bill watkins slides

Is it important to understand a prospective borrower’s financial statement?

Yes. It tells you whether the borrower can repay, how risky they are, and how much leverage and liquidity they have, which directly affects credit decisions.

What are current assets?

Assets expected to be converted to cash or used up within one year, such as cash, marketable securities, receivables, and inventory.

What are current liabilities?

Obligations due within one year, such as accounts payable, accrued expenses, current portion of long‑term debt, and short‑term notes.

What is working capital?

Working capital equals current assets minus current liabilities; it measures short‑term liquidity and the ability to meet near‑term obligations.

What is capital on a borrower’s financial statement?

Capital (equity/net worth) is owners’ residual interest: total assets minus total liabilities, including contributed equity and retained earnings.

What is the leverage ratio? What is typically a good ratio?

Leverage ratio here is debt‑to‑equity (total liabilities ÷ equity); lower is safer. Many commercial borrowers are comfortable around 1–3x, but 'good' depends on industry and risk.

Are these items important in understanding a prospective borrower’s financial statement?

Yes. Liquidity, leverage, and capital strength are core to assessing capacity to repay and resilience under stress.

What does 'Standards for Safety and Soundness' mean?

It refers to regulatory and policy benchmarks intended to ensure a bank operates in a safe, prudent manner (e.g., adequate capital, good asset quality, risk management, internal controls).

In banking, what do 'duties' and 'responsibilities' mean?

Duties are the tasks and obligations a bank officer is expected or required to perform (e.g., underwriting, monitoring loans). Responsibilities are the broader accountabilities and consequences of those duties (e.g., protecting depositors, following laws, managing risk).

How many directors must every bank have? Why?

Most U.S. banks must have a board of multiple directors (commonly at least 5) to provide independent oversight, governance, and representation of shareholders and the community; one person alone would be too risky and lacks checks and balances.

Why get to know the Board and review Call Reports?

Knowing the Board helps you align lending and risk decisions with their priorities, while reviewing FFIEC Call Reports helps you understand your bank’s capital, asset quality, growth, and risk profile.

What are the 5 C’s of credit? What is the most important one?

1. Character – integrity and willingness to repay. 2. Capacity – cash flow to service debt. 3. Capital – net worth, 'skin in the game.' 4. Collateral – assets pledged to secure the loan. 5. Conditions – economic and industry environment, loan purpose and terms. Most lenders view Capacity (cash flow) as most important because loans are repaid from cash flow, not collateral.

Should you base a new loan on collateral and/or a guarantor? Why or why not?

Collateral and guarantors are secondary sources of repayment; the loan should be based primarily on the borrower’s ability and willingness to repay from cash flow, with collateral/guarantees used as backup risk mitigation, not the core reason to lend.

Does Capital (net worth) repay loans? Why or why not?

No. Capital absorbs losses and indicates strength, but periodic cash flow (earnings plus non‑cash charges and working‑capital management) actually makes the loan payments.

Which borrower is better with the same $5mm net worth?

A borrower with $5 million in net worth from $5 million in assets and zero liabilities is preferable to one with $5 million net worth from $100 million in assets and $95 million in liabilities, because the first is unleveraged and far less risky.

Definition of Cash Flow:

Cash flow is the net cash generated by a business over a period, typically measured as net income plus non‑cash expenses (like depreciation) adjusted for changes in working capital, available to service debt, reinvest, or distribute.

Definition of Cash Throw Off:

Cash throw‑off is the excess, recurring cash generated beyond what the business needs for operations, maintenance, and normal reinvestment, which is truly available for debt service and distributions.

What does EBITDA mean? Typical EBITDA for a new loan?

EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization—a proxy for operating cash flow before capital structure and non‑cash items. Lenders look for an adequate debt service coverage ratio, typically EBITDA at least 1.25–1.50x total debt service.

Should you sign your loan presentations before they go to Loan Committee? Why or why not?

Yes. Signing shows you stand behind your analysis and recommendation, clarifies accountability, and encourages thorough, careful underwriting.

Legal Lending Limit – Texas state‑chartered bank:

Texas state banks may not lend more than 25% of unimpaired capital and surplus (or Tier 1 capital) to one borrower, with some allowances for fully secured loans.

Legal Lending Limit – national bank:

National banks follow limits under 12 U.S.C. 84; generally, unsecured loans to one borrower are limited to 15% of unimpaired capital and surplus, plus an additional 10% if secured by readily marketable collateral, for a potential total of 25%.

Why do banking laws stipulate Legal Lending Limits?

To prevent excessive concentration of credit exposure to any single borrower, reduce the risk of catastrophic loss, and promote diversification and safety and soundness.

