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PROBLEM LOANS

PROBLEM LOANS. A PROBLEM LOAN IS ONE THAT DOES NOT PERFORM TO THE STANDARDS OF THE LENDING AGREEMENT TO THE LENDER PROBLEM LOANS ARE ONES THAT HAVE RISK OF LOSS GREATER THAN NORMALLY ASSUMED. PROBLEM LOANS SELDOM DEVELOP OVER NIGHT

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PROBLEM LOANS

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  1. PROBLEM LOANS • A PROBLEM LOAN IS ONE THAT DOES NOT PERFORM TO THE STANDARDS OF THE LENDING AGREEMENT • TO THE LENDER PROBLEM LOANS ARE ONES THAT HAVE RISK OF LOSS GREATER THAN NORMALLY ASSUMED

  2. PROBLEM LOANS SELDOM DEVELOP OVER NIGHT • CAUSES OF PROBLEM LOANS CAN RELATE TO NON-FINANCIAL AND FINANCIAL FACTORS

  3. NON-FINANCIAL FACTORS • APPROXIMATELY 25 PERCENT OF PROBLEM LOANS BECOME A PROBLEM BECAUSE OF CONDITIONS OUTSIDE THE CONTROL OF THE LENDER OR BORROWER • WEATHER • CHANGES IN PRICES RECEIVED

  4. INTEREST RATE RISK • DECLINES IN ASSET VALUES • LOSS OF ASSETS DUE TO NATURAL DISASTER • FRAUD ON THE PART OF THE BARROWER

  5. FINANCIAL FACTORS AND SYMPTOMS • A DECLINE IN RETURNS ON ASSETS OR THE RETURN ON EQUITY • EARNINGS AVAILABLE FOR CAPITAL REPLACEMENT AND TERM DEBT REPAYMENT MARGIN DO NOT EXCEED DEPRECIATION EXPENSE. IF CAPITAL ASSET REPLACEMENT IS FORGONE, THIS IS CALLED “LIVING OFF DEPRECIATION”

  6. A CAPITAL TURNOVER RATIO THAT IS MUCH ABOVE OR BELOW STANDARDS FOR THE AREA OR ENTERPRISE • A BUILDUP IN ACCOUNTS PAYABLE, PERSONAL DEBT TO FRIENDS OR RELATIVES, OR CREDIT CARD DEBT • FAILURE TO PAY INCOME TAXES AND REAL ESTATE TAXES • CANCELLATION OF INSURANCE

  7. AN OPERATING EXPENSE RATIO GREATER THAN 80 PERCENT, AND A DEBT-TO-ASSET RATIO OVER 50 PERCENT • A TERM DEBT AND CAPITAL LEASE RATIO THAT IS DECLINING OR IS LESS THAN ONE FOR MULTIPLE YEARS • A REQUEST TO FINANCE AN OPERATING LOAN AS A LONG-TERM DEBT • INTEREST EXPENSE THAT IS MORE THAN 20 T0 25 PERCENT OF REVENUES

  8. THE USE OF SPLIT LINES OF CREDIT FROM MANY SOURCES • EXCESSIVE FAMILY LIVING EXPENSES • TOO MUCH FINANCIAL LEVERAGE, DEBT-TO-ASSET RATIO EXCEEDING 70 PERCENT, OR A LEVERAGE RATIO (DEBT-TO-EQUITY) OVER 230 PERCENT

  9. COMMON DENOMINATORS OF PROBLEM LOANS • UNDER $150,000 IN SALES AND OVER 50% DEBT-TO-ASSET RATIO • OFF-FARM INCOME OVER $50,000 • TREND IN POOR CREDIT HISTORY • CREDIT CARD DEBT FOR CONSUMPTION • QUESTIONABLE FAMILY LIVING EXPENSE

  10. EXOTIC INDUSTRIES • NO RETIREMENT PLANNING, HEALTH, OR DISABILITY INSURANCE • ANNUAL DEBT PAYMENTS EXCEEDING 40% OF ADJUSTED FARM AND NON-FARM INCOME

  11. POT HOLES OF CREDIT • UNDERCAPITALIZATION • GROWTH MOVING FROM A TECHNICIAN TO A MANAGER • BUSINESS LIFE CYCLE MAKING THE TRANSITION FROM GROWTH TO RETIREMENT • KILLER TOYS

  12. HOW TO MINIMIZE LOAN LOSSES • INSIST ON SEEING FINANCIAL DATA ALONG WITH PRODUCTION INFORMATION • PERFORM CREDIT SEARCHES AND MONITOR COLLATERAL • COLLATERAL REQUIREMENTS SHOULD BE DEFINED • LOOK FOR POOR MANAGEMENT PRACTICES

  13. OBTAIN AND ANALYZE GUARANTEES AND ENDORSEMENTS • OBTAIN ALL NECESSARY LOAN AND CREDIT DOCUMENTS BEFORE ADVANCING LOAN PROCEEDS

  14. LOAN WORKOUTS • A VERBAL COMMITMENT TO ACCEPT A LATE PAYMENT • PRINCIPAL DEFERMENT • PRINCIPAL AND INTEREST DEFERMENT • RE-AMORTIZATION • DEBT RESTRUCTURING • PARTICIPATION IN GOVERNMENT PROGRAMS DESIGNED TO ASSIST FARMERS WITH PROBLEM LOANS

  15. VOLUNTARY LIQUIDATION • VOLUNTARY CONVEYANCE OF ASSETS • FORECLOSURE

  16. BANKRUPTCY • CHAPTER 7 PROVIDES FOR LIQUIDATION OF ASSETS FOR THE SATISFACTION OF LEGALLY DISCHARGEABLE DEBTS • CHAPTER 12 FOR FARMERS ONLY, ALLOWS REORGANIZATION OF THE BUSINESS TO MEET DEBT

  17. CHAPTER 11 AND 13 ALLOWS DEBT ADJUSTMENT AND REORGANIZATION

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