Covenant Monitoring

Loan covenants are an essential part of commercial lending.  They provide a framework of understanding for the borrower to meet the requirements of the lender.  The covenants can include financial reporting requirements, performance-based covenants and operating covenants.  The first two are considered affirmative covenants while the last is generally considered a negative covenant.  The loan covenants are included within the loan agreement as a part of the overall loan documentation.  The specific requirements for the delivery of financial reporting or the testing of loan covenants should be explicitly included in the loan agreement and consistent with the approval of the credit facility.

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Loan Policy – A Cultural Evolution

Every financial institution has a culture and more specifically, a credit culture.  This culture can be arrived at in many ways, through the leadership, policies, practices and other intangibles that employees may not even be aware of.  Interestingly, culture is rarely documented as a specific item but rather it is a collaboration of the various policies and procedures and undocumented practices the financial institution has in place to run their business.    It is the culture that sets the tone for how things get done in the financial institution, how customers are treated, how employees are treated and how the financial institution is managed.  It is my experience that separate from their policies and procedures, high performing financial institutions have created a culture where everyone knows what the expectations are, and everyone works to achieve them for the betterment of the financial institution.

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