agreement for our borrower. If changes have occurred in the monitoring plan, they should be described.

10. Comparison with Credit Policy

The ALLISON WRIGHT BANK Credit Policy contains policies and standards that all credits must meet.
Exceptions to ALLISON WRIGHT BANK policies and standards are expected to be rare and are subject to
an exception approval process. Explain any exceptions to policies and standards in this section with
mitigators, if applicable.

Unless otherwise indicated, it is assumed that the transaction complies with all applicable underwriting
guidelines. Narrative should be provided on all areas of non-compliance with underwriting guidelines. List
the aspects of the transaction that fall outside of the applicable guidelines and explain the approval rationale,
together with relevant mitigating factors.

11. Relationship Strategy/Adequacy of Compensation:

Briefly describe our business and credit risk management strategies regarding the client and what other
services/transactions may be considered in the near and intermediate future. Discuss how the proposed
transaction fits within the Bank's strategy for the client. Compare level of risk being undertaken with the
level of compensation for the transaction being considered. Demonstrate numerically the total relationship
profitability. For example, a new credit line may have thin pricing, but is justified because of profitable non-
credit business.

Credit Risk Management Strategy: When underwriting large exposures, whenever possible the lending
officer should attempt to structure the transaction in accordance with “Market Conditions”, even if we are not
planning to sell down the exposure at this time. This is both a marketing strategy and a credit risk
management strategy. Future liquidity or credit risk management conditions may make it desirabledesireable
to sell down a large exposure. When structuring a large transaction, the lending officer should consult with
the Credit Administration to be cognizant of current market conditions (i.e. the “market hurdle”) with a view
to preserving our option to sell down the transaction in the future.

12. Summary: Strengths and Weaknesses:

List noteworthy strengths and weaknesses of the proposed transaction, together with any known and relevant
mitigators to the weaknesses.

13. Risk Rate and Rationale:

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List the RR and justify your rationale. Thoroughly explain the rationale behind the proposed RR, especially
if it is a new facility or if the rating has changed. Discuss what events need to take place for an increase or
decrease in the loan quality rating and the expected timing (if applicable) for those events to occur. This
section should thoroughly support and explain the proposed risk rating given the known credit factors (e.g.
cash flow, collateral, guaranty). The risk rating rationale should address and account for downside risks. It
should also explain what mitigators (strengths) exist that would preclude a lower rating. In other words, it is
not enough just to explain why the recommended RR is appropriate, but this section should also explain why
the recommended RR is not better or worse.

Since credit facilities are individually rated, it is possible for a borrower with multiple credit facilities to have
multiple risk ratings based on different repayment sources, risk factors, structure, etc. If this is the case, it
should be thoroughly explained in this section. RRs may not be disclosed to borrowers or other parties
outside the Bank (including other financial institutions) absent proper court order or under other extremely
limited circumstances.

14. DDA and Other Product Offerings:

Detail current DDA and other product offerings for the borrower. Explain any potential product risks and
plans to monitor and/or control those risks. Describe potential opportunities or future plans to expand these
“non-borrowing” products.

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CREDIT UNDERWRITING STANDARDS

What are credit underwriting standards? They are the guidelines, endorsed by the board of
directors through approval of the financial institution’s credit policy, for determining the safety
and soundness of the credit-granting process. They include defining what lending practices and
types of risks are acceptable and direct lending personnel on how to make choices between risks
and rewards. Critical factors need to be identified that significantly affect the safety, soundness,
and the repayment of a loan. These factors are called underwriting standards.

Underwriting Consumer Loans

It is suggested that the traditional C’s of credit be used as a starting point, namely:

 Character
 Capacity
 Capital
 Collateral
 Condition
 Can We?

Character:

Character measures Human/Management Factors such as

! Borrower’s moral character

! Determination to meet obligations
! Willingness to cooperate with lender

Capacity: Repayment Ability

While the analysis of character dealt with past performance, the analysis of “capacity” deals with
future performance. Today, the ability to repay the credit per the terms of the contract is more
important than the bank’s having leverage to collect the credit through collateral. The difference
between a good loan and a charge-off lies in one word: repayment! It should be remembered that
it is not past performance but future performance that will determine the amount of repayment
available for the loan the lender is about to make.

The financial institution should include in its credit policy a defined method for determining
capacity to service debt and should provide guidelines that are acceptable (i.e., total housing
expense not to exceed 28 percent of the applicant’s disposable income; total housing and other
fixed payments not to exceed 36 percent of the applicant’s disposable income).

Capital: Financial Position

Capital can be analyzed and measured by reviewing net worth and down payment or the amount
of equity invested by the borrower. The lender should make sure that every borrower has

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sufficient equity to enable total recovery of loan funds through the sale of assets if all else fails.
Since problems do arise in loan repayments, lenders want assurance of adequate equity in the
borrower’s assets to rely on in case repayment fails to materialize. Equity provides the cushion
against adversity and potential loss by the creditor. Down payment or equity guidelines are to be
established for each type of loan made by the bank.

Many lenders underestimate the importance of equity when making loans to commercial and
agricultural customers. The equity position is the best single indicator of the strength of a
business and the commitment of its owners. A business with insufficient equity has little ability
to weather adversity or to take advantage of growth opportunities. It appears that, at a bare
minimum, equity would equal at least 20 percent of total
assets in almost any business.