Are Bank Examiner discussions important for Loan Officers? How should you handle them?

Yes. They influence loan classifications, reserves, capital, and even your bank’s CAMELS rating. Loan officers should prepare thoroughly, explain their reasoning clearly, listen to concerns, and treat the dialogue as a chance to improve risk management.

Should you stand up for convictions with Examiners or just agree?

You should respectfully stand up for well‑supported credit decisions using data and analysis, while remaining open to valid examiner concerns.

Anticipate 'crash and burn' scenarios?

Yes. Good lenders underwrite downside cases—stress‑testing revenues, expenses, collateral values, and covenants—to ensure the borrower can survive shocks.

Always be ethical and fair with borrowers?

Yes. Ethics and fairness build trust, reputation, and long‑term relationships, and they help avoid legal and regulatory problems.

Should bank officers be Financial Advisors for borrowers?

Yes, to a point. A strong loan officer adds value by advising on structure, cash‑flow discipline, and risk, while avoiding conflicts of interest.

What are the 3 'Y’s' of lending for problem loans?

1. Yell (raise the issue early, communicate). 2. Yoke (work with the borrower to restructure). 3. Yield (recognize loss, charge off when recovery is not realistic).

Is it important to know what bank regulators want?

Yes. Understanding their expectations on capital, asset quality, underwriting, compliance, and governance helps you structure sound loans.

Different Bank Regulatory Agencies and the types of institutions they regulate

1. OCC: Charters and supervises national banks. 2. Fed: Supervises bank holding companies. 3. FDIC: Insures deposits and supervises state non‑member banks. 4. State banking departments: Regulate state-chartered banks. 5. NCUA: Regulates federal credit unions.

What are Reports of Examination?

Formal reports issued after regulatory examinations that summarize a bank’s condition, including CAMELS ratings, risk findings, and corrective actions.

What do Reports of Examination focus on?

Safety and soundness: capital adequacy, asset quality, management, governance, earnings, liquidity, and compliance with laws.

What does CAMELS stand for?

CAMELS = Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk.

Adequate ratios (typical ballparks):

1. Capital Ratio: CET1 ≥ 6.5% of risk‑weighted assets. 2. Classified Asset Ratio: Well under 40–50% of capital is manageable. 3. Past Due Loan Ratio: Aim for under 2% of total loans. 4. Earnings Ratio: Consistent, positive ROA and ROE. 5. Liquidity Ratio: Adequate high‑quality liquid assets.

Which CAMELS component is most important and why?

Many practitioners argue Asset quality is most critical because sustained credit problems can quickly erode earnings, capital, and liquidity.

Definition of a Special Mention loan rating:

A loan with potential weaknesses that, if not corrected, could lead to more serious problems; it does not yet expose the bank to enough risk for a Substandard classification.

Definition of a Substandard loan rating:

A loan inadequately protected by the borrower’s current net worth, with well-defined weaknesses jeopardizing repayment.

Definition of a Doubtful loan rating:

A loan with weaknesses making full collection highly improbable; the prospects for full recovery are poor.

Definition of a Charge-off loan rating:

A loan (or portion) deemed uncollectible and removed from the bank’s books as an asset.

Are bank charge‑offs still assets? Typical mid‑size bank charge‑off/recovery ratio?

No. Once charged off, the amount is no longer an asset. Many mid‑size banks recover only a fraction of charged-off amounts.

What is a Board Resolution?

Used to acknowledge issues and commit to corrective actions when problems can be managed at the board/governance level.

What is a Memorandum of Understanding (MOU)?

An informal agreement between a regulator and a bank outlining specific weaknesses and required corrective steps.

What is a Formal Agreement?

A legally enforceable agreement specifying detailed corrective actions, timelines, and responsibilities for serious issues.

What is a Consent Order?

A formal enforcement order issued with the bank’s consent, imposing binding corrective measures.

What is a Supervisory Program?

An enhanced supervision regime where regulators increase monitoring, reporting, and follow‑up to ensure correction of identified problems.

What is a Cease & Desist Order (C&D)?

A formal order directing a bank or individuals to stop unsafe practices and undertake corrective actions.

What is a Removal Proceeding?

An action to remove and possibly ban an officer for engaging in unsafe practices that harm the bank.

What are the 5 keys to success highlighted in the lecture?

Attitude, perseverance, creativity, adaptability, and hard work.

What is the Rule of 3's in interviews and loan presentations?

Pick three memorable points about yourself or your credit argument.

What should you do early in your career?

Get a mentor and don’t be afraid to ask for help.

What should you do before interviews regarding Call Reports?

Review Call Reports on FFIEC.gov to understand your bank’s condition.