The “Credit Crisis” What Should a Borrower Expect in Today’s Debt Market? CEBI – Spring Summit 2008 Mike Flynn Member FDIC

What’s Happening? Record Real Estate Foreclosures Banks experience liquidity problems Federal Reserve Intervening Investors are panicking Member FDIC

Why is this Happening? Adjustable Rate Mortgages adjusted upward Sub Prime Borrowers can’t handle higher mortgage payments Housing values are dropping Housing starts have hit record lows Supply of homes exceed demand Securitization Market is Pushing Back Member FDIC

Why did this happen? Loans to Sub Prime Borrowers increased to a record $600 billion Basic underwriting standards were ignored MBS and CDO were purchased by the billions much riskier than was understood Major banks and investment banks have experienced record losses As a result Housing markets tumbled Member FDIC

Effect on Credit Industry Consumers are not willing to buy homes Lenders are obligated to improve their due diligence Lenders have tightened their lending standards even to traditionally strong borrowers Investors are not willing to take the risk of purchasing securities which are exposed to mortgages Fed has dropped short term interest rates Member FDIC

What should borrowers expect in 2008? Underwriting process could take longer Credit requirements may seem more stringent Terms and conditions may seem more stringent Competition for your business may seem less Member FDIC

How to survive the crunch? Be honest with yourself! If there is a problem, don’t keep putting it off. It won’t take care of itself Find help in a turn-around expert. Ask for referrals from attorneys and accountants. The good ones pay for themselves If you feel you can handle this on your own: –Increase your cash position Stay on top your accounts receivable, start calling early and often Make the most of your accounts payable – stretch it as far as you can without hurting your relationships Make sure your inventory levels are rational -- eliminate the fluff Member FDIC

How to survive the crunch? –Reduce your more expensive interest rate debt first –Reduce your fixed expenses, outsource where you can –Don’t forget about friends and family financing –Start your banking search earlier –Let time take care of this situation –Don’t panic! Member FDIC

What are the banks looking for? Some banks are just not lending at the moment because of their own business issues Be right up front with the banker to quickly determine if they are interested in new business If after 3 banks say “no”, consider finance companies, asset-based lenders and accounts receivable factors Banks are looking for tighter structures –Smaller advance rates on collateral –Strong cash flow coverage ratios –Shorter maturities –More equity –Stronger profits Member FDIC

Underwriting Criteria Cash flow Collateral Conditions Capacity Character Member FDIC

YesNo Capacity Debt Service Coverage > 1.20 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) divided by CMLTD (Current Maturity of Long-Term Debt) plus interest ProfitabilityCompany is profitable in the current year Company has been profitable at least 2 of the last 3 years. Capital Debt/Equity <4:1Total Liabilities divided by Tangible Net Worth (Net worth minus intangible assets, prepaid expenses, goodwill, deposits, other assets)

Member FDIC YesNo Collateral Accounts Receivable (A/R) Bad debt has been minimal No one account makes up more than 10% of A/R All international A/R is insured Inventory (Can the inventory be easily sold?) Not on consignment Commodity, not specialized Raw Materials or Finished Goods Machinery & Equipment (Can these Fixed Assets be easily sold?) General equipment with broad application Real EstateOwner occupied Environmentally safe Property located in bank’s natural market

Member FDIC YesNo Conditions Purpose of loan. Size of Loan Type of Loan Age of business Marketplace Economy Business purpose – not to make distributions Loan is not “too big” or “too small” for bank Fits within bank’s niche 3 or more years Growing Stable Character FICO > 700 Referral from a trusted source.

If you have any questions: Mike Flynn American Chartered Bank Cell: Member FDIC