Collateral: Identification and Valuation

Collateral is the property-personal or real- against which the lender takes a lien in case the debtor
does not repay the loan as agreed. It is a secondary source of repayment.

The pledge of collateral normally adds safety to a loan, since the lender can sell the security to
obtain repayment lithe debtor fails to pay. Collateral should cover interest during foreclosure,
legal costs, and reduced price due to “fire sale” conditions. If the loan is well collateralized, the
borrower will most likely liquidate the collateral, pay the loan, and retain the difference.

The market value of the collateral must be obtained and verified.

Split collateral (i.e., collateral of the same type in which two or more creditors each has a partial
security interest) should be avoided.

Condition: Economy

Condition of the economic environment and the impact that it has on the ability to repay the
credit to the bank must be taken into consideration in order to evaluate each credit properly.
While the bank cannot abandon its customers whenever a sector of the economy becomes
depressed, extra caution must be exercised. When analyzing economic condition, determine the
stability of the source of repayment. Consider length of service, type of occupation, and stability
of industry. The customer’s place of employment tends to be a concern only when the bank is
aware of impending layoffs or conditions that could lead to a disruption of income, such as
seasonal employment. The loan officer must use good judgment along with the bank’s credit
standards and guidelines.

Can We? Introduces the Credit Policy

After the traditional C’s of credit are established, one must consider whether the loan request is
in line with the bank’s credit policy. A borrower may possess all five C’s but the purpose of
their loan request may be in direct conflict with the bank’s credit policy. It this occurs, a denial
of the request must be considered.

Bankers Insight Group, LLC Page 18

 RATIO DEFINITIONS
For manufacturing, wholesaling, retailing and service companies, a review of the financial
statements to determine the following factors should be conducted.

LIQUIDITY

LEVERAGE

ASSET MANAGEMENT

OPERATIONS

CASH FLOW

LIQUIDITY
Liquidity is a measure of the quality and adequacy of current (short-term) assets to meet current
(short-term) obligations as they come due.

Current Ratio

Calculation: Current Assets

Current Liabilities

Quick Ratio

Calculation: Cash + Marketable Securities + Accounts Receivable

Current Liabilities

Accounts Receivable Turnover Rate

Calculation: Net Sales

Accounts Receivable

Bankers Insight Group, LLC Page 19

Accounts Receivable Turnover in Days

Calculation: 365 days (or the number of days in a period being measured)
Accounts Receivable Turnover Rate

Inventory Turnover Rate

Calculation: Cost of Goods Sold

Inventory

Inventory Turnover in Days

Calculation: 365 days (or the number of days in a period being measured)
Inventory Turnover Rate

Accounts Payable Turnover Rate

Calculation: Cost of Goods Sold

Accounts Payable

Accounts Payable Turnover in Days

Calculation: 365 days (or the number of days in a period being measured)
Accounts Payable Turnover Rate

Bankers Insight Group, LLC Page 20

LEVERAGE

Leverage refers to the proportion of funds invested in an entity by the creditors in the form of
loans and the owners in the form of equity. Highly leverage firms (those with heavy debt in
relation to net worth) are more vulnerable to business downturn than those with lower debt to
worth positions. While leverage ratios help measure this vulnerability, it does greatly depend on
the requirements of particular industry groups.

Debt to Net Worth

Calculation: Total Debt

Tangible Net Worth
.

Debt to Total Assets

Calculation: Total Debt

Total Assets

Bankers Insight Group, LLC Page 21

ASSET MANAGEMENT (EFFICIENCY) RATIOS
Asset Management or Efficiency Ratios measures management’s ability to utilize assets to
generate revenue or create value (i.e. generate a profit).

Asset Efficiency or Asset Turnover Ratio

Calculation: Total Sales

Total Assets

Net Fixed Assets Efficiency or Turnover Ratio

Calculation: Total Sales

Net Fixed Assets

Fixed Asset Usage Ratio

Calculation: Accumulated Depreciation

Gross Fixed Assets

Fixed Asset Life Ratio

Calculation: Net Fixed Assets

Depreciation Expense

Bankers Insight Group, LLC Page 22

OPERATIONS (PERFORMANCE OR PROFITIBILITY RATIOS)

Gross Profit Margin

Calculation: Gross Profit

Net Sales

Operating Profit Margin

Calculation: Operating Profit

Net Sales

.
Net Profit Margin

Calculation: Net Profit

Net Sales

Return on Stockholders Equity

Calculation: Net Income

Stockholder’s Equity

Return on Investment (Assets)

Calculation: Net Income

Total Assets

Bankers Insight Group, LLC Page 23

CASH FLOW AND FINANCIAL RATIOS
Financial Ratios measure the ability of a borrower to meet its financing obligations including
Interest Expense, Principal Payments on Long-Term Debt and other fixed charges such as Lease
Payments.

Interest Coverage Ratio

Calculation: Earning (profit) before Interest, Taxes, Depreciation & Amortization

Annual Interest Expense

This ratio is a measure of a firm’s ability to meet interest payments. It measures the number of
times all interest paid by the company is covered by earnings before interest charges and taxes. A
high ratio may indicate that a borrower would have little difficulty in meeting the interest
obligations of a loan. This ratio also serves as an indicator of a firm’s capacity to take on
additional debt.

