Overview of
Commercial Banking
Ken Carson
SVP/Credit Administrator
Umpqua Bank
February 8, 2006
Agenda
• Marketing
• Commercial Lending
• Credit Assessment
• Credit Policy
• Pricing
• Problem Loans
• Careers in Commerical Lending
Marketing Commercial
Banking Products
Consumer Lead Product:
–The checking account
Commercial Lead Product:
–The loan
Marketing Commercial
Banking Products
Commercial Banking Products:
– Loans
– Depository
– Cash Management Services
– Merchant Visa
– Internet & Electronic Banking
– Investments
– Leases
Marketing Commercial
Banking Products
Transactional Banking Relational Banking
Low Rates & Fees,
High Volume
Mass marketing
Lenders are order
takers
Walmart
Higher Rates & Fees,
Lower V0lume
“Handshake”
marketing
Lenders are “trusted
advisors”
Nordstroms
Marketing Commercial
Banking Products
Competition
–Other Commercial Banks
–Non-Bank Competition
–Quasi-governmental agencies
Commercial Loans
Types of Commercial Loans
–Short Term Working Capital Loans
–Revolving Lines of Credit
–Term Loans
–Commercial Real Estate Loans
Commercial Loans
Cash Flow vs. Asset Based
Cash Flow Based
Repayment: Profits
Asset Based
Collateral: Unsecured
Repayment:
Liquidiation
Collateral: Secured
Not margined
Margined
Cash Flow Covenants
Working Capital
Covenants
Credit Assessment
The Five C’s
–Character
–Capacity
Credit Assessment
Capacity
The Key Principle:
Loans are repaid by cash,
not by profits.
Credit Assessment
Capacity
Corollary to the Key Principle
Your loan is repaid by cash,
not by ratios.
Credit Assessment
The Five C’s
–Character
–Capacity
–Capital
–Collateral
–Conditions
Credit Policies and
Procedures
Internal Credit Procedures
–Board of Directors
–Chief Credit Officer
–Credit Committee vs. One-over-one
–House Limit & the Legal Lending Limit
–Total Credit Exposure
Credit Policies and
Procedures
Monitoring Loans
–Loan Covenants
–Collateral Monitoring
–Risk Ratings
Credit Policies and
Procedures
Lending Between Banks
– Why?
• Reduce concentration risk
• Manage overall portfolio
• Manage the bank’s balance sheet
– Types of inter-bank lending
• Syndications
• Participations
• Sale to the Secondary market
Pricing Loans
Pricing Structures
–Variable Rate Loans
–Fixed Rate Loans
–Swaps, Collars & Other Derivates
–Loan Fees
Pricing Loans
Pricing Considerations
–Cost of Funds
• Actual Cost of Funds
• Marginal Cost of Funds
Interest Rate Yield Curve
Interest Rate Changes
Federal Home Loan Bank Rates
6.000
5.000
Percent
4.000
3.000
CMA
1-Year
3-Year
5-Year
10-year
2.000
1.000
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Pricing Loans
Pricing Considerations
–Cost of Funds
• Actual Cost of Funds
• Marginal Cost of Funds
–Risk Factors
–Market Factors
–Relationship Factors
Managing Problem Loans
• Risk Rating Systems
– 1 through 10 (1=high, 10=low)
– Pass Rated (1 through 6)
– Criticized (7), Classified (8 & 9), Loss (10)
• Non-Performing Loans (NPAs)
• Charge-Offs & Recoveries
• Special Assets Department
Loan Loss Allocation
Beginning Allocation
44.2
- Charge Offs
-7.8
+ Recoveries
+4.9
+ Loss Provision Exp.
+2.5
= Ending Allocation
=43.8
Adequacy of Loan Loss Allocation
Pass
Spec Mention
Substandard
Doubtful
x
x
x
x
=
=
=
=
Total
+ Special Allocation
Total Loan Loss Allocation
Careers in Banking
The Typical Career Path
–Loan Assistant
–Credit Analyst
–Assistant Relationship Manager
–Relationship Manager
Careers in Banking
Skills & Character Qualities
–Non-negotiables
• You will be drug tested
• No criminal records
Careers in Banking
Skills & Character Qualities
–Technical Skills
• Accounting
• Computer Skills
Careers in Banking
Skills & Character Qualities
–Character Qualities
• Work Ethic & Initiative
• Professionalism
• Teachable
• Patience