FIN 426 Credit Analysis Fall 2023
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FIN 426 Credit Analysis
Fall 2023
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Professor: |
Jocelyn Evans |
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Class Times: Office: |
MW 2:30-3:45 PM BHH 115 BHH 238 |
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Phone/Voice Mail |
678-438-7775 (cell) |
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e-mail: |
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Office Hours: |
8:00 – 10:00 am MW, 1:00 - 2:00 MW pm or virtually by appointment
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NOTE: It is your responsibility to read, understand and abide by all the course information and policies listed below. Failure to do so could result in you failing this course or being withdrawn from this course by your instructor or by the Finance Department. The course syllabus provides a general plan for the course; deviations may be necessary.
IMPORTANT RULES, GUIDELINES AND OTHER INFORMATION
NOTE:
Please excuse the official/legal tone of the rules and guidelines, they are not intended to be impersonal or harsh. These policies have evolved over many years and hopefully cover all questions that may arise concerning the administration of the class.
Prerequisites:
FIN 325
Measurable Student Learning Outcomes
Bachelor of Business Administration BBA SLOs:
1. Business Knowledge: demonstrate technical competence in domestic and global business through the study of major disciplines within the fields of business.
2. Critical Thinking Skills: define, analyze, and devise solutions for structured and unstructured business problems and issues using cohesive and logical reasoning patterns for evaluating information, materials, and data.
3. Communication Skills: conceptualize a complex issue into a coherent written statement and oral presentation.
4. Technology Skills: competently use technology in modern organizational operations.
5. Entrepreneurship and Innovation: demonstrate the fundamental of creating and managing innovation, new business development, and high-growth potential entities.
Course Description:
The credit worthiness of bank loans will be assessed based on the analysis of a publicly traded corporate borrower’s financial statements. Consideration is given to the analysis of cash flows, loan structuring, credit scoring and tax considerations. Tools for predicting potential problem loans will also be discussed from a financial and non-financial corporation perspective. Prerequisites: FIN 325
This course provides an in-depth review of how credit analysis and loan evaluation decisions are made. Students will develop the necessary skills in analyzing financial statements and applying them in determining the borrower’s financial condition and performance, which will necessitate having an intermediate level of Excel knowledge. Lending in the banking sectors has a unique set of challenges because the credit analysis and risk identification process must account for intense regulation from the Federal Reserve, FDIC, state, OCC, and other monitoring bodies such as the SEC. Our focus will be on the application process, financial statement analysis/Excel, credit analysis, loan structure, compliance, documentation procedures, and monitoring after closing. Nonfinancial firms such as suppliers perform credit analysis to assess the quality of existing and potential customers with minimal regulation. All firms will be evaluated based on the 5 C’s of credit.
Course Overview
Commercial Banking is a comprehensive study of commercial banks and their role in the economy. The course emphasizes the practical application of business and economic principles as they relate to bank management and regulatory policy and the foundational techniques of credit analysis. Topics covered include banking history and regulation, consumer and commercial credit analysis, asset and liability management, risk management, loan policy, and money management services. Trends such as consolidation, on-line banking, internationalization, and project-line expansion are also addressed.
This course is structured around the theme of credit analysis and risk management in banking. The premise is that commercial credit underwriting supports lending activity drives economic growth. You will examine how banking institutions generate earnings and assess the risks assumed in their operations. Topics to be covered include performance analysis, capital management, interest rate risk management, credit analysis and resolving asset quality problems, liquidity planning, investment portfolio analysis, the use of off-balance sheet instruments and activities, and industry consolidation associated with failures and acquisitions. Content and discussion will cover both domestic and international banking activities.
The objective of this course is to also provide the student with the conceptual framework necessary to analyze and comprehend the current problems confronting managers of commercial banks and other institutions. The course materials do not dwell on the development of financial theories. It is assumed that the student comprehends the basic theoretical concepts of corporation finance, monetary theory, and financial accounting. Each class session will be structured to include lecture, discussion, and problem/case analysis. Text reading assignments are described in the attached materials. Specific dates at which assignments are due will be indicated in class.
