This website has a new section! Check out the financial statement and ratio analysis information here...

http://www.financialstatements.commercialloananalysis.com/

Credit Decisions and Behavioral Science

The RMA recently passed along this very interesting article about credit decision-making and the behavioral biases exhibited by humans.

This is a topic that I have been researching myself.  In the future, I plan to consult with banks about improving credit decision-making processes in light of the biases and errors that are often unavoidable due to human nature.  It's a very interesting intersection between finance, credit, and psychology.  If you are interested in helping out, providing ideas, or learning about how your bank can benefit from the research in this field, then please contact me.

Here's the entire link to the RMA article:
https://www.rmahq.org/decision-making-and-corporate-culture-insider/

How to Order Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders

There are a couple of ways to obtain my book, Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders.

You may order on Amazon.

Or, you can check out the Financial Statement Analysis section of this website.  You will find that selected sections of the book (particularly financial ratios) are presented there.

Thanks for reading!

Ken Pirok

How Does Your Bank Calculate NOI?

When analyzing commercial real estate, most banks present columns with NOI listed for historical periods along with a column of pro forma or "underwriting" NOI.  Pro forma NOI is often calculated using “Potential Gross Income” (representing gross rents as if the property were 100% leased) less a vacancy factor.

In pro forma analyses, appraisers and banks often apply replacement reserve factors as well.  Recent appraisals may contain an appropriate vacancy factors, management fees, and replacement reserve assumptions to use in your analysis.

Your bank’s loan policy may also dictate standard amounts to use for vacancy, bad debt, replacement reserves, and management fees in the pro forma analyses.  If your bank has a policy on how to calculate pro forma or "underwriting" NOI, then I'd like to hear about it.  Feel free to leave a comment about how you make the calculation and which expenses are included and excluded.

Current and Non-Current Assets and Liabilities

There are two types of assets and liabilities, “current” and “non-current.”  Current assets are those that are expected to be converted to cash in one year or less, and current liabilities are those that will come due in one year or less.  So, cash, marketable securities, accounts receivable, and inventory are all considered current assets, while accounts payable and the principal amounts of loans due within a year are considered current liabilities.

Non-current assets and non-current liabilities are due or converted to cash in more than a year.  Fixed assets and intangible assets are considered non-current, and loan amounts which are due in more than a year are also considered non-current.

Updated: OCC: Semiannual Risk Perspective

The OCC just released another Semiannual Risk Perspective.  The link below will take you right to the report.  Their page is always updated with the most recent report at the top and with previous reports available below.

https://www.occ.gov/publications/publications-by-type/other-publications-reports/index-semiannual-risk-perspective.html