Cash Flow / Debt Coverage Ratio

Calculation: Net Profit
Plus: Non-Cash Charges
+ Change in Accounts Receivable
+ Change in Inventory
+ Change in Accounts Payable
+ Change in Accrued Expenses
= Cash After Operating Cycle
Minus: Dividends Declared
+ Change in Net Worth
= Cash After Financing Cost
Less: Current Portion of Long-Term Debt
= Cash Available for Other Debt
+ Change in Gross Fixed Assets
= Financing Surplus (Requirement)

Bankers Insight Group, LLC Page 24

REAL ESTATE

Underwriting Standards for Real Estate

• Capacity of Borrower
• Net Operating Income*
• Debt Coverage Ratio (NOI / ADS) > 1.15
• Value of Mortgage Property
• Overall Financial Strength of Borrower
• Hard Equity Invested into Property (Including unencumbered equity in properties)
• Secondary Sources of Repayment
• Additional Collateral or Credit Enhancements

*Potential Gross Income (PGI)

Less: Physical Vacancy

Economic (Credit) Loss

Effective Gross Income (EGI)

Less: Operating Expenses

Real Estate Taxes

Hazard Insurance
Repair/Maintenance (Buildings)
Maintenance (Grounds)
Depreciation
Water/Sewer/Trash
Electric (Common)
Interest Expense
Management Fees
Leasing Commissions
Reserves for Replacement

Total Operating Expenses

Net Operating Income (NOI)

NOI = > 1.25 times

DCR

Bankers Insight Group, LLC Page 25

 Savannah Fresh Fish Compny
Balance Sheet
Years Ended December 31
(000)

ASSETS 12/31/09 12/31/10 12/31/11

Cash 195 126 69

Accounts Receivable, Net 475 683 994
Inventory 241 300 743
Prepaid Expenses 19 23 29
Other Current Assets 0 37 38

Total Current Assets 930 1,169 1,873

Gross Fixed Assets 782 856 1,076

Less:Accumulated Depreciation (224) (323) (465)
Net Fixed Assets 558 533 611

Other Non-Current Assets 94 24 32

TOTAL ASSETS 1,582 1,726 2,516

LIABILITIES AND EQUITY

Notes Payable-Line of Credit 0 25 375

Long-Term Debt-Current Port. 26 23 15
Accounts Payable 138 231 465
Interest Payable 2 2 3
Income Tax Payable 0 2 0
Accured Expenses 70 86 181
Dividends Payable 0 0 30
Other Current Liabilities 10 12 7

Total Current Liabs. 246 381 1,076

Long-Term Debt 302 280 265

Common Stock 150 150 175

Preferred Stock 0 0 0
Paid in Capital 0 0 0
Retain Earnings 884 915 1,000
Total Equity 1,034 1,065 1,175
TOTAL LIAB AND EQUITY 1,582 1,726 2,516
26
 Savannah Fresh Fish Compny
Income Statement
Years Ended December 31
(000)

12/31/09 12/31/10 12/31/11

Net Sales 5,937 8,481 11,025

Cost of Goods Sold 4,472 6,402 8,240
Gross Profit 1,465 2,079 2,785

Operating Expenses
Salaries 1,015 1,446 1,859
Utilities 50 70 93
Insurance 21 28 36
Telephone 15 20 27
Other Taxes 5 6 9
Bad Debt Write-off 6 6 9
Advertising 88 132 171
Interest Expense 29 41 54
Delivery Expenses 99 147 195
Depreciation 84 111 154
Total Operating Expenses 1,412 2,007 2,607

Income Before Taxes 53 72 178

Gain (Loss) from Sale of Fixed Asset 0 7 (5)

Extraordinary Income 0 0 19
Income Taxes 20 28 77

Net Income 33 51 115

27
 RATIO WORKSHEET
SAVANNAH FRESH FISH COMPANY

2009 2010 2011

Sales Growth % N/A 42.8% 30.0%

Current Ratio 3.78 3.07 1.74

Quick Ratio 2.80 2.18 0.99

Leverage Ratio (Debt/Worth) 0.52 0.62 1.14

Sales-to-Assets 3.78 4.91 4.38

Sales Net Fixed to Assets 10.6 15.6 18.0

Net Fixed Assets Usage Ratio 29.0% 38.0% 43.0%

Inventory Turnover (Rate) 18.6 times 21.3 times 11.1 times

Inventory Turnover (days) 19.6 days 17.1 days 32.9 days

Receivable Turnover (Rate) 12.5 times 12.4 times 11.1 times

Receivable Turnover (days) 29.2 days 29.2 days 32.9 days

Payable Turnover (Rate) 32.9 times 27.7 times 17.7 times

Payable Turnover (days) 11.1 days 13.2 days 20.6 days

Gross Profit Margin 24.7% 24.5% 25.3%

Operating Profit Margin 0.9% 0.9% 1.6%

Net Profit Margin 0.6% 0.57% 1.0%

Return on Equity 3.2% 4.8% 9.8%

Return on Assets 2.1% 3.0% 4.6%

Bankers Insight Group, LLC | 28

 SAVANNAH FRESH FISH COMPANY
CREDIT ANALYSIS MEMORANDUM
February 25, 2012
LIQUIDITY

Liquidity as measured by the Current Ratio decreased from 3.78 to 1.74 over the three
year period. The cause of the decrease can be traced to the rapid sales growth over the
three year period (72.8% combined).