The credit worthiness of bank loans will be assessed based on the analysis of a borrower’s financial statements. Consideration is given to the analysis of cash flows, loan structuring, credit scoring and tax considerations. Tools for predicting potential problem loans will also be discussed.
Learning Goals
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Students will identify the major factors that need to be considered when evaluating and analyzing loan and other credit requests. The course utilizes various quantitative techniques and spreadsheet applications to aid in the evaluation process. After completion of this course, students will be able to: 1. Learn a systematic approach in analyzing loan requests. 2. Evaluate financial statements using various financial analysis techniques including common size reports, financial ratios and industry norms. 3. Recognize warning signals early in the analysis process. 4. Utilize important financial ratios to interpret the borrower's financial condition and performance. 5. Perform trend analysis. 6. Compare borrower with peers and industry. 7. Assess the accuracy of financial data and detect potential asset overvaluations and liability understatements. 8. Describe a borrower's financial condition and performance. 9. Identify the strengths and weaknesses of loan applicants. 10. Summarize findings important to the decision process by computing a cash flow statement and structuring a loan agreement. |
Learning will be achieved using several training formats including textbook reading, presentation slides, practice exercises, assignments and cases. As this is an online course students need to interact online with the professor and their classmates, to do assignments, meet deadlines and in some circumstances to work in virtual groups. Course delivery will focus on ensuring that students are able to:
· Understand where they can find all the pertinent financial data that is needed in order to utilize the various techniques required for the credit analysis.
· Use a financial calculator and an Excel spreadsheet to complete the quantitative part of the credit analysis and loan evaluation.
· Get behind the numbers to interpret the financial ratios and identify the associated trends appropriately.
· Obtain data about companies, their competitors and industry statistics in order to perform peer and industry comparisons.
· Evaluate any qualitative data such as information on management, customers, products and any other important factors for a more in-depth analysis.
· Skills: Financial Analysis, Credit Structure, Documentation, Business Analysis, Credit Risk, Industry Analysis, and more
· Career paths: Commercial Lending, Credit Analysis, Risk Management, Credit Auditing, Rating Agencies, Real Estate Lending, and more
· Intermediate Excel Knowledge
The underwriting process is intended to assess the prospective borrower’s credit standing, the ability to repay and the value and adequacy of any collateral. To assess the borrower’s ability to repay, we analyze the borrower’s cash flow, liquidity, credit standing, employment history and overall financial condition. For example, the home mortgages recently originated have a weighted average credit score of 769. In addition, many borrowers have large down payments, high liquidity and substantial net worth (equity). All credit requests should be underwritten using full documentation. Loan origination policies and consistent underwriting standards should result a low historical loan loss experience.
Regular monitoring and annual reviews of loans are performed to identify and evaluate any deterioration in primary and/or secondary sources of repayment, including evaluations of the borrower’s financial condition and value of the collateral. Updates to risk grades are made, as needed, upon completion of reviews. Relationship managers and business bankers are encouraged to bring potential credit issues to the attention of credit administration personnel in a timely manner. For loans that are criticized or classified, the Bank’s Special Assets Committee reviews loan grades, reserves and accrual status on a quarterly or more frequent basis. This review includes an evaluation of the market conditions, the property’s trends, the borrower and guarantor status, the level of reserves required and loan accrual status. Additionally, we have an independent, third-party review performed on our loan grades and our credit administration functions each year. The results of the third-party review are presented to the Audit Committee of the Board. These asset review procedures provide management with additional information for assessing and affirming our asset quality. In addition, for business and personal loans that are not secured by real estate, we perform frequent evaluations and regular monitoring.
Course Objectives
1. To provide an understanding of how a loan is graded from a credit perspective based upon financial statements and other information.
2. To provide an in-depth review of credit analysis and loan documentation
3. To provide an understanding of the evaluation of collateral risk
4. Evaluate the legal and ethical issues surrounding the financial industry and the crisis that affect decision-making in banking organizations.
5. The course provides a framework within which key financial decisions and risks relating to banking within the international environment are analyzed.
