How to Navigate Banking Relationships October 5, 2012 Bill McDermott, McDermott Financial Solutions

The New normal Consolidation, SunTrust story Consolidation, past, present and future Formation of new community banks Profit picture for banks improving Haas Dodd, stiff regulatory environment How many have had the bank restrict terms of their LOC?

Outline BankSpeak The banks financial health could be the problem What happens at loan renewal When to stay and when to leave Must haves and nice to haves in a loan package and bank presentation Here comes trouble, covenant defaults, forbearance agreements

Your new normal includes…. Helping your client find $$Loan maturity does not = renewal Forbearance agreements, covenant defaults, loss share agreements

Heres how to help your client Assess the strengths and weaknesses of the financials 3 years of financials - analyze them, trends… Banks want to know about: Liquidity (balance sheet) Leverage (balance sheet) Profitability (income statement) Activity (AR and Inventory turns) Asset quality (balance sheet)

Is your client financially healthy? Were they profitable for the last operating year? Are they leveraged less than 4 to 1? Total debt/net worth

Guiding your client through the new normal … Everything is about risk/reward Bank reward is 5% gross margin with no upside, banks are leveraged between 8 and 12 to 1,therefore risk tolerance is low Bank profitability is up, but credit is still tight. Why? Lending conditions are unfavorable, economy is sluggish, low interest rates, Risk profile for the reward is not there

The must haves… Your bank presentations must address these, its non negotiable 5 Cs- Character Collateral Cash flow Credit Conditions

One of the best shortcuts to finding financing for your clients… Find a bank that is profitable, has adequate capital and is either raising capital, paying back TARP money or both You cant assume every bank is lending money just because their doors are open MOU, Consent orders and Cease and Desist orders are public records, just know where to look (google search-bank name consent order) These are all regulatory terms that mean the bank is having issues which could affect your ability to borrow

Why is it so hard to find $$… All banks are highly regulated. Because of bank failures, regulatory environment is tight under quick links, bankers, institution directory, bank find, name and state of bank Look for capital-asset ratio (8-12%), 85% is high Banks have liquidity and leverage issues too. If your line isnt renewed it might be their problem, not yours

Is the Bank on a Watch List? Has it been sold or acquired in the last 5 years? Do you sense your loan is in a special assets category?

Google Alerts… If you have a Google profile, you can set up an or text alert to obtain daily information about a bank Examples: PNC insures RBC merger is fast track south from DC to Atlanta - 11/10/11 UCB reports net loss of $6.2 million for Q /31/11 Synovous posts profit after 3 years - 10/27/11 (we post these on Facebook and LinkedIn daily)

More Google Alerts… Georgia banks post $608 million Q1 profit – May 24, 2012 Southwest Georgia Financial Declares Quarterly Cash Dividend May 24, 2012 Renasant Bank/Non Chexsystems Banks May 19, 2012

Gone Shopping? How many of you your clients have gone shopping for a new banker/relationship in the last 2-3 years? Why did they shop? What did they learn?

The new normal -new loan, loan renewal -anxiety is the price you pay for the unprepared mind and mouth

Prepare and Propose For a new loan at a new institution, the bank wants 1. 3 years of financial statements or tax returns 2. Interim financial statement with comparable a year ago (10/31/11 vs 10/31/10) 3.For a line of credit, they will request AR and AP aging, may request comparable a year ago 4. Personal financial statement and two years personal tax returns 5.Real estate projects or LLCs they will ask for separate financial statement or tax return, rent roll 6.Contractors (job status reports-contracts in progress, contracts completed)

Present…. -Presentation to the bank should incorporate the 5 Cs of credit for the bank Character Collateral Cash flow Credit Conditions -Demonstrate you have: A Command of your financials A Clear request A Compelling case

There was a time when loan maturity =loan renewal. Covenant defaults were waived and forbearance agreements were a foreign term to most business owners Under the new normal, this is not the case Banks are enforcing covenant defaults and entering in to forbearance agreements. This is new territory for your clients

Whats a loan covenant default A covenant is a mutual promise made between two parties A loan covenant is a promise to loan by the bank and a promise by the business owner to run the business with certain conditions If the promise is broken by either party then there is a loan covenant default. If you break the loan covenant, you break your promise to the bank and they may break their promise to loan

If any of these happen… Options could be… Your bank declares a default You enter into a forbearance agreement, you bank agrees to forbear or delay the close of your business in exchange for something The bank forecloses on your business You declare bankruptcy

Special Assets Department SAD If you or your client has had losses, had a loan covenant default and signed a forbearance agreement, you might be in SAD Its consider special, because there is greater than average or special/specific risk associated with it Banks put all these loans together in one department to work them out of the bank Bank failures, acquisitions can cause a movement in loans to SAD due to loss share agreements even if they pay promptly

Forbearance Agreement How many of your clients have signed one of these in the last year or 2? Did they know what it was? Likely, they didnt meet the 30 day payout, they broke a cash flow or leverage covenant with the bank, loan covenant default or waiver Recitals, term, interest rate, fee, conditions 6 to 12 month term is common. Getting it as long as possible is to your clients advantage

If any of these happen… There could be a forbearance fee (this may sound ridiculous) however, the bank feels consideration is given for not foreclosing on the business ½-1% is common The Scope of Forbearance- have your client pay special attention here, this defines what the bank will or wont do and what your client agrees to do or not do Typical items in this section Lender wont accelerate the debt, discontinue lending or obtain a judgment against your client They may also want to correct loan documentation

In addition… The bank may ask you or your client to waive a jury trial or waive their rights to bankruptcy provisions They may ask you to hire a turnaround professional or provide an equity infusion Beware of cross collateralized, cross default language if you have 2 loans (double crossed) You may be asked for a banking plan, how will you turn things around?

Can a forbearance agreement be avoided… Watch your covenants, leverage or profitability Offer additional collateral Agree to a higher rate or fee Put capital in the business vs borrowing it

Questions? Bill McDermott