The growth in sales was financed by short term debt as it increased from $246,000 to
$1,076,000. This growth caused Current Liabilities to grow at a faster pace as a percent
of Total Assets than Current Assets to Total Assets. This trend results in Liquidity
decreasing as described in the preceding paragraph

The Current Liabilities realizing the largest increase are Accounts Payable and Notes
Payable, which is in response to the company’s needs to support an ever increasing
investment in Accounts Receivable and Inventory. These assets grew faster than the
growth in revenue thus indicating a slowdown in the Collection Period and the Inventory
Turnover.

While sales grew by 30% at FYE 2011, the Accounts Receivable turnover slowed to 32.9
days from 29.2 days over the year, while the Inventory turnover expanded from 19.7 days
to 32.9 days over the same period.

The financial impact of Accounts Receivable turning slower caused a funding need of
$112,000 while Inventory turning slower caused a funding need of $300,000 over the
year. This again was funded by debt (short term) because Equity did not grow sufficient
enough to cover this need.

As a result of the slowdown in the Accounts Receivable and Inventory turnovers, it

caused the Accounts Payable turnover to lengthen from 11.3 days to 20.6 days over the
Period.

LEVERAGE

The leverage position, as measured by the Debt to Worth ratio, deteriorated from 0.53 to
1.15 over the Period. This deterioration reflects the aforementioned increase in Current
Liabilities, specifically, Accounts Payable and Notes Payable.

Once again, the growth in sales, fueled by the increase in debt caused Leverage to
elevate. Although the Leverage position is deteriorating, it is still acceptable presently.
The downward trend requires close monitoring.

Bankers Insight Group, LLC | 29

ASSET MANAGEMENT

Management utilization of its assets to generate revenue and profits is improving. The
Asset Turnover Ratio (Net Sales to Total Assets) improved from 3.75 to 4.35, while the
Return on Assets (Net Income to Total Assets) improved from 2.09 to 4.53 over the
Period.

The Net Fixed Assets Turnover Ratio also shows signs of improving as it increase from
10.64 to 18.04 over the Period.

OPERATIONS

Sales increased 73% over the Period (43% in 2009 and 30% in 2011). This increase
reflects the market acceptance of SFF “Quick Freezing Techniques”, which allows the
company to expand its market by selling fish as “Fresh Frozen” across the Mississippi
River.

In spite of the significant sales growth, the Gross Profit Margin actually improved from
24.7% to 25.3% over the three year period. The financial impact of the improving Gross
Profit Margin was $66,150 over the three year period.

The improved Gross Profit Margin reflects SFF success in obtaining a higher sales price
for the fresh frozen fish and controlling its direct costs.

Management was successful in holding Operating Expenses steady as a percentage of

Sales over the Period at 23.2%. Holding the Operating Expenses constant in light of the
substantial increase in sales is a display of good management. Consequently, the
Operating Profit Margin improved from 1.4% to 2.1% over the Period.

As a result of the improvement in Gross Profit Margin and Operating Profit Margin, Net
Profits increased from $33,000 to $115,000 over the Period.

Bankers Insight Group, LLC | 30

CASH FLOW
12/31/06 12/31/07
Net Profit 51 115
Plus: Interest (Assuming Interest is included in CPLTD)
Plus: Non Cash Charges (Depreciation) 111 154
+ Change in Accounts Receivable (208) (311)
+ Change in Inventory (59) (443)
+ Change in Accounts Payable 93 234
+ Change in Accrued Expenses 16 95
Cash After Operating Cycle 4 (156)
+ Change in Net Worth (20) (5)
(Change in Stock Accounts, Paid in Capital, etc)
Cash After Financing Cost (16) (161)
Less: Current Portion of Long Term Debt (26) (23)
Cash Available for Other Debt (42) (184)
+ Change in Gross Fixed Assets (74) (220)
Financing Surplus (Requirement) (116) (404)

SFF experienced a negative Net Cash After Operations of $156,000 at fiscal year ending
12/31/07 as a result of increases in Accounts Receivable ($311,000) and Inventory
($443,000). This drain on cash was offset somewhat by the increase in Accounts
Payable in the amount of $234,000; however, it was not enough to counteract the
increase in the trading assets. The Accounts Payable increase is reflected by their past
due status.

The financial impact of the Accounts Receivable, Inventory and Accounts Payable
turning slower is as followers:

A/R : $30,205 X 3.7 days = ($111,925)

Inv : $22,575 X 13.3 days = ($300,252)
A/P : $22,575 X 9.3 days = $211,640

Financial Impact ( $200,537)

This financial impact is the consequence of these accounts increasing at a faster rate
than the 82% increase in sales over the Period. It reflects management’s inability to
manage these accounts by maintaining the historical turnover rates.

Cash After Financing Costs further increased to a negative $175,000 reflecting the

Bankers Insight Group, LLC | 31

negative $19,000 change in Net Worth while Cash Available for Other Debt further
increased to negative $198,000 reflecting the Current Portion of Long-Term Debt of
$23,000.

In spite of the large negative Cash Available for Other Debt, SFF spent $220,000 to
increase Gross Fixed Assets, which resulted in a Financial Requirement of negative
$418,000.

The Financial Requirement was funded by drawing $375,000 under the Line of Credit
and raising equity of $25,000 from the sale of stock. The shortfall was funded by the
company’s own cash.

