1. Didi, Frohardt, Baker Hill
Gus Staahl, Bank of North Dakota
Lindsay Wagner, Bank of North Dakota
Participations: The What, Why & How

2. What is a participation?
“An instrument which allows multiple lenders to participate or share
in the funding of a loan. The originating (lead) lender underwrites
and closes the loan, and [then] sells portions of the loan to other
participants...”
Callahan & Associates, “Loan Participation Program Manual,” June 2013.

3. Who is a participant?
“Participating institutions share in the funding of a loan, becoming
an ‘owner’ of a portion of the loan with all benefits of full
performance and, if non-recourse, all associated risks of loss—as if
the participant had originated the loan itself.”
Callahan & Associates, “Loan Participation Program Manual,” June 2013.

4. Bank of North Dakota
• The only state-owned bank in the nation
• Asset size as of 2018: $7B, with loans approx. $4.5B
• BND does not provide direct loans to borrowers other than a few
exceptions (student loans, some agriculture loans)

5. Why buy or sell participations?
• Buy
– Pricing strategy
– Increase loan volume
– Portfolio concentration
• Sell
– Bank exposure
– Liquidity
– Portfolio concentration

6. Participation risk management
• Participant in due diligence prior to approval
– Due diligence on the bank you are thinking about working with
• Meet with senior lending management
• Discuss credit culture
• Lending and administrative processes
– Due diligence on the specific credit request
• Borrower
• Credit request

7. Participation risk management
• Separate risk analysis
– Lead bank risks
• Multiple participants
• Approval process
• Managing credit and portfolios
– Loan policy guidelines
– Underwriting and credit quality
• Financial analysis
• Collateral valuation and position
• Ongoing loan performance

8. Participation risk management
• Loan loss reserve
– As if it’s your own debt
• Servicing fees
• Fees income sharing
• Costs sharing
– Typically workout situations

9. Participation risk management
• Loan servicing
– Sellers perspective
• Payments and fees
• Collateral
• Understand responsibilities for ongoing monitoring requirements
– Buyers perspective
• Pre-funding review
– All documentation
• Ongoing review
• Must be agreed to with lead bank
• Tracking of required documentation

10. Participation agreement
• Standard participation agreement
– Periodic buying or selling to institutions
• Master participation agreement
– Regular buying or selling to specific institutions

11. Participation agreement
• Participation agreement
– Parties involved
– Total loan amount and amount purchased
– Recourse provisions
– Pro rata
– Collateral position
– Rights and remedies for a breach of contract
– Servicing responsibilities
– Basis of revenue and expense distribution
– Loan documentation responsibilities

12. Baker Hill and risk mitigation
• Opportunities
– Credit request structure
– Attach key documents
– Approval
• Credit analysis
– Statement spreading
• Maintain statement spreads
• Reporting
• Exception tracking
– Documentation
• Documentation required for origination and ongoing analysis

13. Baker Hill and risk mitigation
• Loan accounting
– Mirrors the core accounting system for reporting and analysis
• Reporting
– Portfolio concentrations
– Exposures
– Documentation tracking
– CECL

14. Next steps to think about
• Participation appetite
• Specific participation credit policy
– Lender
– Credit underwriting
– Documentation
– Servicing
• Participation specific processes

15. Questions??

16. Thank you!
Didi.Frohardt@bakerhill.com