FIN 426 Credit Analysis SLOs
1. Demonstrate a practical understanding of loan underwriting by completing a credit analysis for a financial institution and a non-financial firm.
2. Understand the eligibility criteria for loans.
3. Understand the role of covenants.
4. Apply Excel quantitative skills to cash flow analysis.
5. Develop the ability to read and analyze bank financial statements.
6. Complete a financial analysis for a non-financial publicly traded firm.
7. Structure a loan agreement and compute a cash flow statement.
Required Course Materials
1. Financial Reporting and Analysis: A Practitioner’s Guide, Fridson and Alvarez, Wiley & Sons, ISBN 9780470018002.
2. The Rating Agencies and Their Credit Ratings: What They Are, How They Work, and Why They are Relevant. Langohr, and Langohr, Wiley & Sons, ISBN 9780470018002
3. Fundamentals of Corporate Credit Analysis, Blaise Ganguin and John Bilardello, Standard & Poor’s, McGraw-Hill Irwin, ISBN 9781265917586.
5. Selected articles and cases
6. Business Calculator
Cases
Additional Recommended Materials
Periodicals listed below will be useful for class and are available in the Library..
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1. Bloomberg |
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6. Forbes |
Required Technology
You are expected to have the computing resources necessary to complete this course through personal and/or University channels (e.g., computer labs). Our course will take place within the Canvas LMS and utilizing various software technologies that facilitate interaction and communication. We can make alternate arrangements should your reason for being without computer access warrant an accommodation (note: travel for vacation/work does not necessitate accommodations). Below is a list of some helpful computer requirements for full participation in online portions class, if any:
· The latest version of QuickTime
· The latest version of Adobe Reader
· A current word processing software
· Google Chrome, Firefox, or Edge for Windows computers
· Google Chrome, Firefox, or Safari for Apple computers
· Broadband Internet connection is preferred. Examples of broadband Internet connection are high-speed DSL or a Cable modem.
Technical Preparation
If this is an online course, please ensure that your technical equipment is up to date before you begin your coursework. UMKC’s Online Readiness Survey addresses several of your learning characteristics and the computer equipment that you have available to use for your schoolwork. The questions on learning characteristics cover your self-directedness, learning preferences, study habits, and technology skills. There is one set of questions that specifically addresses your computer equipment capabilities. There is one additional set of questions that specifically addresses our computer equipment capabilities.
If you do not have strong computer skills, please come see me before the class that the assignment is due. If you do not have a working knowledge of Excel, we will remedy this by completing the free Alisson tutorial as an assignment.
Technology Support
· Live Chat: UMKC Helpdesk
· In-Person Assistance:
o 9 AM - 5 PM, Monday – Friday
o Fine Arts Building, Room 314
· Phone: 816-235-6700
o This number is answered 24/7.
o We provide assistance with Canvas, Moodle, Panopto, and other teaching/learning software.
· Email: [email protected]
· Fax: 816-235-6503
· Online: Online Problem Report Form
Email Expectations
During the work week, I try to reply to all student emails within 24 hours. Emails received during the weekend will receive a response the first day of the work week. Please contact me via my Blackboard Messaging System. There will be a 48 hour response time (Excluding weekends) on all messages.
Course Structure
The course will be conducted in the UMKC Canvas site. Navigate to the Start Here to find the syllabus and a course schedule.
Discussion Forum
It will be used for class discussions and other postings of general interest that are directly related to the course. Everyone can read Discussion Forum postings; therefore, do not post private information.
Course Grading and Assignments
The description for each assignment is described at the end of the syllabus. There are no makeup papers and discussion posts. If you have a University sanctioned events such as student-athlete competitions, Enactus competition, etc.) please provide me documentation at the beginning of the course. Since all assignments are announced in advance (see schedule on Canvas), you can upload it from anywhere.
Grading
Grading Turnaround
I am committed to providing students with timely grading as I believe it to be very important in emphasizing areas of strength and identifying areas of improvement. My goal is always to provide feedback for all graded work ideally within one class period.