RECOMMENDATION

Although SFF is profitable, it is not recommended for the bank to entertain a request for
term financing. This conclusion is due to the inability to generate cash to service future
debts as a result of the high rate of sales growth and the growth in Accounts Receivable
and Inventory beyond the rate of sales growth resulting in a huge drain of SFF cash.

Bankers Insight Group, LLC | 32

 SAMPLE
Commercial Real Estate Loan Submission
Part 1 - CRE Loan Overview

NAME OF PROPOSING BANK

Borrower: State the legal name of the borrowing entity and what type of entity the borrower is (for
example, general partnership, limited partnership, corporation, individual, etc.)

Purpose: Give a brief description of what the borrower is proposing to build and/or purchase with
the requested loan proceeds and state the source of funds needed in addition to the
loan proceeds. Be certain that the loan purpose and the loan proceeds disbursement
document match.

Request I Amount: State the amount and terms of the loan requested and, where applicable, state what the
floor and ceiling loan amounts are to be.

Rate: %

Fee: % and $

Term: The term of the construction loan and/or mini-perm and any extensions to either one.

Description of Give a brief, concise description of the property and improvements that the borrower is
Security: making as well as where the site is located. Include a concise description of the
improvements that are to be constructed and/or description of the improvements that I
already exist. Also include square footage of improvements, principal use, parking, etc.

•
Appraisal: LTV: State the Loan to Value and Loan to Cost ratios for the proposed
improvements and/or existing facility.
Appraiser: State the name of the appraiser and their professional designations.
Date: State the date of the appraisal.
Amount: State the value amount of the appraisal, the value of the land, and the
capitalization rate used by the appraiser.

Market Data I Give a brief summary of the competition that the subject property will be competing with
Feasibility Study: for income or sales. Included in this analysis should be average vacancy rates, average
rental rates, and average sales amounts that existing properiies or projects are
experiencing. If the proposed property is projecting higher occupancy and rental rates
than the competition, give an explanation and justificati on for the variances. Also,
mention any comparable properties that are under construction or planned for
construction in the near future.

Repayment Sources: , Always state at least two (2) sources, primary and secondary, that will repay the loan.
On construction loans with takeout commitments in place state the name of the long-
term lender, the amount of the commitment, the rate, the fee, and the expiration date of
the commitment. Also list any extraordinary conditions of the commitment at this point
such as rental achievements, etc.

SAMPLE CRE Loan Submission - Part 1- CRE Loan Overview - Page 1 of 11

Borrower I Guarantor: Give a brief summary of the borrowing enttty and· its principals and guarantors. Mention
the main line of business and briefly describe any previous projects with which the
borrowing entity, principals, and guarantors have been involved. Also give a synopsis of
the borrower I guarantor financial statements. Highlight any major points or items found
in their financial statements.
Total Assets Total Liabilities Net Worth

Attach Credit Analysis and Financial Statements to CRE presentation memo.

Account Relationship: State in columnar format all present loans that are outstanding to the borrower and to
any of the principals involved in this proposed project. Also provide in columnar format
information on deposit relationships with the borrower and/or guarantors.

Proposing Bank Debt:

Debt Type Original Amount Outstanding Unused
Indirect:
Related:

Proposing Bank Deposits: Date Current Average

Account Name Account Opened Balance Balance
Number

Other Banking Existing:

Services:
Potential:

General Contractor: This section relates to construction loans only and should include the General
Contractor's name, type of bonding required on this project, and information on the
recent accomplishments of the General Contractor. Also, state if a third party inspecting
architecUengineer will be required on the project.

Strengths: List in numerical/summary form the strong points of the proposed project, for example:
1.) Percentage of the project pre-leased is %.
2.) Percentage of borrower cash equity in the project is %.
3.) The loan-to-cost ratio is favorable at %.
4.) The superior location of the project.
5.) The financial strengths of the borrower and guarantors.
6.) A bonded, fixed price contract with a successful general contractor with whom
previous experience.
7.) Proven track record of the developer.

Weaknesses: List in numerical/summary form the weaknesses of the proposed project, for example:
1.) Office vacancy rates in subject are running at 2.5 times developer's projections.
2.) There are two office buildings scheduled to come on stream in the area of the
proposed building.
3.) This is the developer's first office building project.

-
SAMPLE CRE Loan Submission - Part 1- CRE Loan Overview - Page 2 of 11
Special Conditions: List all the major conditions which the borrower must fulfill before the loan closes, for ·
example:
. 1.) Receipt and approval of an MAI Appraisal.
2.) Review and approval of all leases.
3.) Receipt and approval of the permanent lender's loan commitment and execution of a
Buy/Sell Agreement ·
4.) Assignment of additional collateral,for example, a $200M CD.

Loan Covenants: List any major Joan covenants which the borrower must fulfill.

Loan Grade: Identify the officer-assigned Joan grade for this particular credit extended to the
borrower.

Policy Exceptions: List any policy exceptions that pertain to this particular borrower.

Officer Lending officer summarizes all of reasons for recommending approval of the loan and
Recommendation: anv other pertinent information that the lending officer has not discussed elsewhere.

