Shared National Credit (SNC) Exam Preparation Guide

Purpose

The Shared National Credit (SNC) Program reviews large syndicated loans ($100M+ shared by 3+ institutions) to provide consistent classification across regulatory agencies (OCC, Fed, FDIC). The exam aims to:

• Assess credit quality and risk management for large exposures.
• Identify trends in syndicated lending.
• Ensure banks have adequate capital and reserves.
• Promote sound underwriting and credit administration.

Scope

• Loan Size: Credits aggregating $100 million or more.
• Participants: Shared by three or more federally supervised institutions.
• Focus: The assigned rating applies to all banks in the syndicate.

Importance for Your Institution

• Regulatory Scrutiny: Directly impacts CAMELS ratings and capital adequacy.
• Provisioning & Capital: Criticized assets require higher reserves, impacting profitability.
• Reputational Risk: Poor results can damage market and regulatory reputation.
• Risk Management Improvement: Provides feedback for strengthening internal processes.

2.1. Essential Credit File Components

Ensure each file is comprehensive. Key components include:

• Credit Approval Documents: Original approvals, amendments, waivers, and timely annual reviews.
• Borrower Information: Legal name, structure, organizational chart, and ownership details.
• Loan Documentation: Signed agreements, security/guarantee docs, notes, and term sheets.
• Financial Statements & Analysis: 3-5 years of audited historicals, interims, financial spreads, well-supported projections, and ratio analysis.
• Collateral Information (If Secured): Descriptions, current valuations, lien perfection docs, and updated LTV calculations.
• Industry & Market Analysis: Borrower's industry, market position, and key risks.
• Ongoing Monitoring: Call reports, internal risk rating history, covenant tracking, and watchlist reports.
• Communication Records: Key correspondence with borrower, agent, and syndicate members.

2.2. Financial Analysis & Spreading Standards

• Accuracy: Reconcile spreads to source documents.
• Consistency: Apply consistent accounting treatments and adjustments.
• Adjustments: Clearly document and justify all non-GAAP adjustments (e.g., EBITDA add-backs).
• Projections: Base on well-supported assumptions and include stress tests.

2.3. Internal Rating Process & Justification

• Clear Rationale: The basis for the risk rating must be clearly articulated and linked to bank methodology.
• Timeliness: Ratings should be changed promptly when conditions change.
• Objectivity: Ratings must be grounded in an objective assessment of credit risk.

3.1. Key SNC Definitions (Summarized)

• Pass: Sound quality, minimal risk. Repayment expected as agreed.
• Special Mention (SM): Potential weaknesses that deserve close attention.
• Substandard: Inadequately protected by current worth/paying capacity. Well-defined weakness that jeopardizes orderly liquidation.
• Doubtful: Collection or liquidation in full is highly questionable and improbable.
• Loss: Considered uncollectible.

3.2. Core Focus Areas for Examiners

• Repayment Capacity: Historical and projected cash flow sustainability.
• Collateral: Current valuation, lien perfection, and liquidity.
• Capital Structure & Leverage: Debt-to-Equity, tangible net worth, and debt composition.
• Liquidity: Working capital and access to facilities.
• Management & Sponsorship: Experience, track record, and sponsor support.
• Covenant Compliance: Tracking of breaches, waivers, and amendments.

4.1. Accuracy of Data Tapes

Errors or inconsistencies in submitted data tapes create a poor first impression. Verify key data points and reconcile totals to internal systems.

4.2. Internal Pre-Review / Mock Exams

Conducting an internal mock exam is invaluable. It helps identify potential criticisms, strengthen files, and prepare analysts to defend their credits.

5.1. Initial Information Requests (IIRs)

Respond accurately, completely, and on time to requests for files, data, and policies.

5.2. Examiner Interactions

Be prepared to discuss each credit. Maintain a professional, cooperative, and transparent demeanor.

5.3. Preliminary Findings

This is a critical opportunity to provide additional information or present counterarguments before final decisions are made.

6.1. Structuring Your Defense

• Acknowledge and Validate: Acknowledge valid points raised by the examiner.
• State Your Thesis: Clearly state your rating and overall assessment.
• Present Key Facts: Walk through risk areas with specific, current data.
• Address Weaknesses Proactively: Discuss known weaknesses and their mitigants.
• Justify Reliance: Be prepared for deep scrutiny on collateral or sponsor support.

6.2. Pitching a Cohesive Narrative

• Know Your Story: Have a concise summary for each credit.
• Consistency: Ensure your verbal narrative matches the written documentation.
• Connect the Dots: Explain how different pieces of information fit together.