UMKC Grading Scale
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Percentage Grade |
Letter Grade |
GPA Value |
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≥ 93.0% |
A |
4.00 |
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≥ 90.0% |
A- |
3.70 |
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≥ 87.0% |
B+ |
3.30 |
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≥ 83.0% |
B |
3.00 |
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≥ 80.0% |
B- |
2.70 |
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≥ 77.0% |
C+ |
2.30 |
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≥ 73.0% |
C |
2.00 |
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≥ 70.0% |
C- |
1.70 |
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≥ 67.0% |
D+ |
1.30 |
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≥ 63.0% |
D |
1.00 |
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≥ 60.0% |
D- |
0.70 |
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< 60.0% |
F |
0.00 |
Makeup Quiz Policy
Students must be present in class at the time of the quiz to be eligible for credit. There are no makeups for missed quizzes, but each student will drop their lowest 2 (out of 22) scores which includes missed classes/quizzes. The date of quizzes is announced in advance (see schedule on Canvas). If a student anticipates missing more than 2 quizzes, the instructor should be contacted as soon as possible to make alternative arrangements.
Late Assignment Policy
No late assignments will be accepted for full credit without consent of the instructor. Assignments will be considered one day late if not turned in by the beginning of class on the due date. The late penalty will be one letter grade per 24-hour period.
Course Grading: Assessment
The course is designed to introduce loan underwriting based upon the five C’s of credit. The course grade will be as follows:
Grading Pctg of grade
Discussion Posts & Assignments 10% (Due every Sunday)
Class Participation and Speaker Engagement 10%
Strategic Analysis Paper s 10%
Historical Analysis 10%
Economic Impact Paper 10%
Proforma Analyses 10%
Case Studies and Quizzes 20%
Firm Credit Analysis and Loan Package 20%
Total Points 100%
Deliverables
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Module 1 |
Part 1: Overview |
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8/21 |
Systemic Approach to Credit Analysis and Loan Evaluation Objectives Credit Risk Credit Analysis Seven C’s Credit Analysis Process |
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8/23-28 |
Choose publicly traded corporation for your credit analysis Introduction to financial reporting and sources of information Income Statement Balance Sheet Statement of Cash Flow Statement of Owner’s Equity Other comprehensive income/loss and Statement of Earnings Footnotes CEO Letter Analysts’ Forecasts and Recommendations Credit Rating Agencies The Role of Credit Ratings (Chapter 1 Credit Ratings) |
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8/30 |
Understanding financial statements, GAAP rules and Lending Process Objectives Introduction Credit Process Documentation SEC Reporting Regulations (Sarbanes Oxley Act, Regulation G, Fair Disclosure Act, Etc.) Types of Businesses Compiled, reviewed, or audited statements
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9/6-11 |
Company-and industry specific risks (Chapter 3 and 4 Ganguin) The Adversarial Nature of Financial Reporting (Chapter 1 Financial Statement Analysis) Domestic and global conditions Country specific risk (Chapter 1 Ganguin) · Economy analysis · Industry analysis · Business analysis
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9/13,18-20 |
Analyzing financial performance based on the 7 C’s of Credit Capital-equity investment Conditions-industry, economy, etc. Capacity-cash flow available to repay the loan Collateral-form of security that guarantees repayment Character-demonstrated responsibility and the integrity of your actions Courage-entrepreneurial mindset (CDFI) Compassion-commitment to community (CDFI)
We help to overcome disparities and to make communities more entrepreneurial. The art is the courage and compassion to understand the story and advocate for the customer before work peers and loan committees. The courage and compassion also sits at times on the side of telling people that they are not ready, and a business loan will not support their meeting of their family needs, adding jobs, and helping communities improve economic mobility for its citizens.
· Sometimes taking the time to understand why a credit score that can be sub 600 or even sub 500 is not a disqualifier. · It means understanding that not everyone has secondary collateral to pledge and so doing the best that you can, given that which is available. · It means that when equity is lacking, you need to employ a structure that supports that reality. · It means talking to customers to tease out their goals and ambitions to test sales assumptions, understanding of costs and viably assessing attitude and aptitude.
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2023-09-21