SAMPLE CRE Loan Submission - Part 1- CRE Loan Overview =- Page 3 of 11

 SAMPLE
Commercial Real Estate Loan Submission
Part 2 - CRE Project Repayment Analysis

Acquisition and Development

Loan
Project The following is the repayment analysis for the A & D loan to Grand Scheme
Description: Estates Development. Inc. The project consists of 100 acres of land of which 62.5
acres are suitable for development. The borrower will improve the 62.5 acres into
100 for-sale residential building lots.

Project Summary: Borrower: Grande Scheme Estates Development, Inc.

Type: Acquisition and Development Loan
Purpose: To provide 75% of costs of acquiring and developing land. The
remaining 25% will come from cash on hand and sale of other real
estate assets.
Amount: $2, 175,000
Rclte: Floating Prime + 1%
Fees: $43,500
Term: 24 months

Income:
Acreage Lot Size Number of Lots Income per Lot Total Project Sellout
6.25 acres .25 acres 25 tots $40,000 $1,000,000
12.50 acres .50 acres 25 lots $50,000 $1 ,250,000
18.75 acres .75 acres 25 lots $60,000 $1 ,500,000
25.00 acres 1.00 acres 25 lots $70,000 $1,750.000

62.50 acres 100 lots $5,500,000

Expenses:
Soll Costs
Bank Commitment Fees ($43,500)
Closing Costs and Legal Fees ($30,000)
Architectural and Engineering ($100,000)
Interest Reserve Estimate (60% outstanding x 14.3% x 24 montl1s) ($373,250)
Marketing and Sales Commissions ($150,000)
Contingency ($103.250)
Total Soll Costs ($800,000)

Hard Costs
Land. Gross: 100 acres per confirmed contract price ($1 ,000,000)
Net: 62.5 developed acres
Sewer and Water ($175,000)
Roads ($400,000)
Landscaping ($125,000)
Electric Service ($200.000)
Miscellaneous and Contingency ($200,000)
Total Hard Costs ($2, 100,000)

I Developer Profit: $2.600,000

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - A & D Loan - Page 4 of 11
 A & D Loan - Sources and Uses of Fundina Analvsis

Total Soft Costs: $800,000

Total Hard Costs: $2, 100,000

Total Project Costs: $2,900,000

Less: Loan Proceeds ($2,175,000)

R equired· Equity (Upfront Borrower Cash) - 25°/ri $725

000

_ _P is------------- 1
!..!r.!oiec"t -C"'o-s=t Anatvs=
Average loan per saleable acre $2,175,000 / 62.5 acres $34,800
Release price per saleable acre $34,800 x 1.2 limes $41,760
Total release proceeds $41,760 x 62.5 acres $2,610,000

Loi Size Release Price Per Acre Release Price Per Lot Number of Lots Release Proceeds
.25 acres $41,760 $10,440 25 $261,000
.50 acres $41,760 $20,880 25 $522,000
.75 acres $41,760 $31,320 25 $783,000
1.00 acres $41,760 $41,760 25 $1,044.000

Total Release Proceeds $2,610,000

Loan to Project Cost: $2, 175,000 I $2,900,000 75.0%

Developer Profit Margin: .$2,600,000 I $2,900,000 86.7%

Repayment Acreage: Loan I Release Price Per Acre

$2,175,000 I $41,760 52.08 acres

Repayment Percentage: Total Acreage in Project 62.50 acres

Repayment Acreage I Total Acreage 83.3%

Repayment Lot: Total Loan $2,175,000

Release for .25 acre lots x 25 $261.000
Release for .50 acre lots x 25 $522,000
Release for .75 acre lots x 25 $783,000
Total Release Proceeds for 75"1ots ($1,566,000)

Remaining Loan $609,000

Release for 1.00 acre lots $41.760

Remaining Loan I Release for 1.00 acre lots 15 lots

Total lots sold to repay loan 90 lots

(75 lots + 15 lots)

Based on the release price, the sale of the 53'' acre or

1
the 90 " lot will repay the loan.

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - A & D Loan - Page 5 of 11
 SAMPLE
Commercial Real Estate Loan Submission
Part 2 • CRE Project Repayment Analysis

Apartment Project Loan

Project The following is the repayment analysis for the apartment project loan to Grandview Limited
Description: Partnership. The project, which will consist of five (5) apartment buildings, will contain 100 units
with 175 paved parking spaces of which 50 will be cpvered spaces. The project will also have a
25-yard swimming pool, a clubhouse with exercise room, laundry facilities in each building, and a
playground area for children.

Project Summary: Borrower: Grandview Limited Partnership

Type: Construction {C) and Mini-Perm {MP) financing
Purpose: To provide 80% of estimated costs of apartment project. Remaining 20% will come
from cash generated by sale of Limited Partnership interests in the property and by
loans from partners, and from land already owned by borrower.
Amount: $2,484,000
Rate: Floating Prime + 1%
Fees: $50,000
Term: 15 months on Construction; 45 months on Mini-Perm.

Proforma Income and Exnense Analvsis

Income:
Number of Units Type Size Total s.f. Monthly Rent Annual Rent
15 Units Efficiencies 500 square feet 7,500 s.f. $300 $54,000
30 Units 1 Bedroom / 1 Bath 700 square feet 21,000 s.f. $380 $136,800
30 Units 2 Bedroom I 2 Bath 850 square feet 25,500 s.f. $450 $162,000
25 Units 3 Bedroom I 2 Bath 1,100 square feet 27.500 s.f. $525 $157.500
100 Units 81,500 s.f.

