Overview of Commercial Banking
Overview of Commercial Banking
Ken CarsonSVP/Credit Administrator
Umpqua Bank
February 8, 2006
Ken CarsonSVP/Credit Administrator
Umpqua Bank
February 8, 2006
AgendaAgenda
•Marketing•Commercial Lending•Credit Assessment•Credit Policy•Pricing•Problem Loans•Careers in Commerical
Lending
•Marketing•Commercial Lending•Credit Assessment•Credit Policy•Pricing•Problem Loans•Careers in Commerical
Lending
Marketing Commercial Banking Products
Marketing Commercial Banking Products
Consumer Lead Product:– The checking account
Commercial Lead Product:– The loan
Consumer Lead Product:– The checking account
Commercial Lead Product:– The loan
Marketing Commercial Banking Products
Marketing Commercial Banking Products
Commercial Banking Products:– Loans– Depository– Cash Management Services– Merchant Visa– Internet & Electronic Banking– Investments– Leases
Commercial Banking Products:– Loans– Depository– Cash Management Services– Merchant Visa– Internet & Electronic Banking– Investments– Leases
Marketing Commercial Banking Products
Marketing Commercial Banking Products
Transactional Banking
Relational Banking
Low Rates & Fees, High Volume
Higher Rates & Fees, Lower V0lume
Mass marketing “Handshake” marketing
Lenders are order takers
Lenders are “trusted advisors”
Walmart Nordstroms
Marketing Commercial Banking Products
Marketing Commercial Banking Products
Competition– Other Commercial Banks– Non-Bank Competition– Quasi-governmental agencies
Competition– Other Commercial Banks– Non-Bank Competition– Quasi-governmental agencies
Commercial LoansCommercial Loans
Types of Commercial Loans– Short Term Working Capital
Loans– Revolving Lines of Credit– Term Loans– Commercial Real Estate Loans
Types of Commercial Loans– Short Term Working Capital
Loans– Revolving Lines of Credit– Term Loans– Commercial Real Estate Loans
Commercial LoansCommercial Loans
Cash Flow vs. Asset BasedCash Flow vs. Asset BasedCash Flow Based Asset Based
Repayment: Profits Repayment: Liquidiation
Collateral: Unsecured
Collateral: Secured
Not margined Margined
Cash Flow Covenants Working Capital Covenants
Credit AssessmentCredit Assessment
The Five C’s– Character– Capacity
The Five C’s– Character– Capacity
Credit AssessmentCredit Assessment
CapacityCapacity
The Key Principle:The Key Principle:
Loans are repaid by cash, Loans are repaid by cash,
notnot by profits. by profits.
The Key Principle:The Key Principle:
Loans are repaid by cash, Loans are repaid by cash,
notnot by profits. by profits.
Credit AssessmentCredit Assessment
CapacityCapacity
Corollary to the Key PrincipleCorollary to the Key Principle
Your loan is repaid by cash, Your loan is repaid by cash,
notnot by ratios. by ratios.
Corollary to the Key PrincipleCorollary to the Key Principle
Your loan is repaid by cash, Your loan is repaid by cash,
notnot by ratios. by ratios.
Credit AssessmentCredit Assessment
The Five C’s– Character– Capacity
The Five C’s– Character– Capacity – Capital– Collateral– Conditions
– Capital– Collateral– Conditions
Credit Policies and Procedures
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
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
Credit Policies and Procedures
Monitoring Loans– Loan Covenants– Collateral Monitoring– Risk Ratings
Monitoring Loans– Loan Covenants– Collateral Monitoring– Risk Ratings
Credit Policies and Procedures
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
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 LoansPricing Loans
Pricing Structures– Variable Rate Loans– Fixed Rate Loans– Swaps, Collars & Other
Derivates– Loan Fees
Pricing Structures– Variable Rate Loans– Fixed Rate Loans– Swaps, Collars & Other
Derivates– Loan Fees
Pricing LoansPricing Loans
Pricing Considerations– Cost of Funds
•Actual Cost of Funds•Marginal Cost of Funds
Pricing Considerations– Cost of Funds
•Actual Cost of Funds•Marginal Cost of Funds
Interest Rate Yield Curve
Interest Rate Yield CurveInterest Rate Changes
Federal Home Loan Bank Rates
0.000
1.000
2.000
3.000
4.000
5.000
6.000
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Month
Pe
rce
nt
CMA1-Year3-Year5-Year10-year
Interest Rate ChangesFederal Home Loan Bank Rates
0.000
1.000
2.000
3.000
4.000
5.000
6.000
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Month
Pe
rce
nt
CMA1-Year3-Year5-Year10-year
Pricing LoansPricing Loans
Pricing Considerations– Cost of Funds
•Actual Cost of Funds•Marginal Cost of Funds
– Risk Factors– Market Factors– Relationship Factors
Pricing Considerations– Cost of Funds
•Actual Cost of Funds•Marginal Cost of Funds
– Risk Factors– Market Factors– Relationship Factors
Managing Problem Loans
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
• 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 AllocationLoan 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
Adequacy of Loan Loss Allocation
Pass x =Spec Mention
x =
Substandard
x =
Doubtful x =Total
+ Special Allocation
Total Loan Loss Allocation
Careers in BankingCareers in Banking
The Typical Career Path– Loan Assistant– Credit Analyst– Assistant Relationship Manager– Relationship Manager
The Typical Career Path– Loan Assistant– Credit Analyst– Assistant Relationship Manager– Relationship Manager
Careers in BankingCareers in Banking
Skills & Character Qualities– Non-negotiables
•You will be drug tested•No criminal records
Skills & Character Qualities– Non-negotiables
•You will be drug tested•No criminal records
Careers in BankingCareers in Banking
Skills & Character Qualities– Technical Skills
•Accounting•Computer Skills
Skills & Character Qualities– Technical Skills
•Accounting•Computer Skills