Potential Gross Income $510,300

Less: Vacancy and Credit Loss (5% Potential Gross Income)
($25,515
) Plus: Laundry Income @ $8.00 per unit per month $9,600
Effective Gross Income $494,385

Expenses:
Real Estate Taxes ($30,000)
Insurance ($5.000)
Maintenance ($28,000)
Replacement Reserve ($10,000)
Management Fee (4% Effective Gross Income) ($18,600)
Utilities ($6,000)
Miscellaneous ($4,000)
Total Expenses ($101,600)

Net Operating Income $392,785

Debt Service:
Annual Debt Service: $2,484,000 @12.75% 25-year amortization $330,587

Debi Service Coverage: $392,785 I $330,587 1.1sx

Maximum Debt Service for 1.15x Debi Service Coverage: $392,785 / 1.15x $341,552

Estimated Annual Breakeven: Estimated Annual P &-I $330,587

Estimated Annual Expenses $101,600
$432,187

Breakeven I Effective Gross Income $432,187 / $494,385 87. 4%

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - Apartment Project - Page 6 of -11
 Anartment Proiect Loan - Sources and Uses of Fundina Analvsls

Soft Costs:
Bank Commitment Fees $50,000
Closing Costs and Legal Fees $35,000
Architectural and Engineering $120,000
Interest Reserve Estimate (55% outstanding x 14.375% x 15 months) $250,000
Marketing $25,000
Contingency $150,000
Total Soft Costs $630,000

Hard Costs:
Land $210,000
Concrete and Brick $500,000
Clubhouse and Pool $190,000
Heating, Ventilation, Air Conditioning $275,000
Plumbing $200,000
Studs and Drywall $225,000
Carpeting and Appliances $175,000
Landscaping and Paving $250,000
Electric $300,000 .
Miscellaneous and Contingency $150,000
Total Hard Costs $2,475,000

Total Project Costs: $3,105,000

Less: Loan Proceeds ($2,484,000)

Beguired· Egui (I aad alread owaed b;i Borrower) $210 000

(lJRftont Borr.ower Casb) S4n 000
Iota l Egui 2QDt1t S621 000

Loan To Value

Net Operating Income $392,785

Capitalized al 12% $3,273,000

Loan to Value ($2,484,000 I $3,273,000) 75.9%

Proiect Cost Analusis

Total Costs Per Unit $3,105,000 / 100 units $31,050

Total Costs Per Square Foot $3, 105,000 I 81,500 s.f. $38.10

Hard Costs Per Square Foot $2,475,000 I 81,500 s.f. $30.37

Loan Per Square Foot $2,484,000 / 81,500 s.f. $30.48

Loan To Total Project Costs $2,484,000 I $3, 105,000 80.0%

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - Apartment Project - Page 7 of 11
 SAMPLE
Commercial Real Estate Loan Submission
Part 2 - CRE Project Repayment Analysis

Office Building Loan

Project The followingis the repayment analysis for the office building loan to ABC, Inc. The project will be
Description: a one-story office building containing 30,000 gross rentable square feet. The building will have
paved pafking for 45 cars with another 25 spaces under a lease option. National Tenant, Inc. has
pre-leased 40% of the building. ·

Project Summary: Borrower: ABC, Inc.

Type: Construction {C) and Mini-Perm {MP) financing
Purpose: To provide 80% of the costs of buying land and developing 30,000 square foot
office building. The remaining 20% of costs will come from land already owned by
borrower and cash on hand plus receipts from accounts receivable.
Amount $2,250,000
Rate: Floating Prime +1%
Fees: $45,000
Term: 18 months on Construction; 42 months on Mini-Perm.
Amortization: 25-year schedule

Proforma Income and Exnse Analvsis

Income:
Pre-leased 12,000 s.f. @ $16.00 per s.f. $192,000
To be leased 18,000 s.f.@ $16.00 per s.f. $288,000
Potential Gross Income $480,000
Less: Vacancy and Credit Loss (5% Potential Gross Income) ($24,000)
Effective Gross Income $456,000

Expenses:
Real Estate Taxes ($30,000)
Operating Expenses stopped at $2.50 per s.f. ($75,000)
{Slopped means that pursuant to lease terms, the tenant will be
responsible for all operating expenses that exceed $2.50 per s.f.)
Management fee (4% Effective Gross Income) ($18,240)
Total Expenses ($123,240)

Net Operating Income Before Debt Service $332,760

Debt Service:

Annual Debt Service: $2,250,000 @12.00% 25-year amortization $284,371

Debt Service Coverage: $332,760 I $284,371 1.17x
Maximum Debt Service for 1.15x Debt Service Coverage $332,760 / 1.15x $289,357

Estimated Annual Breakeven: Estimated Annual P & l .$284,371

Estimated Annual Expenses $123,240
$407,611

Breakeven I Effective Gross Income $407,611 / $456,000 89.4%

Breakeven Per Square Foot $407,611 / 30,000 s.f. $13.59

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - Office Builing Page 8 of 11
 Office Buildina Loan - Sources and Uses af Fundina Anal=is

Soft Costs:
Bank Commitment Fees $45,000
Closing Costs and Legal Fees $35,000
Architectural and Engineering $100,000
Interest Reserve Estimate (55% outstanding x 14.365% x 18 months) $270,000
Marketing and Leasing Commissions $60,000
Contingency · $100,000
Total Soft Costs $610,000

Hard Costs:
Land $227,500
Concrete and Brick $425,000
Steel $70,000
Heating, Ventilation, Air Conditioning $200,000
Plumbing $150,000
Studs and Drywall $150,000
Tenant Finish $330,000
Landscaping and Paving $200,000
Electric i $250,000
Miscellaneous and Contingency · $200,000
Total Hard Costs $2,202,500

Total Project Costs $2,812,500

Less: Loan Proceeds (2,250,000)

Beguired· Egui !I and alread owned bx Borr:oweg Si100 ODO

(Ugfront Bor:mwei: Casb) $462 5!!!!
Iotal Eg1d!I 20°,',, $562 500

Loan To Value

Net Operating Income $332,760

Capitalized at 11% $3,025,000

Loan to Value ($2,250,000 I

$3,025,000) 74.4%

Proiect Cost Analvsis

Total Costs Per Square Foot $2,812,500 / 30,000 s.f. $93.75

Hard Costs Per Square Foot $2,202,5001 30,000 s.f. $73.42

Loan Per Square Foot $2,250,000 I 30,000 s.f. $75.00

Loan To Proiect Costs $2,250,000I

$2,812,500 80.0%

SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - Office Building - Page 9 of 11
 SAMPLE
Commercial Real Estate Loan Submission
Part 2 - CRE Project Repayment Analysis

Shopping Center Loan

Project The following is the repayment analysis for the shopping center loan to Strip Center
Description: Shopping, Inc. The project will be a strip shopping center containing 95,000 square feet and
paved parking for 350 cars. Major Anchor Store, Inc. has pre-leased 35,000 square feet of
the project.

Project Summary: Borrower: Strip Center Shopping, Inc.

Type: Construction (C) and Mini-Perm (MP) financing
Purpose: To provide 80% of estimated project costs for proposed strip shopping
center, Remaining 20% of costs from cash and liquidation of borrower real
estate assets. ·
Amount $3,834,000
Rate: Floating Prime + 1%
Fees: $81,000
Temi: 18 months on Construction; 42 months on Mini-Perm.

Proforma Income and Exoense Anal=is

Income:
Pre-leased 35,000 s.f. @ $8.00 per s.f. $280.000
To be leased 60,000 s.f.@ $10.00 per s.f. $600,000
Potential Gross Income $880,000
Less: Vacancy and Credit Loss (5% Potential Gross Income) ($44,000)
Effective Gross Income ($8.80 per s.f.) $836,000

Expenses:
Real Estate Taxes ($50,000)
Insurance ($6,500)
Maintenance ($31,000)
Replacement Reserve ($10,000)
Management Fee (4% Effective Gross Income) ($33,440)
Utilities ($12,000)
Miscellaneous ($4,000)
Total Expenses ($1.55 per s.f.) ($146,940)

Net Income Before Debt Service $689,060

Debt Service:

Annual Debt Service: $3,834,000 @12.75% 25-year amortization $510,253

Debt Service Coverage: . $689,060 I $510,253 1.35x

Maximum Debt Service for 1.15x Debt Service Coverage: $689,060 / 1.15x · $599,183

Estimated Annual Breakeven: Estimated Annual P & I $510,253

Estimated Annual Expenses $146,940
$657,193

Breakeveri I Effective Gross Income: $657,193 / $836,000 78.6°,'o

Breakeven Per Square Foot $657,193 195,000 s.f. $6.92

SAMPLE CRE Loan Subm_!ssion - Part 2 -CRE Project Repayment Analysis -Shopping Center - Page 10 of 11
 Shonnjno Center Loan - Sources and Uses of Fundinn Anal•=is

Soft Costs:
Bank commitment fees $81,000
Closing costs and legal fees $35,000
Architectural and Engineering Costs $80,000
Interest Reserve Estimate (55% outstanding x 15.0.% x 18 months) $480,000
Marketing and leasing commissions $104,500
Contingency $125,000
Total Soft Costs $905,500

Harri Costs:
Land: 6.02 acres $600,000
Concrete and Brick $700,000
Steel and Metals $225,000
Heating, Ventilation, Air Conditioning $425,000
Plumbing $250,000
Studs and Drywall $325,000
Tenant Finish $475,000
Landscaping and Paving $412,000
Electric $275,000
Miscellaneous and contingency $200,000
Total Harri Costs $3,887,000

Total Project Costs: $4,792,500

Less: Loan Proceeds ($3,834,000)

Beguimd· Egui (UQfrnat Botmwer Casb) 20'&. Sl!5B 500

Loan To Value

Net Operating Income $689,060

Capitalized at 12% $5,742,000

Loan to Value ($3,834,000 I $5,742,000) 66.8%

Proiect Cost Analvsis

Total Costs Per Square Foot $4,792,500 I 95,000 s.f. $50.45

Hard Costs Per Square Foot $3,887,000 I 95,000 s.f. $40.92

Loan Per Square Foot $3,834,000 I 95,000 s.f. $40.36

Loan To Total Project Costs $3,834,000 I $4,792,500 80.0%

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SAMPLE CRE Loan Submission - Part 2 - CRE Project Repayment Analysis - Shopping Center - Page 11 of 11